MASTERS IN FINANCE
EQUITY RESEARCH SHOPRITE HOLDINGS LTD COMPANY REPORT
FOOD RETAIL 6 JANUARY 2013
STUDENT: JOSÉ MARIA LIMA [email protected]
The start of an International Firm Recommendation: SELL Vs. Previous Recommendation
Strong growth profile abroad, solid cash flow Price Target FY14: 158.6 ZAR generation at home Vs. Previous Price Target
Price (as of 5-Jan-14) 163.6 ZAR
. We start our coverage of Shoprite Holdings Ltd with a Reuters: SHPJ.J, Bloomberg: SHP SJ recommendation of SELL and a price target FY14 of 158.6 52-week range (ZAR) 158.08-206.37 ZAR. Each share presently trades at a premium of 3.05% at 163.6 Market Cap (ZAR m) 94,432.140 ZAR and yield a -19.4% one year return. Outstanding Shares (m) 535.143 Average Daily Volume (last 3M) (m) 2.663 . Macroeconomic prospects at home may pressure 1-Year Return (%) -19.4 sales. Economic growth is expected to slow down to 2.8% given Source: Bloomberg and Company’s Data the decrease in commodity prices and the capital outflow of the country. Government and trade deficit are long-turn concerns for us. We expect 2014’s LfL to be pressure and to be the smaller ones in the last 3 years, 4.18%, nevertheless the company wishes to trigger growth through the opening of 100 new supermarkets.
. Africa sparkles in the horizon. Shoprite desires to continue its expansion strategy, replicating its business model, in Source: Bloomberg Sub-Saharan Africa. An acceleration of store openings and (Values in ZAR millions) 2013 2014F 2015F maintenance of two digits growth in sales are expected in the next Revenues 92,747 105,603 120,877 decade (24.2% in 2014). EBITDA 6,745 7,854 9,023 EBIT 5,359 6,112 7,041 . Suppliers pressure Working Capital affecting cash Net Profit 3,615 4,269 4,952 flow. Working Capital has turned positive in 2013 and we expect it EPS 6.76 7.98 9.25 DPS 3.19 3.99 5.09 to be maintained. This is explained by the relative decrease of ROIC 36.9% 29.2% 29.8% Accounts Trade Payables. To control the margin between CPI and Working Capital 2,519 2,868 3,283 CAPEX 3,568 3,338 3,99 PPI, retailers are paying faster to get discounts. Source: Company’s Data and Analyst Estimation
. Strong financial and liquid position. The company Company description currently has a D/E of 27.1% and a level of cash equivalent to 6% Shoprite is the biggest food retailer in Africa. The company has its main operations in South Africa but it is also present of sales. We believe that D/E will decrease overtime to reach in other 16 Sub-Saharan countries. The company’s most national competitors and that cash may be used to financing an important brands are Shoprite, Usave and Checkers. Besides Supermarkets, the firm it is also present in Furniture acquisition outside the continent which is a major concern for us. and other small businesses.
THIS REPORT WAS PREPARED BY JOSÉ MARIA LIMA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
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SHOPRITE HOLDINGS LTD COMPANY REPORT
Table of Contents
EXECUTIVE SUMMARY ...... 3
COMPANY OVERVIEW ...... 4
COMPANY DESCRIPTION ...... 4 SHAREHOLDER STRUCTURE ...... 5 DIVIDEND POLICY ...... 5 MACROECONOMICS ...... 6
MACROECONOMICS OF AFRICA ...... 6 MACROECONOMICS OF SOUTH AFRICA ...... 7 THE SECTOR ...... 9
SECTOR DESCRIPTION ...... 9 COMPARABLES ...... 11 BUSINESS UNITS: DESCRIPTION AND FORECASTS ...... 13
SUPERMARKETS IN SOUTH AFRICA ...... 13 SUPERMARKETS OUTSIDE SOUTH AFRICA ...... 18 FURNITURE ...... 21 OTHER OPERATING SEGMENTS ...... 23 OTHER IMPORTANT ITEMS DESCRIPTION AND FORECAST ...... 24
FINANCIAL DEBT ...... 24 EXCESS CASH ...... 24 SUM-OF-PARTS VALUATION ...... 25
WACC...... 25 TERMINAL VALUE ...... 27 PRICE TARGET ...... 27 SENSITIVITY ANALYSIS ...... 29 SCENARIO ANALYSIS ...... 29 MULTIPLES ANALYSIS ...... 30 SWOT ANALYSIS ...... 31
APPENDIX ...... 32
RESEARCH RECOMMENDATIONS ...... 39
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Executive summary
Shoprite Holdings is South Africa’s biggest Food Retailer, having approximately 92 Billion rands in Sales in the year ending in June 2013. Nearly 86% of the Shoprite is South Africa’s group’s total sales come from the internal market, being the remaining 14% major Food Retailer related with the group’s international expansion in other Sub-Saharan African countries. Shoprite is a truly African company.
Africa has been able to present a concrete and sustainable growth profile during the last years, having grown 6.5% in 2012. South Africa is the continent’s most Africa is passing through a positive period in economic developed nation and it is considered an emerging economy. Nevertheless terms. Nevertheless South growth has been slowing down and the country is only expected to grow 2.8% in Africa has been slowing 2013. Moreover South Africa has numerous structural issues like its deformed down labour market, its public and external deficit and its idiosyncratic social and ethnic problems.
Modern Grocery Distribution penetration rates have hugely increased in the last 10 years, representing 55% of total Food Retail market. This is explained by the The South African Food Retail market has positive evolution of consumption, living standards and urbanization that changed dramatically changed in the the way South Africans consume. The market is controlled by 5 major last decade companies: Shoprite, Pick n’ Pay, Spar, Massmart and Woolworths; being Shoprite the biggest player with a share of 32.5% last year.
Supermarkets in South Africa are responsible for 83% of EBITDA, but Supermarkets outside South Africa are the ones that have been presenting EBITDA Margin of Shoprite is greater evolution, growing always above two digits in the last 5 years (27.9% in above industry, but it may not be sustainable in the long-run 2013). Shoprite’s international expansion is already responsible for 12% of EBITDA. The company’s EBITDA Margin is of 7.4% which is above industry average of 5.8%. It is our belief that these margins are not sustainable in the long run because of the pressure that national suppliers are making to increase prices (PPI is above CPI), which has already turned Working Capital positive, damaging the Cash Flow.
Shoprite has a strong financial and cash position. Debt to Equity is of 27.1% and The possibility of an M&A the debt profile is almost entirely convertible bonds. Shoprite currently has a cash operation outside the continent is a major threat for position above the requirements for Working Capital (6% of Sales). The possible the company solid position use of this money for an M&A operation outside Africa is of great concern for us, since the company does not have market know-how outside Africa.
We start our coverage with a We start our coverage of Shoprite with a SELL recommendation and a target SELL recommendation and a price of 158.6 rands. Despite the growth profile of the company, its robust target price of 158.6 rands financial and cash situation and its well planned international expansion, the market is trading the company at a premium of 3.05%.
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Figure 1: Evolution of Each Company overview Business Unit Contribution to Total Sales 100% Company description
80% Shoprite Holdings is a South African Food Retailer group. Shoprite was founded 60% in 1979 and it is nowadays the major player in the food retail market of the 40% country with 32.5% market share of the Modern Grocery Distribution1 and the 20% biggest supermarket chain in the African continent. The company currently
0% operates 2179 stores in all Sub-Saharan Africa (SSA) within several different 2008 2009 2010 2011 2012 2013 businesses and brands. Reaching several target markets and individuals through Other Operating Segments Furniture its different brands and supermarkets types, Shoprite aims to be a company that Supermarkets Non-SA Supermarkets SA reaches all people from all classes. The company’s vision is to provide low prices Source: Company Data and create a trustful relationship with its customers in an appropriate shopping Figure 2: Evolution of Each atmosphere. Business Unit Contribution to EBITDA Currently one can subdivide the group’s businesses in three segments: 100% Supermarkets, Furniture and Other operating segments. The contribution to Total 80%
60% Sales and EBITDA of each Business Unit has remained stable during the last 5
40% years as observable in Figures 1, 2 and 3, despite the decrease in the foreign
20% businesses of the company following the 2008 International crisis, this part of the
0% group is the one with the highest potential for future revenue and profit growth. 2009 2010 2011 2012 2013 The supermarkets branch includes three different types of brands that are Source: Company Data Shoprite2, Checkers and Usave. The Furniture segment has three different kinds
Figure 3: Evolution of Total of stores too, which are OK Furniture, OK Power Express and House&Home. Sales and Geographical The other operating segments include several diverse businesses from a food Billion Contribution Rands chain, Hungry Lion, several franchisee operations and Liquor and Pharmacy 100 Stores. 80
60 The company is currently present in other 16 Sub-Saharan countries besides South Africa, with a main focus on Namibia, Angola, Zambia and Nigeria. The 40 Sales outside SA represented in June 2013 nearly 14% of Total Sales, which 20 represents an increase in its contribution of 2.1 percentage points since 2010, 0 2008 2009 2010 2011 2012 2013 when it represented only 11.9% of Revenues. Operations abroad and its growth
Sales outside South Africa are the crown jewel and future long term drivers of Shoprite Group.
Sales in South Africa Source: Company Data
1Modern Grocery Distribution refers to modern retailing that is basically organized trade. It is the opposite of the concept of Traditional Grocery Distribution. 2 The first and main trademark of the group.
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Shareholder structure
Shoprite Holdings currently has 570,579,460 common shares with a nominal value of 113.4 cents each. The Share Capital of Shoprite remains constant at 650 Million shares with a nominal value of 113.4 cents each. The division of the company’s shares can be seen in Figure 4,5 and 6. As it can be seen, Shoprite has a much diversified base of shareholders both geographically and institutionally. Wiese and Basson, both founders of the company and Chairman and CEO respectively still own 15% and 1.8% correspondingly. They are in the company since day one, and their succession, given their old age, 71 and 67 correspondingly, is one of our major concerns in the long run. The shareholder structure of Shoprite exhibits numerous financial investors like Banks, Funds and Pension Funds, both national and international. This fact is particularly related with the exposure of the company Source: Company Data to not only South Africa but also to the rest of Sub-Saharan Africa (Supermarkets Figure 5: Geographical outside South Africa represents 13.7% of Enterprise Value), being a good stock for Break-down of Beneficial Shareholders a portfolio that wants an African exposure. The South African Government Pension 12,90% Fund is the second bigger shareholder of Shoprite. This is the biggest pension 2,6% 3 3,3% fund in Africa and it is an independent entity responsible for the pensions and 3,9% 45,3% retirement benefits of South African public employees. So the government has no direct participation in the firm’s equity. Free Float represents 37.9% which is an indicator of this stock’s great liquidity. 32,0%
South Africa USA Luxembourg UK Dividend Policy Singapore Other Source: Company Data Shoprite’s dividend for the fiscal year ended in June 2013 was of 3.19 rands per stock. This means that total dividends were approximately of 1.7 Billion rands Figure 6: Management and represented 47.3% of the company’s earnings. Pay-out ratio advance from Position 36.8% in 2008 to 47.3% in 2013 (Figure 7), but it is still low considering other 17,37% companies in the JSE, since the company is still investing a lot in the expansion
6,21% of its business in SA and in their foreign operations. Nevertheless, Pick n’ Pay has an even lower Pay-out ratio of 21.9%. Dividend yield was of 1.8%, being decreasing since 2009. Shoprite’s dividend yield is very low considering its main
76,42% comparables and the JSE’s companies, Pick N’ Pay has an expected average Management Own Shares dividend yield of 3.9% for 2013, and Spar of 4%. The average dividend yield in Public Owners the Johannesburg Stock exchange was of 2.83%. This difference can be Source: Company explained as dividends are not growing at the same pace than the price per Data share, dividends grew 193% in the last 5 years, while the price per share grew
3 It has more than 1 Trillion rands of assets and 1.2 Million active members.
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320%. Consequently Shoprite’s yield is declining in relative terms since the market is valuing more the firm.
