Massmart | Powered by Walmart

Weak discretionary spend has been severely plaguing Massmart's (MSM's) sales, with the company making its first interim loss in over a decade of R647m. The MSM share price fell by 50% over the last six months, with rising concern to long-term sustainability of the Group. Over the last three years, MSM has been re-engineering its supply chain towards a centralised, omni-channel platform. Delays with the implementation of the new SAP Hybris IT system as well as a slew of management changes, are hindering sales and creating additional costs. MSM's new CEO, M Slape, from major shareholder Walmart's emerging markets division, has a good track record. Slape will prioritise the bedding down of the new systems and operating protocols. Together with the new CFO, M Abdool-Samad, MSM will focus on harnessing the power of Walmart's supply chain technologies and front-end marketing strategies. Walmart remain committed to transforming MSM into one of the strongest retailers on the African continent.

Interest bearing debt to equity is at c.90% and interest cover is c.2.5x. We note that half of MSM's debt is revolving facilities which carry no covenants. Thus, we believe MSM can withstand near-term challenges but is unlikely to pay a dividend until a firm recovery to profits in FY ‘21.

We estimate diluted HEPS (including IFRS 16 impacts) of -25cps and -318cps in H2 '19 and FY '19, respectively. Although an uphill task, we believe MSM is likely to extract supply chain efficiencies over the next two years which could narrow losses to c.R294m in FY '20. However, MSM remains dependent on higher discretionary sales volumes for a recovery of Group profitability, which we expect to begin in FY '21 (c.R287m).

We calculate a 12m TP of R61/share. We upgrade MSM to an OUTPERFORM recommendation but caution the share price will remain subdued due to the weak macro-environment to which MSM is particularly leveraged.