BROKERS’ NOTES: Buy Woolies, sell Pick n Pay

Imtiaz Suliman, portfolio manager: Sentio Capital 

BUY:  Woolworths 

In an environment where the macroeconomic fundamentals are quite tough, Woolies has some self-help opportunities. 

There’s the margin recovery in the fashion, beauty and home business which has come under pressure in the past, and Woolies is starting to get it to the right size in terms of space. It is working actively to get the margin up to 14%, which is very earnings accretive, and I don’t think 14% is where it will stop. 

As for David Jones, if you look at it strategically it doesn’t fit into the business.  I wouldn’t expect it to be part of the portfolio in a few years’ time. It’s taken a lot of management time and capital from the business and under CEO Roy Bagattini it wouldn’t be set on holding it. I think there’s some value unlock to come  — not so much from monetary value but from freeing up time and focus in the business. 

SELL: Pick n Pay 

I would sell Pick n Pay. We’ve got the market dominated by the likes of Shoprite in terms of the whole spectrum — from value, to middle and upper income — and you’ve got Pick n Pay going through a refresh, trying to create a new brand. I think this change is going to be a bit disruptive until it finds a business model that works. It’s also going through all this during a hugely competitive period. It will take some time to bed down its model, and this is not something it can just implement quite quickly. It has corporate and franchise stores and to get consistency is more difficult, whereas Shoprite is just corporate-owned stores and it can implement changes more quickly.