Source: Company Data and Analyst Estimation
Figure 8: Real Economic Macroeconomics Growth Evolution 8,00% Macroeconomics of Africa 6,00%
4,00% Unlike the developed world and most of the emerging nations, Africa has been
2,00% able to present a solid and sustainable growth profile during the last years, in an
0,00% adverse world economic context. Africa’s future is very optimistic according to 2010 2011 2012 2013 -2,00% several international institutions, nevertheless a change in the economic profile of
Europe North America the continent and the stabilization of institutions is imperative for the 4 Latin America Asia & Oceania concretization of those prospects .
Africa The continent’s economy grew more than 6.5% in real terms during the last year Source: United Nations Data with projections assuming a slower growth during 2013 and 2014. This economic slowdown is due to the lower growth in countries that have a stronger relationship Figure 9: Commodities' Prices evolution with the global economy or are facing social and political unrest. Nevertheless we 2005=10 0 in US$ must take into account that the 2012’s growth was positively influenced by the 250 restoration of the Libyan oil production sector. However the forecasts are still one 230 of the highest in the world (Figure 8). This economic evolution originates from a 210 diverse variety of factors: exports, private consumption, public spending and 190 private investment are all increasing. 170
150 The main aspect that is influencing African economic prosperity is the evolution
130 of the price of commodities in recent years (Figure 9). Countries that have plenty
110 of resources have been taking advantage by increasing exports and receiving
90 significant private investment from developed countries and even China. Oil, gas
70 and mineral production are at maximums and there is an additional boost in the
50 production of agricultural goods, given good harvest years.
2005 2007 2008 2009 2010 2011 2012 2006 This money flow has been a challenge for governments and society in general. Agricultural Goods Metals Oil Government spending and private consumption are increasing. Nevertheless Source: IMF Data government’s fiscal balance does not present a problem giving the increase in revenues from this new economic era. Governments should take this opportunity
4 According to the African Economic Outlook 2013.
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to develop other sectors in the economy besides the primary. The so call Natural- Figure 10: African Macroeconomic Indicators resource base structural transformation must occur in the continent in the near
10,0% future, especially in the countries that are benefiting the most from the money
7,5% inflows. The development of a strong manufacturing sector and the investment in 5,0% education and human development has to be a priority. Furthermore, both 2,5% political and administrative structures are still lacking and without a serious 0,0% investment, which might compromise economic growth in the long run. -2,5% Monetary policy has also been a great challenge. Influenced by the price of -5,0% 2011 2012 2013F 2014F commodities, the moneys inflows and the stabilization of the external balance,
Economic Growth Africa has had high inflation rates around 8% (Figure 10). These prices increases Inflation that are especially problematic in oil and agricultural goods have been pressuring Fiscal Balance the poor urban population, which can be of great concern as it fuels tensions External Balance within and lead to political unrest. In addition the interest rate mechanism in most Source: United Nations: African Economic Outlook 2013 African countries is still very weak. Thus monetary authorities must be careful Figure 11: SA when weighting its main goals: low inflation and economic growth. Macroeconomics Indicators
8,0% 6,0% 4,0% 2,0% Macroeconomics of South Africa 0,0% -2,0% South Africa (SA) is currently Africa’s main economy and the most developed -4,0% -6,0% nation in the continent and it is one of the emerging economies that grew -8,0%
significantly in the last decade. Despite considerable growth in the past, the
2007 2011 2005 2006 2008 2009 2010 2012
2014F 2015F 2016F 2013F economy has slowed down. Moreover the country still has a considerable Economic Growth number of structural problems such has social inequality that has been a Fiscal Balance continuous source of social and political tension. External Balance
Source: IMF Macroeconomic Forecasts Economic growth is expected to be 2.8% in 2013 which means a slowdown in
Figure 12: Rand/US$ relation to 2012 and a very low growth when compared to pre-crisis figures Evolution (Figure 11). Several factors are affecting the economy performance, from where 14 we can highlight: Slowdown of commodity prices; Capital outflow from the 12 country that is triggering a great depreciation of the rand; External and fiscal 10 8 deficit are not controlled; Population challenges and structural problems in the 6 labour market; Problems with the EU, the main trade partner. 4 2 The South African economy has a strong primary sector, with mining and the 0 great conglomerates responsible for that sector a very important part of the country’s GDP, total natural resources rents were above 11% of GDP in 20125.
Source: Bloomberg Given the slowdown of commodity prices since 2011, the exports of the country are slowing down in this industry.
5 Natural Resources Rents refers to the revenues deducted from the costs of extraction. IMF data.
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Moreover the country is suffering from an outflow of capitals, which is a tendency Figure 13: CPI and CPI Food that is affecting other emerging countries like Brazil and India. The huge flow of Evolution money from developed nations to emerging ones after the financial crisis of 2008, 20,0% giving the low interest rates in the US and Europe, are starting to going back for 15,0% those countries, especially with the possibility of an increase in the FED interest 10,0% rate. This has severely affected the rand, which depreciated more than 15% in 5,0% the last 12 months (Figure 12). The currency depreciation has a direct effect in
0,0% inflation, which is forecast to remain high during the next three years (Figure 13).
2008 2009 2010 2011 2012
2014F 2015F 2016F 2013F Additionally the country’s external and fiscal balances are in the red and are CPI CPI Food expected to remain so for the next years. There are some concerns in the short- Source: IMF Data and Forecasts, Analyst Estimation term financing of the external deficit giving the outflow of capital that SA is Figure 14: Population Evolution suffering. So one of the country’s goals should be to reduce its external deficit Millions through a boost in exports or a decrease in imports. Nevertheless exports are 2,5% 56 being affected by the restrictions in the labour market and the volatility of the 54 2,0% rand, while imports are being powered by the government investment plans. 52 Budget deficit is another problem. The government of Mr. Zuma has been caring 1,5% 50 out a policy of continuity in relation to high public investment, especially in the
48 transports sector, both rail and road. The infrastructure investment plans and the 1,0% cut in the corporate tax rate for 28% are pressuring an already negative fiscal 46 0,5% balance. 44 Population has been slowly increasing in the past few years, reaching 51 Million 0,0% 42
in 2012 as it can be seen in Figure 14. This slow growth is associated with the
2008 2005 2006 2007 2009 2010 2011 2012
2015F 2014F 2016F 2013F increase in the mortality rate because of the high incidence of HIV, which is one Population Population Growth 6 Source: FMI of the country’s greatest challenges, more than 12% of South Africans have HIV . Urban population has been also constantly increasing, reaching 63% in 2013, Figure 15: Unemployment Rate which bring significant social and way of life changes in the country.
28% Other issue of concern is the labour market. The country has been passing 27% 26% through a great period of strikes and labour unrest, particularly in the mining 25% sector. This year and until October, a total of 5.4 Million man-days of strike have 24% 23% already occurred, the same than all the year of 2012. It is estimated that this cuts 22% economic growth by 0.5% of GDP7. These situations together with a deformed 21% 20% and restricted labour law, where there are radical unions like the National Union
of Metal Workers and even quotas regarding a person’s colour, are responsible
2005 2006 2007 2008 2009 2010 2011 2012
2013F 2014F 2015F 2016F Source: Statistics South Africa (STATSSA) for a great pressure to increase wages, which affects the already huge
6 According to UNAIDS. 7 According to the National Treasury of South Africa.
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unemployment rate8 (Figure 15). Risks of large scale strikes are still very high and of great concern for us.
Furthermore the government unilaterally ended the Bilateral Investment Treaties with EU countries. South Africa wanted only one agreement with the entire bloc but there has been a lot of confusion between both parties in the matter. Although the possible small effect of this decision in terms of exports and FDI, it is an additional problem with the country’s main trade partner.
Notwithstanding all the negative aspects mentioned above, the country has a decent FDI flow (expected of 1% of GDP in 2013), a low external debt (under 45% for 2013) and a respectable value of foreign reserves, which can cover imports. Regarding the country’s most important stock exchange, the Johannesburg Stock Exchange (JSE), for the investors that hedged against exchange rate risk, it has been the best emerging market performance during the previous 3 years, having a real return of 4.1% in 3 years. For investors that did not hedge against the rand, the JSE has been a terrible disappointment.
Figure 16: The Food Retail The Sector Market
80% Sector Description 60%
40% The South African food retail market has been an industry with huge growth 20% during the last decade. Penetration rates of modern grocery distribution (MGD) 0% 2002 2012 exploded; South African retail companies grew and started its internationalization
Modern Distribution process; competition increased in urban areas and consumer’s pattern changed. Traditional Distribution Basically the industry followed the prosperity period that the country has been Source: STATSSA Data enjoying in the last decade and change in a positive way, starting to become Figure 17: Household Consumption more and more like a developed country retail industry. Evolution in % of The grocery distribution industry grew during the last 10 years about 10% per 64% GDP 10% 63% 8% year, and it represented in 2012 about 360 Billion rands in sales. Modern grocery 62% 6% distribution had a tremendous increase, from approximately 40% to more than 61% 4% 55% of the total food distribution market in 2012 (Figure 16). This growth in the 60% 2% 59% 0% industry is directly influenced by the evolution of the industry main drivers and by 58% -2% the change in consumer behaviour. 57% -4% The evolution of sales in the retail sector is influenced by the price and quantity of
Household Consumption Expenditure goods sold. Price can increase in nominal or in real terms. So price depends on Growth in Household Consumption inflation and real factors. These include: household consumption expenditure and Source: World Bank Data
8 In economic theory, if you do not have flexibility in wages, the labor market will adjust through unemployment.
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consumer’s patterns. If the costs of producing a good increases, its price must Figure 18: General Government follows the same tendency. If a household is wealthier it can purchase further Final Consumption Expenditure in % of goods and pay more for their grocery products. GDP 23% 22% Household consumption expenditure has been constantly increasing (Figure 17), 21% 20% besides 2009, a year influenced by the global recession. From 2010 onwards it 19% 18% has been growing faster than GDP. Moreover, looking for government 17% 16% expenditure we can see that it has been constantly increasing, reaching 22.4% of 15%
GDP in 2012 (Figure 18). This can be explained by the increase in government
2007 2012 2005 2006 2008 2009 2010 2011 Source: World Bank Data social grants for the poor part of the population. Consequently all households including the low income families are spending more each year. This trend is Figure 19: LSM Evolution in % of responsible for the increase in the number of stores and sales of major retailers 60% Total Population and the increase in the penetration rates of modern grocery distribution. 50% 40% In addition consumption patterns are changing. Looking to the Living Standards 30% Measure9 (LSM), there is a clear trend of people moving from the lower LSMs to 20% higher ones (Figure 19). This trend influences the type of consumption of each 10% customer, since a population with higher income, different lifestyle and more 0% concentrated around urban centers (Figure 20) consumes differently. An example 2008 2009 2010 2011 2012 LSM 1-5 LSM 6-7 LSM 8-10 is the increase in the sales of pre-prepared food due to home cooking declining, Source: SAARF Data given the inclusion of women in the workforce. Or some individuals that had a Figure 20: Urbanization wrong and poor diet in the past, which are now eating more protein products. Evolution 120% Thus, individuals are migrating from the traditional distribution to the modern one 100% when reaching LSM levels 3 and 4. In here there is an opportunity for hard 80% discount chains like Usave in the case of Shoprite and some Pick n’ Pay brands. 60% 40% On the other hand the higher LSM categories are also increasing, which means 20% that consumers desire higher value brands, giving a great opportunity to
0% companies like Massmart or chains like Checkers.
