SPAR | Liquor cheer

SPP delivered a consistent set of results relative to its peer group, with HEPS growing 10% y/y in H1 '20. Higher SA inflation of c.3% was supportive to earnings and ahead of peers (SHP c.1.2%, PIK c.2.2%). SPP has a superior mix of revenue in SA. Liquor and private label (c.10%, c.23% of SA revenue) had c.7% like-for-like y/y volume growth a tight consumer environment. Thus, we continue to believe that SPP will outperform its peer group in future. The lack of an African footprint creates less of a distraction to investors and management. The business convenience business model requires few major adjustments, with upside optionality to margins in Ireland, Poland and Switzerland.

Food and beverage inflation in SA were up at c.4% in H2 '19, with potential to rise further to c.5% during FY '20. Higher inflation will provide welcome relief to high growth of fuel and labour opex. The private label dynamic in SA is supporting SPP's store-brand revenue. SPP aims to capture some of the private label margin through the purchase of c.50% of its key supplier Monteagle. Liquor sales will continue to be high in the near-term and will support SA top-line growth. Acquisitions of food service companies in Ireland will be margin enhancing. Switzerland should grow strongly in FY '20, albeit off a low base including significant, unsuccessful marketing expenses

We forecast that the Group will grow normalised HEPS by 6% y/y to c.1 213 cps in FY '20. Accelerating internal inflation and organic growth in the Group's SA operations will protect margins at c.3%.

SPP is cash generative with a high pay-out ratio (c.70%) and a good income yield of c.4%. We estimate that the counter is trading at a 17x rolled forward PE, which is cheap relative to PIK's and SHP's average and with no turnaround requirements. We calculate a 12m TP of R233/share and retain a MARKET PERFORM rating.