8 minute read
Fashion Retail
money&investing
Staying power: Petrol stations in their current guise are unlikely to suddenly disappear
have made it difficult for ordinary investors to share in the ownership of the SA petroleum sector’s bricks-and-mortar assets. Barriers include onerous licence requirements, complex legal structures and environmental legislation.
Watters tells the FM that SA has about 4,000 petrol stations, most of them controlled by the major oil companies and a small group of private developers and property owners. “Th e industry is quite fragmented, so there’s a big opportunity for consolidation,”he says. “Pe o p le still need income and petrol stations are a more defensive option at a time when traditional sectors are under pressure.”
He refers to the retail and office sectors in particular, which he believes are vulnerable on the back of pandemic-related rental losses and lease cancellations.
“Though the listed property sector as a whole has gone through a tough 18 months it’s the big diversified Reits that have been on the back foot. The only stocks that have performed are specialist ones such as logistics-focused Equites, self-storage owner Stor-Age and multilet industrial plays Stenprop and Sirius.”
Watters says a key attraction of owning service stations is the long leases —15 to 20 years on average compared with three to five years for shopping centres and offices. “Also, your only tenants are the large oil companies like Sasol, Engen, Shell and BP. So your income streams are secure.”
Afine owns just seven service stations scattered across four provinces, worth R307m. But Watters is confident that the portfolio can be bulked up to R1bn within the next 18 months as the company has first right of refusal to Petroland’s developments. He also expects strong appetite among existing service station owners to list their properties in exchange for Afine shares, given how “e f f ic ie nt ” the Reit structure is. “It provides liquidity and tax benefits for property owners,”he says.
Watters, Todd and a few other shareholders have self-funded the business with a loan to value of just below 30%. But they will go to the market to raise capital at a later stage and, Watters says, “hopefully bring some institutional investors on board”.
Though Afine did not marketitself via the usual prelisting roadshows to potential i nv e s t o r s , it is likely to attract smaller retail investors looking to diversify away from the sector’s typical mixed-bag offerings. Howard Penny, equity research analyst at Anchor Stockbrokers, says that at last week’s listing price of R3.67 a share and interim dividend guidance of 25c a share, Afine offers a dividend yield of more than 10%. There’s further upside on the back of potential accretive acquisitions.
Penny notes that a longer-term risk is the global shift to electric and other fuel-efficient vehicles. But he doubts whether petrol stations in their current guise will suddenly disappear, because petrol and diesel cars bought today will probably still be on the roads for at least the next 10 to 15 years.
He adds: “However, there will most likely be an evolution of stations over the long term to offer a blend of food, retail and convenience alongside different fuel and energy options.” x
FASHION RETAIL Lea d i n g the fashion pack
It’s been a long grind through the woods, but cash-flush Mr Price is back on form—and winning market share
Adele Shevel s h eve l a @ b u s i n e ss l i ve .co. z a
ý Riots and lockdowns aside, S A’s fashion and home retailers had one of their better years on the JSE in 2021.
Pepkor, for example, has soared 60% in the year to date, while Truworths has rallied more than 45%. TFG and Mr Pricelagged somewhat, though gains of 17.3% and 20% respectively are hardly shabby.
But it’s over a period of five years that Mr Price has really shown its worth as an i nv e s t me nt .
Where Truworths and TFG went backwards —total returns for both were a negative 14.7% and 1.5% respectively over the same time frame —Mr Price has gained 49% in value.
That comfortably bests the 41% returned by the JSE’s all share index, and shows a welcome return to form for what was long a retail darling.
After barely putting a foot wrong in the years after its listing, Mr Price shares were pummelled in 2016 after some bad fashion blunders made earnings growth grind to a near halt. It’s been a somewhat treacherous ride since.Th e group’s shares recovered in the wake of 2018’s
Mr Price BUY
Target price: R227.50 Potential upside: 13.1%
* Based on analysts’ consensus forecast
Pepkor HOLD
Target price: R24.50 Potential upside: 13%
Ramaphoria, peaking at R290 in March of that year, before beginning a long slide back to the Covid lows of R154 in March 2020. But the group appears to have regained its mojo.