2005 2006 2007 2008 2009 2010 2011 2012
2015F 2014F 2016F 2013F Regarding the margins of the sector, they can be evaluated through the evolution Urban Population Rural Population of the consumer’s price in relation to the producer’s price . This is, retailers gain Source: United Nations Data through the gap between the price that sell the goods and the price at which they Figure 21: Prices Evolution 7,0% purchase them, so this difference can be seen as a proxy for the sector’s margins. Looking to Figure 21 it can be seen that in the previous months, 6,0% margins are being pressure by the increase in the producers’ price and in the 5,0% control of the consumers’ price by the retailers. The increase in PPI is reflecting 4,0%
the increase of electricity, labour and fuel in the country. The control in CPIs and
jul-13
set-13
jan-13
fev-13
jun-13
abr-13
ago-13 mai-13
mar-13 the low reflection on the sector margins have been achieve at the cost of Working
PPI CPI Capital that I will explain further ahead. Source: STATSSA Data
9 LSM is a measure of poverty calculated by SAARF (South African Audience Research Foundation). It divides people by its living standards in 10 groups, taking into account degree of urbanization, ownership of cars among other factors. LSM1 is the poorest group while LSM10 is the richest one.
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It is our expectation that although there is a short-term pressure in margins Figure 22: Distribution Forecast Evolution especially in the low income target supermarkets which have consumers that are 120% more price sensitive (retailers cannot reflect the increase in PPI in price in this
100% case because sales might decrease), the retail sector still has good growth
80% prospects in the country. The penetration rates are still low if compared to other
60% developed markets (80 to 90% of total distribution) and even lower than other emerging markets like Brazil, where the MGD accounts for 60% of the market or 40% some eastern Europe countries (Figures 23 and 24). With the continuation of the 20% increase of urbanization and a change in the consumer patterns of South 0% 2012 2013F 2014F 2015F 2016F Africans it is our expectation that although growth will likely slow down, estimates Modern Grocery Distribution give us a penetration rate of 66.2% in 2016 (Figure 22). Moreover each company Traditional Grocery Distribution can continue to have an organic growth strategy, unlike many markets where Source: Analyst Estimation M&A is the only way to further develop a retailer.
Figure 23: Other Emerging Countries Figure 24: Developed Countries Distribution in Distribution in 2012 2012 100% 100% 47% 60% 81% 81% 50% 97% 50% 88% 87% 53% 40% 19% 19% 0% 3% 0% 12% 13% Russia Brazil Romania Poland Portugal UK Germany
Traditional Grocery Distribution Modern Grocery Distribution Traditional Grocery Distribution Modern Grocery Distribution
Source: Planet Retail Source: Planet Retail
Comparables
Figure 25: Market Share of Currently the food retail sector in the country is controlled by 5 major companies the Food Retail Industry in that together control over 93% of the market (Figure 25), which are: Shoprite, 2012 Pick n’ Pay, Spar, Massmart and Woolworths. The concentration in the South 6,4% 4,0% African market is different from other emerging countries where the market 7,6% 32,5% shares of top retailers are still very low. This is evidence that in the case of industry segmentation SA is a very mature market. These retailers are 21,7% characterized by a high growth profile (sales CAGR of 12.07% in the last 3 years), low CAPEX needs (due to the use of leasing in relation to stores), 27,8% respectable margins (industry EBITDA margin in the last 3 years was of 5.8%) Shoprite Pick n Pay and low leverage ratios (comparables median of 8.6% debt to equity). Moreover Spar Massmart all are expanding its model to other Sub-Saharan countries despite the still huge Woolworths Others development that the SA market offers. Source: Companies Data and Analyst calculus The company that is more similar to Shoprite is Pick n’ Pay (Figure 26 presents the firm’s main financials), which is one of the oldest modern retailers and is listed since 1968. It used to be the number one retailer and is has been going
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through a great process of restructuring. Nowadays it has the second highest market share and operates through the Pick n´ Pay and the Boxers brands. The company shifted its business profile in 2012, selling its poor operations in Australia and focusing on the internal market and in neighbouring countries. Moreover the company changed its management recently in order to become more efficient. These changes are not yet reflected in company’s financials, nevertheless we believe that EBITDA margin and sales growth should recover in the medium run. Pick n’ Pay is exposed to all type of customers, from the lowest LSM to the highest one. Nevertheless the firm is still very concentrated in low middle income consumers (LSM 3 to 6), which can be problematic in the short term.
Spar (Figure 27 summarizes the company’s core data) is the third largest company of the industry and has a different business model being a typical wholesaler, being responsible for the purchase of groceries and to sell them for independent supermarkets than operates with its name and brand. Nevertheless this business model has major risks since independent supermarkets that constitute the bulk of the company’s clients are not obliged to buy from the firm. For that reason the company has low CAPEX needs and a high cash flow generation, nevertheless Spar does not control its growth.
The fourth player in the industry is Massmart (Figure 28 presents its key statistics). The company had a strong investment plan during the last 4 years that was accelerated with the entrance of its now major shareholder, Walmart10. The plan consisted on diversifying its retail offer, enhance the supply chain and expand to other African countries. Currently, the company operates in all LSM segments through its different 10 brands (Game, Dion Wired, Makro, Builders Warehouse, Builders Express, Builders Trade Depot, CBW, Jumbo Cash & Carry, Cambridge Food and the Shield buying group).
Finally, the last large retail company is Woolworths (Figure 29 summarizes the firm’s financials). The firm operates through two different retail chains that are food and clothing11. Food accounts for more than 50% of total sales. This firm is the one with the highest ROIC and ROE of the industry because its business model is very different than the previous retailers since it targets only high income consumers that are in the higher LSM categories (8 to 10). The company Figure 26-29 source: Companies Data and Analyst calculus is geographically present in SA and in Australia.
10 In 2011 Walmart acquired 51% of the company. 11 In the clothing business it has an agreement with the British Marks & Spencer.
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Business Units: Description and Forecasts
Supermarkets in South Africa
Figure 30: Supermarkets Target, This business unit of the group comprises all the supermarkets stores in the Size and Relative Store Number country. For the year ended in June 2013 Shoprite had approximately 71Billion LSM 10 rands in Sales from its 810 supermarkets in the country. EBITDA Margin was of 9 8.1% (Figure 31). This represents approximately 76.5% of the group’s Total 8 7 Sales and 83.1% of its EBITDA in 2013. As it was previously mentioned, Shoprite 6 has three types of Supermarkets that are Shoprite, Checkers and Usave. There 5 4 is also one sort of hypermarket that is Checkers Hyper (the three Shoprite Hyper 3 were shutdown in 2011). As it was beforehand stated each supermarkets aims to 2 target different food retail customers (look to Figure 30). It is important to mention 1 0 that it is company’s policy not to own its stores, but leasing it in order to reduce 0 5000 10000 the PP&E investment demand to open new ones and the CAPEX demands Store size in sqm during its life. Moreover leasing has the advantage to provide a greater flexibility Usave Shoprite Checkers Chekers Hyper Source: Analyst Estimation and make it easier to open and close stores.
Usave is a hard discount supermarket that is focused on low income people. In 2008 there were only 91 Usave’s stores in the country, nevertheless by 2013 there were 243 stores, this represents a cumulative growth of 167% in just 5 years. This store is usually smaller and concentrated in poor urban areas and Usave is a supermarket focused on low income smaller cities. It is estimated that each Usave Store as 600 sqm and given the consumers location of the store, the CAPEX needs of this supermarket are expected to be very low. Being concentrated on low income customers, Usave is the perfect vehicle of growth in South Africa, given the country’s population income profile.
Shoprite is the group main brand and supermarket chain. It was the group’s first brand and serves and targets the middle income class. Despite not being a hard Shoprite is a supermarket focused on middle discount supermarket like Usave, Shoprite attempts to serve its clients with the income customers lowest prices as possible, since middle class customers are still very price sensitive. There are currently 361 stores in South Africa. The increase in the number of stores has been stable and between 10 to 20 shops per year (roughly
2 to 6% YoY). These stores are typically larger than Usave’s having an average of 4000 sqm. They are usually located in shopping malls and great metropolitan areas of country, especially in Cape Town, which increase the price of sqm of each store. CAPEX demands are usually higher in a Shoprite store than in a Usave one.
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Checkers is the group brand for upper middle class and upper class customers. It is a supermarket focused on prime quality products, from meat to cheese and Checkers is a supermarket that targets the upper wines, having a greater attention to the quality of the products and its brand. At classes present there are 168 stores in SA, opening an average of 10 supermarkets each year. Checkers are usually smaller stores than Shoprite, being estimated to have around 1500 sqm each, nevertheless they are located in shopping centers and prime zones of SA’s urban areas, being subject at a higher price per sqm than both Usave or Shoprite stores. CAPEX demands are higher in these shops, but so are the margins of this market segment.
Besides the three supermarket chains there is still one hypermarket chain that is Checkers Hyper. At the time, there are 29 Checkers Hyper within the country, having opened on average one hyper per year in the last five years. These stores have around 5500 sqm per store and are located in road intersections in the main South Africa Urban zones. They have the same concept as Checkers, but with a wider and higher variety of products. They are the stores that have the great CAPEX expenditures and that need the biggest investment of all according to our
Source: Company Data, Analyst estimates. Estimation Total Stores reach 801 in 2013, coming from a base of 536 stores in 2008 (Figure 32). This represents a growth of 53 per year or an average growth of 8.3% YoY (Figure 33). The development and expansion of Usave was the main responsible for such increase and penetration in the country’s food retail market. Total sqm of the supermarkets increased from 1573100 sqm to 2001300 sqm. This represents an average YoY growth of 4.9% since 2008. One may see that the sqm grown less than the number of stores, which is associated with the fact that the small Usave shops where the main driver of growth in SA. Average Source: Company Data, Analyst Estimation space per store decreased from 2935 sqm to 2499 sqm. It is estimated an opening of 100 new stores in 2014, especially from the Shoprite and Usave Figure 33: Stores Growth brands. It is our belief that from 2014 onwards the firm will continue to invest in Supermarkets SA 50,0% the South African market, with a notable emphasis in the Usave brand, which has 40,0% a great possibility of growing in peripheral urban areas which are increasing in
30,0% the country. There is also still growth possibility for the Shoprite and Checkers brand, mainly because of the tendency of improvement of the living standards of 20,0% South Africans (seen through the LSM categories) and the change in consumer 10,0% behaviour in developed urban areas. 0,0% Sales and its drivers are the most important variables in a Food Retail Business, -10,0% like Shoprite Holdings. Posing as a growth company during last years, the -20,0% division between the Sales performed in mature supermarkets and the new ones Usave Shoprite must be performed. So Total Sales depend of the Sales per sqm of the existent Checkers Checkers Hyper Source: Company Data, Analyst Estimation stores and the total sqm space of those stores, and the Sales per sqm of the new
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shops and its total space. In order to perform this division, we had to assume that Figure 34: Sales Evolution Billion 12 Rands the ramp-up of a new supermarket is of 1 year . We have also assumed an 120 25% average percentage of Sales for the new stores during its first year of 33% of the 100 20% existing ones, which is a value based on market know-how.
