BROKERS’ NOTES: Buy Shoprite, sell Pick n Pay

Gary Booysen, portfolio manager: Rand Swiss

Buy: Shoprite

Shoprite remains our top local grocer. It is slightly more expensive in earnings terms than its peers, but the quality of operations and management track record more than justify the premium multiple. We expect revenue growth in the high single digits over the next three years despite constrained local conditions. When Shoprite is not building new stores, it’s buying them on the cheap from distressed competitors like Massmart. It is even tentatively expanding into apparel, while still paying record dividends to shareholders. On a technical basis, the current buy range would be between R225 and R235.

Sell: Pick n Pay

If you’re looking for a retail pair, Pick n Pay could make up your short exposure. In earnings terms it’s a similar price to Shoprite, but it looks less attractive because of the risks associated with its current strategic shift and rebrand. The market expects the “new dawn” story to play out, but given the economic downturn coupled with rising food prices and lower consumer spending there is a fair chance that the more robust consensus analyst predictions will not be  met. My preference would be to pair a Pick n Pay short with another retailer (which means your entry should be based on the relative change between the two), but if you’re looking for a naked short, I suggest an entry at above R62.50.