Shoprite Buy Signal

23 August 2020 By PDSNET

For many decades the grocery retail sector in South Africa has been dominated by two major players – Pick ‘n Pay and Shoprite. During much of that time, Raymond Ackerman dominated the market and Shoprite/Checkers played second fiddle under former CEO, Whitey Basson. Following Ackerman’s retirement, Pick ‘n Pay went into a slump and Basson was able to steer Shoprite into a position of dominance by expanding aggressively into Africa and pouring money into improving Shoprite’s warehousing, distribution and stock management. Finally, Richard Brasher, formerly from Tesco in the UK, was brought in to turn Pick ‘n Pay around, and he has done a great job, although he is now reaching the end of his tenure.

Shoprite has, however, become the dominant player with a market capitalization of R71,5bn compared to Pick ‘n Pay’s R21,9bn. Both shares are on an earnings multiple of around 16 and both have positives and negatives from a private investor’s perspective. Shoprite is benefiting from the growing confidence of its CEO, Pieter Engelbrecht, while Pick ‘n Pay may find itself in a leadership vacuum once Brasher leaves. Engelbrecht took the decision to extract Shoprite from Nigeria because that country is apparently too corrupt to run the business effectively. Despite this, Shoprite remains heavily invested in Africa, outside South Africa.

Technically, we see Shoprite as the better option. Consider the chart:

Shoprite: March 2018 to date. Chart by ShareFriend Pro.

Here you can see the point at which Basson shrewdly sold out his Shoprite shares for R201 a share, back in September 2017, netting over R1bn for his more than 30 years of service. The peak price came just a few months later in March 2018 at R275 and since then the share has been in a steady downward trend. We have been advising private investors to apply a 200-day simple moving average and wait patiently for a clear upward break. The company produced very bad results in the year to 30th June 2019. Obviously like all retailers it has suffered from COVID-19. But now it has broken convincingly above its 200-day simple moving average and we believe that this is probably a result of Engelbrecht’s leadership. In retail, quality leadership is everything.

Buying Shoprite at below R120 looks like a good deal. The pandemic is steadily retreating, and the South African economy is normalizing. Shoprite have embraced the new reality with a strong emphasis on their on-line offering. It is always good to buy a high-quality share after it has fallen heavily. We believe that this share can return to a P:E of 25 – which basically means that it can double from current levels – and the downside risk is limited.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Balwin

The JSE property index (J253) has fallen over 68% since December 2018, firstly because of the adverse report about the Resilience group in January 2018 and then because of the pandemic in March 2020. This has left the index trading at a fraction of its underlying value – which represents an opportunity for private investors.
Among the property shares there are some which we believe represent bargains,

The Great Bull

We have often stressed the importance of understanding the long-term context within which the share market is moving. It is very difficult to see what is likely to happen in the future unless you go back in history and study how we arrived at this point. In this context, it is important to understand that, these days, the major markets of the world generally move together – and they all follow Wall Street.

The Confidential Report - October 2020

America
Technically, September 2020 was a correction month on Wall Street, with the S&P500 falling about 9,3%. The market was certainly due for some sort of correction following its record high of 3580 on 2nd September. Consider the chart:

You can see here that over the past month the S&P

The Relationship between Fundamental and Technical Analysis

There are generally two approaches to share assessment – fundamental and technical analysis. The fundamentalist is trying to answer the question, “How good will the company be as a generator of dividends in the future?” while the technician is looking for patterns in the share’s price and volume charts to improve his predictions of where the share

Oil

The Oil market is usually an excellent barometer of the state of the world economy. When there is growth, people buy more cars and drive more, more products are consumed which means they have to be transported to retail outlets – usually by an internal combustion engine of some sort.
The COVID-19 pandemic caused the oil price (North Sea Brent) to collapse to prices below $20 a barrel

Alviva

There is plenty of value for private investors on the JSE at the moment. The big institutions are focusing on the large blue-chip shares and ignoring the smaller companies, but some of those smaller companies offer really good opportunities. We think that Alviva (AVV) is worthy of your consideration.  
Alviva describes itself as,

Two interesting shares.

Warren Buffett has famously been quoted as saying “Be fearful when others are greedy and greedy when other are fearful”. Right now, investors are understandably fearful and for that reason there are some unusual opportunities in the market. The shares which would obviously benefit in the post-COVID-19 period have already moved – shares like Prosus and Sibanye. In fact, mining

The Confidential Report - September 2020

America
The new approach to monetary policy, announced by Jerome Powell (Chairman of the Federal Reserve Bank) on 27th August 2020, has been interpreted by the market as substantially more dovish, with the immediate result that the S&P500 broke up to new record highs – well above the previous high of 3386 made on 19th February 2020, before the advent

City Lodge Rights Issue

The COVID-19 pandemic has hit few listed companies on the JSE as badly as City Lodge. Business and holiday travel has slowed to a crawl and occupancy in the second half of March 2020 fell to a dismal 16,7%. KPMG, the City Lodge auditors, drew attention to the fact that in the 9 months to 31st March 2020 the company lost R316 000 which left it in a position where its liabilities

Gold shares up 225%

On 24th June 2019 we published an article under the heading “New Gold Bull” in which we drew your attention to the fact that the US dollar price of gold had broken up convincingly above resistance at around $1340. Below is the chart which we included with that article.

You can see here the clear upside breakout above the upper