80 As one can see Sales have been increasing at an average of 13.5% per year 15% 60 since 2008, which is a very attractive rate (Figure 34). If we break-down the sales 10% growth profile between Like for Likes13 and New Space contribution, it can be 40 seen that Like for Likes is the main contributor for the evolution of Total Sales 5% 20 (Figure 35), despite the opening of several supermarkets per year. Like for Likes
0 0% may be influenced by the growth in quantity of a supermarket or the growth of the
2009 2008 2010 2011 2012 2013
2016F 2015F 2014F price per item of that store. Taking into account that we are talking about mature
Sales Sales Growth stores and that quantity has a restriction that is space, we may look to LfL to a
Source: Company Data, Analyst proxy of the internal inflation of a supermarket. In Figure 36 we can look for the Estimation evolution of South Africa CPI Food and a two years CPI Food Average. It is very Figure 35: Sales Growth evident the relationship and the same tendency that LfL has with these variables Break-Down which is a proof of what I previously alleged. Consequently we can conclude that 20% not only the opening of new stores have been contributing to the company’s 15% sales growth in South Africa, but also its ability to increase the Sales in the 10% existing supermarkets. It is important to notice that in 2013 LfL (4.8%) was 5% smaller than Food CPI (6.1%), which means that Shoprite is not passing to 0% consumers all the increase in prices, maintaining its policy of affordable and competitive prices in comparison with other industry players. Sales per sqm in
Like for Likes New Space Contribution the existing stores and in the new ones have been also increasing. Total sales
Source: Analyst Estimation per sqm are now of 35.4 thousand rands, and total sales per store of 88.5 Million Figure 36: Relation between rands per year. 12,0% CPI and LFL Comparing Shoprite’s sales evolution against its main comparables it can be 10,0% seen that the company is not having a bad performance (Figure 37). Shoprite has 8,0% been growing during the last 3 years at a faster rate than Pick n Pay and Spar, 6,0% which are the most similar ones in terms of market share with the company.
4,0% Massmart and Woolworths have been presenting an astonishing growth but they still have a low sales base. 2,0% Our sales prospects are much in line with the store ones. Given the lower 0,0% investment from 2014 onwards the main contribution for the increase in sales in the long-run is LfL and not the opening of new stores. We estimate that LfL will CPI Food CPI Food Average trend and follow the path of the country’s Food CPI. Sales per sqm will constantly LFL Source: STATSSA Data, Analyst Estimation
12 Means that a supermarket takes 12 months in order to be considered mature and for its sales growth and path to be normalized. 13 Like for Likes is a terminology used in the Retail Sector to denominate the growth of Sales that does not take into account the opening of new stores, so it is the growth of an already mature and existing supermarket.
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continue to increase with the effect of internal inflation and the investment in Figure 37: Comparables Sales smaller supermarkets like Usave. Growth 30% Regarding margins, SA supermarkets have been presenting a stable slightly 25% increase in its business margins as one can see in Figure 38. 20% 15% Figure 38: EBITDA and EBIT evolution 10 Billion Rands 9,0% 10% 8,0% 5% 8 7,0% 0% 6,0% 6 2011 2012 2013 5,0% EBITDA 4,0% Shoprite Pick n Pay 4 EBIT 3,0% Spar Massmart EBITDA Margin 2 2,0% EBIT Margin Woolworths 1,0% 0 0,0% Source: Companies Data Source: Company Data,
Analyst Estimation
2009 2010 2011 2012 2013
2017F 2015F 2016F 2018F 2019F 2020F 2014F
EBITDA margin has been increasing, reaching 8.1% of Sales in 2013. This fact Figure 39A: Comparables was due to the small decrease in the Cost of Goods Sold, the increase of Other EBITDA Margin Operating Income within the group and the ability of the group to hold Salaries 12% 10% when it is even hiring more staff. The increased of EBIT Margin takes not only all 8% these effects into account but also the constant decrease in depreciation from 6% 13.9% of Sales in 2008 to 11.6% in 2013 and the smaller losses in Items of 4% 2% Capital Nature. The firm’s EBITDA Margin is in very good shape comparing with 2011 2012 2013 its main peers as one can see in Figures 39A and 39B. Pick n’ Pay, which is the Shoprite Pick n Pay most comparable one, only had an EBITDA Margin of 3% in 2013. The only one Spar Massmart Woolworths with higher margin is Woolworths given its specialization in the premium and high Source: Companies Data worth clients segment. Furthermore it is important to mention that these players also use leasing contracts which makes the EBITDA a measure comparable between them. It is our belief that Shoprite’s higher margins are related with a Figure 39B: Comparables Margin in 2013 very efficient management of costs and the strong brand value of its supermarkets. 14% 12% 10% Margins are too high to be maintained in the long run given the huge pressure in 8% 6% wages and some external costs like electricity in SA. Nevertheless the company’s 4% 2% management could increase the business margins in the last 5 years, so we 0% believe that it would hold them in the next 3 years. Our estimations indicate a slow decrease in margins starting in 2017 and continuing in the following years.
PP&E and Intangible Assets, according to our estimates, represent about 14.8% EBITDA Margin EBIT Margin of Sales in 2013 when they only represented 10.3% in 2008. One may think that Source: Companies Data this value is really low for a company that should have stores, warehouses, great distribution channels in terms of PP&E and a great value in trademarks, costumer relationship and software in terms of Intangible Assets, nevertheless it should be
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taken into account that the group’s supermarkets in South Africa are based on Figure 40: Capex Break - Down lease contracts, not entering in the PP&E account, being out of the Balance 3,5 Billion 3,0 rands Sheet. The use of these contracts give the company greater flexibility and it 2,5 spreads the payment of the investment over a larger time frame. Thus the 2,0 1,5 evolution of PP&E during the last years is not only related with the increase in the 1,0 number of supermarkets, but likewise to the investment in distribution channels 0,5 that the company is performing. During 2013 the distribution space in South 0,0 Africa increased 21% mainly in Centurion, Durban, Port Elizabeth and Brackenfell. The investment in the company master-data and merchandizing is Investment in New Stores, Equipments and Others also significant. In relation to CAPEX, it has been growing at an average of 20% Depreciation Source: Company Data, Analyst Estimation YoY. As one can see in Figure 40, approximately 58% is related with new Figure 41: Working Capital investments and 42% is depreciation of already existing investments in 2013. break-down This is another indicator of the firm strategy and growth profile. In the future, 20 Billion given the lower investment in new stores and the one already performed in new Rands 15 distribution channels, CAPEX growth will be more constant. Its break-down will 10 also be different, being depreciation the majority of capital expenditures in 2016 5 and the following years. 0 Considering Working Capital, a very important measure in a retailer, we can see -5 that Shoprite has managed to maintain it mostly negative from 2008 to 2012. -10 Nevertheless there is a shift in 2013, where NWC turns positive. Intuitively it is -15 better for a company to have a negative working Capital, since it means that you -20 can manage your day to day operations with others people money, this was what happened with Shoprite until 2013. As one can see in Figures 41 and 42 the Cash and Cash Equivalents main responsible for the change in the working capital was the relative reduction Provisions of Trade Payables, which is the amount in debt by the company to its suppliers. Trade & Other Payables This situation is a clear response to the price pressure that occurred regarding Inventories producers, making retailers paying quicker in order to control the prices at a Trade & Other Receivables reasonable level. This is also happening with the firm’s main comparables: Pick Working Capital Source: Company Data, Analyst Estimation n’ Pay and Spar. Working Capital will remain positive in the future and it is going Figure 42: Working Capital to increase in absolute terms, given the increase in operations. We consider that Items in percentage of Sales 20% this situation will continue to occur in the next decade if Shoprite does not alter its supplier base. Including more foreign suppliers would give the company the 15% possibility of gaining bargain power with the national ones. Nevertheless this is a 10% very difficult modification in the retail business and would take significant time 5% and effort. So we estimate that Working Capital will continue to be positive in the years to come. 0% 2008 2009 2010 2011 2012 2013 Trade & Other Receivables As it can be seen in Figure 43 the Cash Flow has been changing almost each Inventories year, reflecting that the business in South Africa is not yet stabilized. Most of the Trade & Other Payables Provisions changes in the Cash Flow during the last years are related with the instability of Cash and Cash Equivalents Source: Company Data, Analyst Estimation
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Working Capital. In 2013 the Cash Flow was negative since it is reflecting the pressure of high investment through the CAPEX and a great change from Figure 43: Operational Cash Billion Flow SA Supermarkets negative to positive in Working Capital in comparison with 2012. In the future the Rands 4 Cash Flow will be positive and with a constant growth, influenced by the 3 stabilization of CAPEX and Working Capital and the continuing growth of 3 Operations. 2 2 1 1 0 Supermarkets outside South Africa -1 -1 Even though the main operations of Shoprite are in South Africa, the company is present in many Sub-Saharan countries, especially West Coast countries, where Source: Company Data, Analyst Estimation it tries to replicate the model and the success the firm has in the national front. In Figure 44 one can see the presence of the company in terms of Supermarkets Figure 44: Company’s Operations Abroad outside South Africa em 2013. Namibia, Zambia, Angola and Nigeria are the principal markets, the first three because of the already established presence and Nigeria because of the incredible reception and growth the group is having. Supermarket operations outside South Africa have been considered the golden star of Shoprite giving the growth profile of the business and its potential, derived by the competitive advantages that an African well-known company has and specially the first mover advantage that the company has in these new markets.
The supermarket models in these countries are the same as in South Africa, only Checkers Hyper is not replicable outside the country giving it’s developed and target market characteristics. This Business Unit is responsible for 12.6% of the group’s Total Sales and 11.9% of EBITDA in 2013. Looking to the numbers, Source: Company Data Shoprite and Usave are the main drivers of expansion, having in 2013, 92 and 56 stores respectively. Figure 45 give us the main statistics of these Operations.
Total Stores have been growing at an average of 9% YoY since 2008. The growth in Usave shops is relatively important. Being all these countries in a development position below South Africa but having achieved a great growth during the last decade, the profile of stores opening is accordingly to the group strategy. Shoprite decided to especially expand Usave that targets low income consumers, and Shoprite stores that targets middle income customers. Checkers expansion was smaller, opening just one store during this period. In that way the group aims to reach not only the people that are starting to use Modern Grocery, as it is pointing to the new middle classes that are emerging in those countries. For that, Shoprite is increasing the perception of the brand and consumers loyalty Source: Company Data and Analyst using platforms like social media and press. Assuming the same sizes in the type Estimation
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of stores than in South Africa, total space increased approximately 34% in the last 5 years.
