Shoprite | Precision retailing
FY'19 has been challenging but transformative for Shoprite Group (SHP). The Group's ERP system upgrade should bring better sales forecasting together with inventory optimisation. SHP abnormally under-indexes on inventory turnover relative to peers, which could now improve. SHP's new platform also enables a richer customer experience through loyalty programmes, consumer mobile applications and online sales platforms.SHP continues to invest heavily behind retail infrastructure, with a further c.R5bn capex in FY '20. Further capex will be spent on SHP's digital infrastructure in FY '20. Group returns have halved to c.12% over the last five years.
SHP has c.R7bn of USD denominated debt, which carries material currency risk with the weakening ZAR. SHP matches a part of its USD liability with USD receivables. We believe gearing at c.65% currently remains comfortable. The Group will sell and lease back c.R940m of retail properties over the next 12m. The Group plans to outsource of the Group's c.R1bn logistics fleet and similar lease back deals on c.R2bn of distribution centre space over the next three years. The proceeds of outsourcing and the sale and leaseback will reduce the c.R8bn net debt balance.
We estimate the decline of Group trading profits, higher interest and tax expenses will reduce group diluted HEPS by 13% y/y to c.345cps in H1 '20. We forecast H2 '20 diluted HEPS to grow by 6% y/y to c.403cps and expect FY '20 diluted HEPS to be down 4% y/y to c.749cps as volumes recover. We estimate that the counter is trading at a 14.9x rolled forward PE. We calculate a one-year target price of R146/share. Accordingly, we upgrade to an OUTPERFORM rating. We caution that despite being undervalued, investors may want a valuation buffer given the near-term earnings drop.
Shoprite Holdings Limited is an investment holding company. The Company is a food retailer and wholesaler. It operates in the Republic of South Africa (RSA). It operates through four segments: Supermarkets RSA, Supermarkets Non-RSA, Furniture and Other operating segments. The Supermarkets RSA segment includes retail operations under the Shoprite, Checkers, Checkers Hyper and Usave brands in South Africa, retailing products, such as food, clothing, general merchandise, cosmetics and liquor. The Supermarkets Non-RSA segment includes its retail operations under the Shoprite, Checkers, Checkers Hyper, Usave and certain Hungry Lion brands outside of South Africa. The Furniture segment includes its retail operations under the OK Furniture, OK Power Express and House & Home brands retailing products, such as furniture, household appliances and home entertainment systems. Other operating segments include trading in franchise operations, and retail and wholesale of pharmaceutical products.
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