Interim results released at the end of last mo nt h showed that the company has grown market share by more than 2% according to the Retailers Liaison Committee, with Mr Price Apparel achieving market share gains for 19 consecutive months. Online sales more than doubled, increasing their contribution to 2.9% of retail sales, while cash sales jumped 38.2%. Earnings climbed 46% to 448.3c a share in the 26 weeks to October 2 2021, and t he cash-rich group upped its interim dividend 34%, to 282.4c a share.
In a recent research note, Standard Bank Securities writes that Mr Price is“a best in class, wellfo c u s ed retailer, and well positioned in the sector”. The bank says: “We are favourably disposed to its clearly focused strategy, and its management team seems well positioned to deliver.”It says Mr Price could earn R11.55 a share in the 2022 financial year and R13.11 in 2023.
Like its peers in SA, Mr Price is doing more to source its products locally —20-million more units of clothing and homeware, to take it to 100-million units a year —though it has stopped short at incorporating a full manufacturing bu s i ne s s .
The r e’s a growingtrend among local retailers to reduce their dependence on global supply chains, especially from Asia, in light of delays and the spiralling costs of bringing in goods not only from China but from countries such as Turkey and Vietnam.
Foschini owner TFG has been at the forefront of growing a local manufacturing base,a nd it has worked for the group, which has also gained market share.
But Mr Price CEO Mark Blair said at the interim results presentation last month that t he group can still get many of the benefits of vertical integration by having a third-party supply base.
“And in some respects it mitigates a lot of risk as well,”Blair says. These relate to “tying up capital, managing factories —in good times but also in periods of disruption—p o t e nt i a l labour issues, single points of f a i lu r e and electricity”. He says: “We ’ve got a wide supply base, and if something happens at any one of those w e’ve got many others we can go to. So it certainly builds up agility.” At present the r et a i le r sources 40.3% of its products from China and 39.2% from SA. “Over the past 12 months we’ve [taken on board] 43 new local manufacturing s u p p l ie r s ,”he said in an analyst presentation.
The 80-million units sourced from SA over the past year were worth R3.9bn,says Blair, adding that theco mp a ny ’s orders accounted for one-third of all units manufactured in SA by listed apparel and homeware retailers. “Th i s gives some context to our scale and what it means for local manufacturing [when we] increase our order volumes even more. We now support over 40,000 factory workers through our supply chain network in SA .”
During the reporting period, the group faced a third wave of Covid, frequent lo a d- s he dd i ng and ongoing global supply disruption. Civil unrest in July caused 111 of its stores —or 7% of the group — to close. Despite this, Mr Price’s earnings now exceed pre-Covid levels. The group appears to have emerged from the pandemic with a higher market share, and plenty of cash — R3.9bn on its books as of October—and no de bt . Chief financial offi-
cer Mark Stirton argues that one of the advantages held by Mr Price is the sheer amount of stuff it sells. “Where there are costs affecting everyone, our order size does [enable] us to get more competitive pricing.” Richard Cheesman, senior investment analyst at Protea Capital Management, says Mr Pr ice’s revitalised strategy of going into babywear and school clothesand its acquisition of Mark Blair Power Fashion and Yuppiechefmake sense. “The group istrying to make inroads on the schooling front, where Pepkor dominates, and babywear seems to be an area that everyone is going into at the moment. “It ’s a good strategy for a company to expand around the close periphery of its core compe tence rather than attempting to grow into farflung geographies.” Cheesman is pleased that Mr Price is focused on its core local business. “The further away you get from what you’re really good at, the lower the likelihood of a profitable outcome,” he says. He says buying into local manufacturing, as TFG has done, can also make sense, but there are reasons why local retailers have not expanded into this area. “We ’ve had the worst year of lo a d- s he dd i ng on record, and have strong unions —some of the reasons why the local apparel manufacturing industry has struggled. Hopefully there are improvements on these fronts.” x
RETAIL ROUND-UP
Mr Price vs TFG vs Truworths vs Pepkor Weekly – based to 100
150 140 130 120 110 100 90 80 70 60 50 40 Mr Price Truworths Pepkor TFG
2020 Apr Jul Oct
Source: Infront 2021 Apr Jul Oct
TFG BUY
Target price: R155.88 Potential upside: 27.3%
* Based on analysts’ consensus forecast
Truworths HOLD
Target price: R58.97 Potential upside: 15.1%