We estimate that the low penetration rates of MGD, the first mover advantage of the firm, the great adaptation of its model to these markets and the reception of the population to the brand would allow the company to increase the number of stores in the coming years (Figure 46). Usave and Shoprite will continue its strategy, while Checkers can focus on the fastest growing countries like Source: Company Data and Analyst Nigeria14. We believe that 320 stores will be operating by 2020. Estimation Figure 47: Sales evolution in One may think that Sales had a mixed pattern in the last years as it can be seen Supermarkets Non-SA's Sales in Figure 47. Nevertheless this is a misleading idea. During 2010 there was a Billion 25 50% Rands slight decrease in sales in rands but not in local currency, where the turnover
20 40% achieved 18%. The great valuation of the rand during both 2010 and 2011 may 30% 15 lead to wrong conclusions when looking at these numbers. In fact the 20% supermarkets operation outside South Africa has been always growing. The lack 10 10% of information regarding each country does not allow a very detail analysis, but 5 0% we know that Shoprite uses not only local suppliers in these countries but also
0 -10% South African producers, therefore the price of imports giving a higher rand also
2009 2008 2010 2011 2012 2013
2015F 2016F 2014F affected prices. Notwithstanding and doing an analysis in rands, it can be seen Total Sales Sales Growth Figure 48: Sales Growth in that overall sales increase more than 124% in the last 5 years and 18.6% YoY 40% Different Currencies average, which is an impressive growth (Figure 48). The profile of this growth can be seen in Figure 49. Space contribution is increasing every year and has a great 20% contribution to the growth than in the case of Supermarkets in South Africa. LfL has been extremely positive during the last two years, being the double of the 0% 15 2010 2011 2012 2013 CPI of all Sub-Saharan Africa (Figure 50). This means that the company is
-20% Sales growth - Rand managing to increase prices in real terms and not only nominally, besides the Sales growth - Local Currency influence that the rand path had. Sales per sqm reached 30.4 thousand rands in Figure 49: Growth of Sales 2013 which is about 86% of the value in SA, nevertheless it has been increasing Break-down 30% constantly even in relation to the same measure in SA. It is important to mention
20% that the break-down of the Sales was performed in the same way as in the South African case. 10% Sales will continue to exhibit two figures growth in the near future according to 0% our estimations. LfL and space contribution will both increase and will almost -10% have the same contribution for overall growth. We estimate that LfL will trend to the Food CPI of the region in the long-run, while space contribution will take Like for Likes Space Contribution Figure 47-49 Source: Company Data, Analyst Estimation
14 Shoprite has been adopting social media marketing especially through Facebook in Nigeria, which increased its brand awareness in the country. 15 Sub-Saharan CPI takes into account the CPI of all countries of Sub-Saharan Africa. This value is from the African Outlook for 2013 of ONU.
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advantage of the opening of new stores. According to our estimations Sales will
Figure 50: Relation between reach 32 Billion rands in 2020 with a CARG of 17.8%. SSA CPI and LFL Regarding Margins, they have marginally increased in 2013, presenting a stable 20% path during the last 3 years (Figure 51A). EBITDA Margin was of 7% in 2013 and
15% EBIT Margin of 5.2%. Looking for the comparison between the margins in international operations with the South Africa ones, it may be seen that SA 10% margins are presently better than the previous ones (Figure 51B). There are
5% several factors that explain this difference. For starting the Costs and General expenses outside SA are greater than in SA in relation to sales, given that as we 0% mention most suppliers in the external front are South African. Moreover in 2011 2012 2013 2014F 2015F 2016F -5% relation to EBIT there are losses regarding exchange rates that affect margins CPI LFL calculated in rands. We estimate that margins will slowly decrease in 2016 and Source: Analyst Estimation the coming years. As in the case of SA, there is a lot of pressure regarding labour costs and electricity. Even thinking that with local suppliers COGS may decrease, we must take into consideration the increase in competition that will occur in the long-run and the superior maturity of these markets.
Figure 51B: Comparing Margins Figure 51A: EBITDA and EBIT evolution Billion of Rands 10% 3 9% 8% SA EBITDA Margin 2 7% 5% 6% SA EBIT Margin 1 5% 0% 0 4% Non-SA EBITDA 3% Margin
Non-SA EBIT Margin
2009 2010 2011 2012 2013
2014F 2016F 2017F 2018F 2019F 2020F EBITDA EBIT EBITDA Margin EBIT Margin 2015F Source: Company Data, Analyst Estimation Source: Company Data, Analyst Estimation PP&E and Intangible Assets, according to our estimates, represent about 15% of CAPEX break-down Million of Figure 52: Capex break-down Rands Sales in 2013 when they only represented 8.6% in 2008. As in the South African 0,8 800 Billion case most of the International Stores are leased, nevertheless the group in 0,7 rands 700 Angola and Nigeria owned its stores, which is a factor of why PP&E and 600 0,6 Intangibles has been increasing and is relatively bigger than in SA. CAPEX has 500 0,5 400 0,4 been growing at an average rate of 53% YoY (look to Figure 52). The 300 0,3 Investment part of CAPEX accounts for 70% of total CAPEX in 2013. This is a 200 0,2 higher value than in the case of SA, indicating the strategy of the group to invest 100 0,1 abroad. We estimate CAPEX to increase around 15% a year in the future except 0 0,0 in 2014, when it will decrease because of the reduction in new openings of Usave Depreciation Investments supermarkets. Unlike SA, the break-down of the CAPEX will be almost equal Investments in New Stores, Equipment and Other between new investments and depreciation given the estimated opening of new Depreciation stores in these geographies. Source: Company Data, Analyst Estimation The Working Capital of the international supermarkets has trailed the same path than the ones at home, evolving from a negative situation to a positive one
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(Figure 53). Working Capital in 2013 was of approximately 320 thousand rands. Figure 53: Working Capital This was one more time caused by the decrease of Trade Payables in relation to Million of Break-down Rands Sales, which was a strategy used by the firm to control the pressure in producers 4.000 prices. We must take into account that most of the goods sold in foreign 2.000 supermarkets are supplied by domestic producers, so the same effect that
0 affected the national supermarkets, affected foreign operations. We estimate that Working Capital will continue to be positive in the following years and even higher -2.000 in absolute value given the huge increases of the operations abroad. There could -4.000 be some attempt of start using more local suppliers than national ones, nevertheless suppliers are still very unprofessional and with a low scale in those Cash and Cash Equivalents Operational countries, making it difficult for a retail company to heavily depend on them. Provisions Trade & Other Payables Lastly the Operational Cash Flow of the business unit has been very instable Inventories Trade & Other Receivables during the last years and was in the red in 2013 as it can be seen in Figure 54. Working Capital This value represents a switch from positive to negative in relation to 2012, and Source: Company Data, Analyst Estimation as in the case of the national supermarkets reflects the switch from negative to positive in Working Capital and the acceleration of investment seen during the
Figure 54: Operational Cash year through a higher Capital Expenditure. Nevertheless, we estimate a positive Flow Non-SA Supermarkets Cash Flow from 2014 onwards, given the stabilization of CAPEX and the lower
600 change in Working Capital. 400
200
Million of Rands 0 Furniture -200
-400 In addition to the Supermarkets Business in South Africa and in other SSA
countries, the firm has a Furniture section that includes three brands: OK
2009 2010 2011 2012 2013
2015F 2014F 2016F
Source: Company Data, Analyst Estimation Furniture, OK Power Express and House&Home. This area of the company was responsible for 3.8% of the Sales and 2.6% of the EBITDA of the group. Besides the opening of new stores and the growth of sales, this part of the group has been losing relative importance for Shoprite. Figure 55 presents the unit most important statistics.
OK Furniture is focused on selling cheap quality Furniture and electrical applicants and currently has 268 stores; of these 233 are in South Africa and 35 in other SSA Countries. OK Power Express is specialized in home entertainment and carpeting goods, being present in very dense urban areas, currently it has 19 stores, of which 18 are in South Africa and 1 in Lesotho. And finally, House&Home is a store focused on quality and sells a large number of furniture and home entertainment products; it has 49 stores open, including 3 abroad.
Therefore the Furniture business has 336 stores in 2013. From 2008 until today, Source: Company Data, Analyst Estimation 100 new stores opened, presenting a YoY growth of 7.3% on average. We
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estimate each one to have an average of 247sqm. Space has increase in the Figure 56: Evolution of Sales same proportion than the number of stores through the last 5 years. It is 20%
15% expected an opening of 25 new stores in 2014 and we estimate that from than
10% onwards an additional 10 net new stores per year given the opening profile of the
5% previous years.
0% Sales have been growing at an average YoY rate of 9.7%, reaching 3.56 Billion -5% rands in 2013 (Figure 56). Nevertheless great part of this growth came from the -10% opening of new stores than of Like for Likes. LfL is presenting very low values that are cause by the continuing pressure of household expenditure in durable Sales Growth goods in South Africa, influencing the sales of home entertainment and furniture. Like For Likes This underperformance affected the Sales per sqm, which decrease last year and New Space Contribution only had an average YoY growth of 2.1% during the last 4 years. Given this Source: Company Data, Analyst Estimation situation that affects LfL together with the decrease in new stores, we believe that the future evolution of the business sales is going to be through a lot of pressure.
Figure 57: Margins evolution In relation to the business Margins, as we can see in the Figure 57, both the Furniture sector EBITDA and EBIT has been decreasing, being of 5% and 3.6% respectively in 10% 2013. Pressure from cogs and general costs like electricity and labour costs were 8% the main responsible for the shrink of Margins. This pressure is going to continue 6% in the near future according to our estimations. We believe that EBITDA Margin is 4% going to stabilized at 5%. EBIT is particularly worrying since depreciation is 2% growing at a faster rate than EBITDA. 0% In relation to PP&E and Intangibles they have been following the same tendency than sales, representing 11.9% of sales in 2013. Despite the management EBITDA Margin EBIT Margin argument that it is performing an aggressive investment in the segment, the Source: Company Data, Analyst Estimation reality is that the percentage of new investments has been decreasing, representing only 38% of Total CAPEX in 2013 and even declining in absolute terms from 2012 to 2013. Estimations give us the same proportion of CAPEX Figure 58: CAPEX Break- Down coming from investments and from depreciation (Figure 58). Working Capital in
140 120 the Furniture sector, according to our estimates, has been following the same 100 80 path than the rest of the group, with a shift to positive in 2013 caused by a faster 60 payment to suppliers. As in the rest of the group we believe that this value will 40 Million of Rands 20 continue to be positive in the future. 0 Therefore the Operational Cash Flow of this segment, pressure by the decline in margins and the change in the working capital profile, was negative in 2013. For the future we estimate a stabilization of a positive Operational Cash Flow. Source: Company Data, Analyst Estimation
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SHOPRITE HOLDINGS LTD COMPANY REPORT
Other Operating Segments
And finally there are other operating segments within the group that are neither supermarkets or related with furniture. These include several and varied businesses: Hungry Lion: a fast - food Chain with 150 restaurants; several franchisee stores: OK Foods, OK Grocer, OK Minimark, OK Value, Megasave, Sentra, Friendly Stores, OK Enjoy, Friendly Liquor that accounts for 398 stores; Liquor Stores: Shoprite Liquor Shop ad Checkers Liquor Shop, which sum up to 195 stores; Pharmacies: Shoprite MediRite and Checkers MediRite, which have a total of 146 stores. Key indicators of these operations can be seen in Figure 59.
All these different businesses accounted for 7% of the group’s total Sales and 2.5% of EBITDA. Total stores reached 889 in 2013 when in 2009 we only had
Source: Company Data, Analyst Estimation 390. One should look carefully to these numbers because at the time the group Liquor Stores and Pharmacies where not counted as a store. Nevertheless Figure 60: Sales Evolution in franchisee stores increased from 252 in 2008 to 398 in 2013. This growth is Other Operating Segments especially related with the creation of the OK Enjoy and Friendly Stores brands. 40% 30% The group desires to create another 17 stores in 2014. 20% In relation to sales they have been growing at an average rate of 23.6% during 10% 0% the last 4 years, mainly due to the increase of the number of stores and -10% businesses and not from Like for Likes (Figure 60). According to our estimations, -20% this growth profile will change to the opposite one from 2015 forwards. Sales Sales Growth growth will stabilize around 4% a year. Margins are shrinking since 2010, being Like For Likes the EBITDA Margin of 2.6% and EBIT Margin of 2.2%. This was due to the great New Space Contribution increase of costs; nevertheless EBIT Margin has been able to decrease less due Source: Company Data, Analyst Estimation to the smaller evolution of Depreciation in relation to sales. We consider that Figure 61: Capex Break- these margins are going to be maintained in the future.
200 Down PP&E and Intangibles represent 2.8% of sales in 2013. In 2011 they have 150 represented around 4.3% which was related with the accounting of the Liquor 100
and Pharmacies Business that year. Without that effect PP&E and Intangibles Million of Rands 50 would have remained stable and around 3%. CAPEX was equally divided 0 between investments and depreciation in 2013 (Figure 61). From 2014 forward,
-50 depreciation will be the larger part of CAPEX. Working Capital of these
operations has followed the same path and tendency than the rest of the group,
2013 2009 2010 2011 2012
2014F 2015F 2016F being positive in the previous fiscal year and will continue to be in the forthcoming years. Operational Cash Flow was also in the red; nevertheless with
Source: Company Data, Analyst Estimation the stabilization of CAPEX and Working Capital, it will be positive from 2014 ahead.
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Other Important Items Description and Forecast
There are some matters than one should analyse not at each business unit but at a group level in order to perform a better investigation and scrutiny. These include Financial Debt and Excess Cash.
Financial Debt
Shoprite’s interest bearing debt size radically changed in 2010 (Figure 62). Before that year the firm only had a bank loan with the First National Bank of
Source: Company Data Namibia in order to finance its operations in Namibia. To better finance its operations activities and the store expansion plan, the company decided to issue 4.5 Million rands in convertible bonds that year which it will expire in 2015. This Figure 63: D/E Evolution new debt profile significantly changed financial ratios. In 2013 D/E was of 27.1%, 35% 30% with the company moving away from its national comparables median of 8.6%. 25% We estimate that in the long run, D/E will tend for the median value of the 20% 15% national comparables of Shoprite (Figure 63) and for that to happen, Interest 10% Bearing Debt will remain almost constant during the next decade. Given the 5% 0% cessation of the convertible bonds in 2015, we have assumed that this debt will be roll-over in the expiration date. It is important to refer that the D/E ratio in South Africa is very low in comparison with same industry companies in D/E Long-term D/E Source: Company Data, Analyst Estimation developed countries (world comparables used for the calculation of the firm’s beta have a median D/E of 33%). This is related with the fact that SA is an emerging economy, not being a mature market in relation to financial loans and capital markets financing. Figure 64: Cash and Cash Equivalents in % of Sales 12%
10% Excess Cash
8% One of the great mysteries of the company is its level of excess cash in balance 6% (see Figure 64). Considering that a retail company needs operational cash 4% equivalent to 2% of its Total Sales16, Shoprite has more cash than it needs to 2% operate. This money can be used in several ways: to repay financial debt, 0% 2008 2009 2010 2011 2012 2013 continue its investment strategy or for an M&A operation outside the African Total Cash Operational Cash continent. It’s our belief that this money should be used to continue its expansion Source: Company Data, Analyst Estimation in SA and in the SSA market, since it’s in these markets that the company has a
16 According to the Mckinsey Valuation Book.
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competitive advantage and can replicate its South African supermarket model. Nevertheless management decision is very blur and uncertainty, making the use of this money one of the greatest risks of Shoprite.
Figure 65: Valuation Break- Down Sum-of-parts Valuation
In order to performed a valuation a Sum-of-Parts approach was decided taking Supermar kets Non- into account a Discounted Cash Flow Model (DCF Model) for each business unit SA of the company and some variables at a group level in a base case scenario (90%) and in a pessimistic scenario (10%). Therefore a DCF model was done
Supermar Enterprise Furniture with our forecasts already mentioned for each of the 4 business units: kets in SA Value Supermarkets SA, Supermarkets Non-SA, Furniture and Other Operating Segments. Adding them and taking into account some tax adjustments at a group
Other level and the Non-Operational Cash Flow we arrived at the Enterprise Value. The Operating Segments Equity value of the firm is then computed taking into account the Interest Bearing Debt (IBD), the Excess Cash and the Non-controlling Interests. We have used an explicit period until 2020 for all BUs and then we have computed a Terminal Value for each one.
WACC
In order to correctly discount the Firm’s Cash Flow one has to compute a Weighted Average Cost of Capital17. In order to correctly estimate this discount rate, one must calculate the Cost of Equity, Cost of Debt and the long-term A different WACC was capital structure of the firm properly. Since Shoprite has a great variety of computed for each different Business Unit businesses in several geographies, one should not compute the WACC for the entire group directly, but should calculate a WACC for every Business Unit in order to better discount every BU’s Cash Flow. So we computed 4 different WACCs for: Supermarkets SA, Supermarkets Non-SA, Furniture and Other Operating Segments. A corporate tax rate of 28%18 was used in the calculations.
Cost of Equity: Since we are valuing a company in an emerging market, our approach differs from the normal method of calculation for a firm in a developed country, nevertheless we have used the Capital Asset Pricing Model adjusting some variables and adding a Country Risk Premium:
17 The WACC represents the rate of return that investors presumes to receive when investing in the company, it can be also seen as the opportunity cost of investors to invest or finance the company with its funds, taking into account the market and idiosyncratic risks associated with it and the type of investment, equity or debt. 18 Source: KPMG world corporate taxes table.
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The risk free rate does not come from the Bond Market of South Africa since South African Government Bonds are not a risk-free security. So we have used the 10 year US Government Bond and have adjusted it to inflation taking into account the long-term inflation of US and South Africa. For the Foreign Operations, Supermarkets Non-SA, the inflation differential took in consideration the long-term inflation for the Sub-Saharan region and not the South African one.
The Market Risk Premium used was 5.5% for historical reasons in developed and mature markets plus a country risk premium. Nevertheless a sector beta was computed in order to transfer the MRP of each business to the company. An unlevered beta was computed taking into account the average of the unlevered betas of the main comparables of each business, which was than relevered with the South African Corporate Tax Rate and the firm’s target D/E. In the case of Supermarkets SA, Supermarkets Non-SA and Other Operating Segments, it was used comparables in the Food Retail business worldwide; for Furniture, it was used comparables in the Equipment and Durable goods Retail industry. Finally, since the firm operates only in emerging countries, a country risk premium was computed. To simplify the process the country risk premium of South Africa was assumed for all the business units. This premium was calculated through the difference in the yield between the US and the SA international bond, which is denominated in the same currency (dollars) and that it is traded worldwide. In order to adjust this bond premium for a stock, we have performed a volatility differential between the South African Bond and Stock Market (JSE) with monthly data from the previous 4 years. Figures 66 to 69 summarize the computation of the cost of equity for each Business Unit.
Cost of Debt: The computation of the Cost of Debt also differs from normal method and approaches, as the company is not rated from one of the main rating companies in the world and it does not have liquid bonds to use as a proxy. Also the company does not segregate its Debt across its operations, so only one cost of debt was calculated and assumed for all business units.
Since Shoprite is a very healthy company, we have assumed the 10-year government bond yield of the South African Government as a proxy for the yield of a fictitious bond of the firm. We have also assumed that the company has the same rate of the Republic, being Baa19. With this rating we could estimate the Figure 67-71 Source: Company Data, Bloomberg, Analyst Estimation probability of default of the company and its recovery rate, achieving a cost of debt of 8.11% (Figure 70).
19 According to Moody’s.
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Capital Structure: Finally to compute the WACC, one should forecast the long- Figure 72: Variables affecting Growth term Capital Structure of the Firm (Debt to Equity Ratio). Shoprite does not have an official Debt to Equity Ratio target, so we have assumed that the capital 90% 80% structure of the firm was going to be equal to its national peers in the long-run. 70% Taking the median of Pick n’ Pay, Spar, Massmart and Woolworths we get a long 60% 50% term debt to equity of 8.6%, which is consistent with the debt to equity the 40% company tends in the forecast balance sheet. 30% 20% 10%
0% Terminal Value
2012 2009 2010 2011 2013
2016F 2014F 2015F 2017F 2018F 2019F 2020F A terminal value was computed for each Business unit, which represents the Reinvestment Rate ROIC Source: Company Data, Analyst Estimation future cash flows of each one after 2020. In order to compute it we have to assume a growth rate (G). In order to know which best G described the Figure 73: Industry ROIC Evolution company’s growth profile in the future a set of variables had to be analysed and
70% taken into consideration. 60% First of all the Reinvestment rate of Shoprite will stabilize in 2020 around 25% 50% according to our estimations and its ROIC will be of 25.7% (see Figure 72). It is 40% important to mention that this ROIC is consistent with the company’s main 30% comparables and the industry average (Figure 73). The ability to have a high 20% 10% ROIC is related with the still great capacity of the company to grow at home and 0% abroad. Moreover the fact that most of the stores in the industry are leased and 2011 2012 2013 not owned decreases significantly the amount of invested capital needed to Shoprite Pick n Pay generate cash, increasing ROIC. Spar Massmart Woolworths This would give us a group growth of nearly 6.5%. Moreover one must think in Source: Companies Data the evolution of the markets where the company is present and look at its CPI. We have assumed a CPI of 4.0% for SA and of 6% to SSA. We believe that Shoprite will grow in real terms so a growth rate has to be bigger than 4.0% and 6% to SA and SSA operations respectively. Moreover we believe in a possible great growth in the foreign operations, where the company is competitive and still has a great possibility of evolution and improvement. Assessing all the things mention above we estimated the growth rates present in Figure 74. This gives us Source: Analyst Estimation a group’s growth rate of 6.1% which is below 6.5% for conservative reasons.
Price Target
Knowing the Enterprise Value, the Equity Value was computed taking into account the Interest Bearing Debt, Excess Cash and Non-controlling interest of the firm in 2013. It is important to mention that the marker value of IBD was
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assumed to be equal to its book value. Dividing the Equity Value for the number of total shares of the company we finally arrive at a price target of 145.3 rands Taking into account the base and the pessimistic scenario per share for June 2013 in the base scenario. This value is equivalent with a we estimate a price target of recommendation price of 167.1 rands for December 2014 (capitalization through 158.6 rands the WACC) in the base scenario. Nevertheless we must take into account our pessimistic scenario, described below, in order to know the correct price. Taking a probability average of 90:10 we get a price of 158.6 rands per share.
Figure 75: Sum-of-Parts Valuation Base Case Scenario Sum-of-Parts 2014F 2015F 2016F 2017F 2018F 2019F 2020F TV DCF Supermarkets SA 1,889,779 1,848,032 2,444,387 2,560,602 2,518,905 2,399,301 2,276,301 52,451,389 DCF Supermarkets Non-SA 209,354 257,716 274,553 274,163 266,946 253,223 233,766 8,174,123 DCF Furniture 39,362 35,670 29,818 22,531 15,660 9,197 3,133 38,225 DCF Other Operating Segments 82,194 84,291 81,256 78,316 75,484 71,787 68,163 1,460,154 DCF Other Group -43,303 -93,033 -75,488 -64,182 -56,169 -50,877 -46,066 -2,419,176 Group DCF 2,177,386 2,132,675 2,754,526 2,871,431 2,820,827 2682631 2,535,297 59,704,715
When looking to these numbers, it is important to highlight some aspects. Firstly the supermarket operation in SA is the most important component for the firm’s value (Figure 77). It represents approximately 88% of the future cash flows of the firm. Foreign operations are responsible for 14% which is a higher value than its current weight in sales or margins of the company, showing the growing importance of the segment in the future. It can be also seen the irrelevance of the company’s Furniture and Other Operating Segments operations in the next years. Furthermore Non-Operational Assets and Liabilities are creating a negative Cash Flow, nevertheless these include mostly deferred taxes of all group’s operations and are not a major threat. Moreover the weight in the Enterprise Value of the Terminal Value is very high, indicating that most of the cash flow generation ability is present in the long and not in the short run. Other important indicator is that Net Debt is negative, this means that Excess Cash is higher that IBD, which is a good indicator of financial health.
Comparing this share value with the close value of 04.01.2014, which was of 163.6 rands, it can be concluded that the company is trading at a premium of 3.05%.
Figure 77: Enterprise Value Decompositon - Base Case 100,0% 87,9% 13,7% 0,1% 2,4% 4,1%
Supermarkets SA Supermarkets Non-SA Furniture Other Operating Non-Operational EV Segments
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Sensitivity Analysis
In order to measure the sensitivity of the price to the WACC and the growth rate, which are two very significant variables, two sensitivity analyses were computed.
As we can see through the tables presented above, the equity value per share of the company is very sensitive to these variables. Obviously, comparing each other, the company’s value is much more sensible to the variation of the WACC and the growth rate in the South African market, since it is where the company has its major operations.
Looking to the numbers, it is possible to determine that with a simple decrease of the WACC by 1% in South Africa our recommendation would change from SELL to BUY. The same would happen with an increase of the growth rate by 1%. In the case of the Operations outside South Africa, only a decrease of the WACC by 1% together with an increase of the growth rate by 0.5% would change our recommendation. This analysis let us conclude that a correct computation of the WACC and the growth rate is essential to truly capture the value of the firm.
Scenario Analysis
When thinking about a pessimist scenario one must consider about risks. And when referring to risks in South Africa one has to talk about ethnic groups and its The pessimistic scenario implications in the social atmosphere of the country. represents the major risk of South Africa – Social In this pessimistic case scenario we have assumed a radicalization from President tensions between different Zuma and its government following the death of Mandela. Afrikaners and British ethnic groups descents are persecuted and the government does nothing to stop it. Following this climate of social tension aggravation, a mass emigration of upper and middle classes occurs to Western countries in the following months, including key employees of Shoprite.
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This scenario is dramatic for the company operations. Its upper and middle classes markets disappear, dramatically reducing sales of Checkers and Shoprite supermarkets. Total Sales are reduced in 50%. Moreover the run of key top employees is reflected in the lack of control and adaptation of costs to this new reality and in the freeze of the expansion plans both in SA and in other SSA countries for two years. The low value of the debt in the firm’s balance sheet is crucial to avoid financial problems. With this scenario the enterprise value is reduce to 39,832.70 Million rands (a decrease of more than 52%). The Equity value per share decreases to 81.9 rands.
Multiples Analysis
In order to complement the valuation of the company, a Multiples analysis was performed. The world comparables of the company that were used to accomplish the beta sector unlevered were used and also the South African industry peers. EV/SALES and EV/EBITDA were the multiples used. In order to have a better analysis, estimations on the evolution of the multiples are also presented.
Figure 80: World Food Retail Multiples
EV/SALES EV/EBITDA Name 2011 2012 2013F 2014F 2011 2012 2013F 2014F Mature Markets 0,5x 0,5x 0,6x 0,5x 7,4x 7,9x 8,0x 7,4x Emerging Markets 0,7x 0,9x 0,9x 0,8x 11,8x 14,6x 14,1x 12,9x South African Market 0,5x 0,7x 0,7x 0,6x 10,6x 12,5x 11,3x 10,1x Shoprite 0,9x 1,0x 0,7x 0,6x 13,1x 14,2x 9,9x 8,6x
As it can be seen Shoprite is trading at a premium when compared to developed markets. In 2013 EV/SALES and EV/EBITDA were trading at a premium of 32% and 17% respectively. This premium reflects the different between the industry in Shoprite is trading at a premium compared with mature, a developed and an emerging market. Looking to the multiples of other South emerging and national industry African retailers, it can be seen that they are all trading at a premium comparing comparables’ average with more mature markets. This is significantly influenced by the expectation of investors in the growth opportunities that exist in the country and in the continent. Basically the market is incorporating the future capacity of generating cash flow in the enterprise value of these companies.
In relation to its South African comparables the company is also trading at a premium of 14% and 13%, nevertheless this is a much smaller premium than in 2012 and 2011. This reflects the confidence in Shoprite’s strategy and management and the appetite of investors in a geographically diversified company in South Saharan Africa.
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SWOT Analysis
To summarize the most important characteristics of Shoprite, we have performed a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis.
Strengths Weaknesses . Sector’s Leader in the South African market – 32.5% Market Share . Great dependence of the Internal market – 86% of Sales are in in 2012 SA
. Higher Margins than its competitors – 8.1% EBITDA Margin . Low bargain power with suppliers against 3% of Pick n’ Pay (main comparable) . High dependence on leasing contracts which are basically . Growth profile in SA and abroad – 9.8% and 27.9% of Sales hidden debt – no information about the amounts growth in 2013 respectively . Higher competition from a restructured Pick n’ Pay and a very . Segmentation of all type of customers, from the lowest to the efficient Woolworth highest LSM Category, avoiding cannibalization . Pressure in Labor costs coming from an inefficient labor market . Strong Brand awareness in SA and all SSA and wrong public policies – strong unions and high strike levels . Low Financial Debt and a high value of Excess Cash – D/E of 27.1% in 2013) . Efficient and competent Management that are within the company for years
Opportunities Threats
. First mover advantage in high growth markets with a still very low . Macroeconomic outlook is negative in the short-term for SA – penetration rate – Especially West Coast Sub-Saharan African economic growth slowdown to 2.8% in 2013 countries like Nigeria . Substitution of the management given its average old age – . Ability to introduce foreign suppliers in the company’s supply chain Wiese and Basson have 71 and 67 years old respectively . Decrease in the corporate tax rate in SA – 28% in 2013 . Greater pressure from suppliers, increasing PPI and . Enough distribution channels to enter into other types of Retail like pressuring COGS and Working Capital Clothes – Strategy already done by Woolworths . The associate risks of having a business in Africa, lack of solid institutions and stability in some countries may threat the company’s cash flow in the long-run
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Appendix
Appendix 1 - Shoprite Consolidated Balance Sheet (Thousands of Rands)
2011 2012 2013 2014F 2015F 2016F 2017F Property, Equipment & Intangible Assets 8,887,854 10,666,741 12,883,388 14,578,464 16,646,994 18,205,896 19,624,327 Trade & Other Receivables 2,305,924 2,721,934 3,457,018 3,936,174 4,505,514 4,927,978 5,313,395 Inventories 7,055,867 8,680,109 10,317,417 11,745,536 13,440,494 14,703,631 15,868,106 Cash and Cash Equivalents Operational 1,445,956 1,654,612 1,854,946 2,111,705 2,416,438 2,642820 2,849,537 Trade & Other Payables 10,071,198 12,733,582 12,723,408 14,484,560 16,574,777 18,132,474 19,568,502 Total Provisions 443,317 477,425 387,394 441,088 504,889 552,230 595,420 Net Working Capital 293,232 -154,352 2,518,579 2,867,767 3,282,779 3,589,725 3,867,117 Other Operating Assets 47,789 91,763 186749 212,633 243389 266211 287031 Other Operating Liabilities 920,103 671,231 763937 869,822 995635 1088992 1174162 Other Operating Assets - Other Operating Liabilities -872,314 -579,468 -577188 -657,189 -752246 -822781 -887131 Operating Invested Capital 8,308,772 9,932,921 14,824,779 16,789,043 19,177,528 20,972,839 22,604,312 Available-for-sale Investments 59,656 0 0 0 0 0 0 Assets held for sale 58,659 391,993 57,071 0 0 0 0 Deferred Income Tax Assets 326,457 413,645 425,381 485,157 558,919 609,850 648,376 Non-Operational Assets 444,772 805,638 482,452 485,157 558,919 609,850 648,376
Deferred Income Tax Liabilities 25,377 152,085 197,135 224,837 259,021 282,624 300,478 Non-Operational Liabilities 25,377 152,085 197,135 224,837 259,021 282,624 300,478 Non-Operating Invested Capital 419,395 653,553 285,317 260,320 299,898 327,226 347,898 Total Invested Capital 8,728,167 10,586,474 15,110,096 17,049,362 19,477,426 21,300,066 22,952,210
Share Capital 616,583 647,314 647,328 647,328 647,328 647,328 647,328 Share Premium 293,072 3,672,069 3,672,069 3,672,069 3,672,069 3,672,069 3,672,069 Own Shares -337,406 -320,146 -320,146 -320,146 -320,146 -320,146 -320,146 Total Retained Earnings 6,512,451 8,745,805 11,184,825 13,319,505 15,548,050 17,707,661 19,728,662 Capital and Shares 7,084,700 12,745,042 15,184,076 17,318,756 19,547,301 21,706,912 23,727,913 Non-Controlling Interest 58,750 62,675 68,194 68,194 68,194 68,194 68,194 Total Equity 7,143,450 12,807,717 15,252,270 17,386,950 19,615,495 21,775,106 23,796,107
Total Borrowings 49,755 4,035,434 4,151,126 3,969,713 4,169,231 3,832,260 3463,404 Net Financial Instruments Position 3,606 231 -23576 -23576 -23576 -23576 -23576 Bank Overdrafts 2,042,100 22,858 7,567 0 0 0 0 Interest Bearing Debt 2,095,461 4,058,523 4,135,117 3,946,137 4,145,655 3,808,684 3,439,828
Shareholders for Dividends 4,851 4,955 6,434 0 0 0 0 Excess Cash and Cash Equivalents -515,595 -6,284,721 -4,283,725 -4,283,725 -4,283,725 -4,283,725 -4,283,725 Total Funds 8,728,167 10,586,474 15,110,096 17,049,362 19,477,426 21,300,066 22,952,210
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Appendix 2 - Income Statement of the Group and its different Business Units (Thousands of Rands)
Group 2011 2012 2013 2014 2015 2016 2017
Sale of Merchandise 72,297,777 82,730,587 92,747,314 923,150 975,512 1,028,665 1,082,261 EBITDA 2,039 2,039 2,041 176,000 181,500 187,000 192,500 Depreciation & Amortization -933,592 -1090,295 -1,350,915 -1,685,780 -1,924,974 -2,105,238 -2,269,258 Trading Profit 3,986,697 4,665,134 5,394,229 6,168,315 7,098,022 7,739,883 8,225,130 Exchange Rate Losses & Items of Capital Nature -78,979 -102,030 -35,193 -5,620,981 -56,649,.84 -5,686,986 -56,759 Operating Profit EBIT 3,907,718 4,563,104 5,359,036 6,112,106 7,041,372 7,683,013 8,168,370 Interest Received 94,614 142,166 259,050 259,050 259,050 259,050 259,050 Finance Costs -125,964 -223,563 -429,185 -441,489 -422,195 -443,414 -407,576 Share of Profit of Associate 0 0 4,952 0 0 0 0 Pre-Tax Profit (EBT) 3,876,368 4,481,707 5,193,853 5,929,666 6,878,227 7,498,649 8,019,843 Income Tax Expense -1,346,826 -1,438,889 -1,578,545 -1,660,307 -1,925,904 -2,099,622 -2,245,556 Net Income 2,529,542 3,042,818 3,615,308 4,269,360 4,952,323 5,399,027 5,774,287 Dividends 1,189,411 1,421,598 1,708,496 2,134,680 2,723,778 3,239,416 3,753,286 Supermarkets SA
Sales 57,213,793 64,584,215 70,925,545 80,150,132 91,608,218 99,278,614 105,600,074 Sales Growth 7.2% 12.9% 9.8% 13.0% 14.3% 8.4% 6.4% Like For Likes 2.0% 8.3% 4.9% 4.2% 4.2% 4.2% 4.0% New Space Contribution 5.2% 4.6% 5.0% 8.8% 10.1% 4.1% 2.4% COGS & General Expenses 53,080,222 59,703,883 65,205,872 73,686,557 84,220,625 91,272,455 97,152,068 COGS & General Expenses Growth 6.5% 12.5% 9.2% 13.0% 14.3% 8.4% 6.4% % of Sales 92.8% 92.4% 91.9% 91.9% 91.9% 91.9% 92.0% EBITDA 4,133,571 4,880,332 5,719,673 6,463,575 7,387,593 8,006,159 8,448,006 EBITDA Margin 7.2% 7.6% 8.1% 8.1% 8.1% 8.1% 8.0% Depreciation 831,309 992,998 1,216,234 1,374,418 1,570,901 1,702,434 1,810,834 Trading Profit 3,302,262 3,887,334 4,503,439 5,089,157 5,816,692 6,303,726 6,637,171 Trading Profit Margin 5.8% 6.0% 6.3% 6.3% 6.3% 6.3% 6.3% EBIT 3,236,842 3,802,315 4,474,058 5,041,756 5,769,291 6,256,325 6,589,771 EBIT Margin 5.7% 5.9% 6.3% 6.3% 6.3% 6.3% 6.2% Supermarkets Non-SA
Sales 7,316,698 9,174,147 11,729,237 14,571,700 17,747,063 20,886,086 24,388,349 Sales Growth 2.1% 25.4% 27.9% 24.2% 21.8% 17.7% 16.8% Like For Likes -1.9% 18.4% 16.1% 12.7% 9.2% 6.0% 6.0% New Space Contribution 4.0% 7.0% 11.7% 11.5% 12.6% 11.7% 10.8% COGS & General Expenses 6,789,900 8,563,320 10,913,077 13,557,752 16,512,163 19,465,832 22,778,718 COGS & General Expenses Growth 3.0% 26.1% 27.4% 24.2% 21.8% 17.9% 17.0% % of Sales 92.8% 93.3% 93.0% 93.0% 93.0% 93.2% 93.4% EBITDA 526,798 610,827 816,160 1,0139,48 1,234,901 1,420,254 1,609,631 EBITDA Margin 7.2% 6.7% 7.0% 7.0% 7.0% 6.8% 6.6% Depreciation 111,274 144,550 203,532 234,074 269,200 309,597 356,056 Trading Profit 415,524 466,277 612628 779873.5 965700.1 1,110,656 1,253,574 Trading Profit Margin 5.7% 5.1% 5.2% 5.4% 5.4% 5.3% 5.1%
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EBIT 407,292 456,079 608,631 773,759 959,585 1,104,542 1,247,459 EBIT Margin 5.6% 5.0% 5.2% 5.3% 5.4% 5.3% 5.1% Furniture
Sales 3,059,648 3,400,185 3,561,555 3,889,298 4,189,275 4,378,637 4,570,056 Sales Growth 1.9% 11.1% 4.7% 9.2% 7.7% 4.5% 4.4% Like For Likes -4.3% 4.6% -0.7% 1.9% 1.8% 1.7% 1.7% New Space Contribution 6.2% 6.6% 5.4% 7.3% 5.9% 2.8% 2.7% COGS & General Expenses 2,887,139 3,180,541 3,382,062 3,693,288 3,978,146 4,157,965 4,339,737 COGS & General Expenses Growth 2.0% 10.2% 6.3% 9.2% 7.7% 4.5% 4.4% % of Sales 94.4% 93.5% 95.0% 95.0% 95.0% 95.0% 95.0% EBITDA 172,509 219,644 179,493 196,010 211,128 220,672 230,319 EBITDA Margin 5.6% 6.5% 5.0% 5.0% 5.0% 5.0% 5.0% Depreciation 41,025 44,152 48,841 54,633 61,112 68,360 76,467 Trading Profit 131,484 175,492 130,652 141,377 150,016 152,312 153,852 Trading Profit Margin 4.3% 5.2% 3.7% 3.6% 3.6% 3.5% 3.4% EBIT 128,879 171,654 129,800 140,525 149,164 151,460 153,000 EBIT Margin 4.2% 5.0% 3.6% 3.6% 3.6% 3.5% 3.3% Other Operational Segments
Sales 4,707,638 5,572,040 6,530,977 6,991,329 7,332,534 7,667,922 7,993,013 Sales Growth 21.7% 18.4% 17.2% 7.0% 4.9% 4.6% 4.2% Like For Likes -8.8% 1.4% -3.1% 3.2% 3.0% 2.9% 2.8% New Space Contribution 8.6% 31.6% 4.7% 3.9% 1.9% 1.7% 1.5% COGS & General Expenses 4,547,377 5,417,603 6,362,304 6,810,767 7,143,160 7,469,885 7,786,580 COGS & General Expenses Growth 21.6% 19.1% 17.4% 7.0% 4.9% 4.6% 4.2% % of Sales 96.6% 97.2% 97.4% 97.4% 97.4% 97.4% 97.4% EBITDA 160,261 154,437 168,673 180,562 189,375 198,036 206,432 EBITDA Margin 3.4% 2.8% 2.6% 2.6% 2.6% 2.6% 2.6% Depreciation 22,834 18,406 21,163 22,655 23,760 24,847 25,901 Trading Profit 137,427 136,031 147,510 157,908 165,614 173,189 180,532 Trading Profit Margin 2.9% 2.4% 2.3% 2.3% 2.3% 2.3% 2.3% EBIT 134,704 133,056 146,548 156,065 163,332 170,687 178,139 EBIT Margin 2.9% 2.4% 2.2% 2.2% 2.2% 2.2% 2.2%
Appendix 3 - Supermarket Sales Analysis (Thousands of Rands)
2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F
Supermarkets SA
Sales per Store 70,686 78,501 81,601 81,734 86,807 88,546 88,957 96,735 101,512 1057,06 Sales per Sqm 24.08 28.31 30.78 31.59 34.32 35.44 35.60 38.88 41.05 42.97 Supermarkets Non-SA
Sales per Store 52,288 71,717 66,333 63,075 68,464 76,662 84,229 91,011 94,937 99,544 Sales per Sqm 17.14 23.37 21.92 21.62 24.54 28.67 31.88 34.88 37.14 39.60
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Appendix 4 - Decomposition of the Cash Flow Statement of the Firm (Thousands of Rands)
Supermarkets SA 2011 2012 2013 2014F 2015F 2016F 2017F
NOPLAT 2,118,513 2,488,615 3,221,322 3,630,065 4,153,890 4,504,554 4,744,635 Depreciation & Amortization 831,309 992,998 1,216,234 1,374,418 1,570,901 1,702,434 1,810,834 Capex 2,082,468 2,477,668 2,908,178 2,742,374 3,270,074 2,839,912 2,748,273 Changes in Net Working Capital 1,054,798 -347,385 2,040,009 250,876 311,620 208,608 170,018 Other Operational Cash Flow 303,583 -237,951 -10,980 57,407 71,306 47,735 39,340 Operational Free Cash Flow 116,140 1,113,378 -521,612 2,068,639 2,214,404 3,206,203 3,676,519 Supermarkets Non-SA NOPLAT 266,573 298,504 438,214 557,107 690,902 795,270 898,171 Depreciation & Amortization 111,274 144,550 203,532 234,075 269,201 309,598 356,057 Capex 403,858 446,678 678,873 498,204 572,966 658,948 757,831 Changes in Net Working Capital 135,742 -48,528 336,513 77,103 86,133 84,221 93,478 Other Operational Cash Flow 36,365 -24,022 8,735 17,689 19,761 19,535 21,795 Operational Free Cash Flow -125,388 20,883 -364,904 233,563 320,764 381,234 424,714 Furniture NOPLAT 84,351 112,347 93,456 101,178 107,398 109,051 110,160 Depreciation & Amortization 41,025 44,152 48,841 54,633 61,112 68,360 76,467 Capex 71,860 74,292 78,783 104,723 117,143 131,035 146,574 Changes in Net Working Capital 58,641 -18,517 103,183 8,850 8,100 5,113 5,169 Other Operational Cash Flow 15,158 -13,101 -1,651 2,040 1,867 1,178 1,191 Operational Free Cash Flow 10,033 87,624 -41,320 44,278 45,134 42,441 36,075 Other Operating Segments NOPLAT 88,164 870,85 105,514 112,367 117,599 122,894 128,260 Depreciation & Amortization 22,834 184,06 21,163 22,655 23,760 24,847 25,901 Capex 147,396 -196,45 40,583 35,555 33,322 34,246 35,011 Changes in Net Working Capital 80,051 -331,54 193,227 12,358 9,160 9,003 8,727 Other Operational Cash Flow 28,765 -177,72 1,616 2,865 2,123 2,087 2,023 Operational Free Cash Flow -87,684 1405,17 -105,517 89,973 101,001 106,580 112,447 Group Level Tax Adjustment -40,230 604,22 -198,187 -72,534 -72,534 -72,534 -72,534 Non Operational Cash Flow -65,910 -2341,58 368,236 24,997 -39,578 -27,328 -20,672 Free Cash Flow to the Firm -193,039 1,188,667 -863,303 2,388,916 2,569,191 3,636,596 4,156,548 Interest Received 94,614 142,166 259,050 259,050 259,050 259050 259050 Share of Profit of Associate 0 0 4,952 0 0 0 0 Finance Costs -125,964 -223,563 -429,185 -441,489 -422,195 -443,415 -407,577 Tax Shield From Finance Costs 43,521 77,241 120,172 123,617 118,215 124,156 114,121 Change in Equity -1,358,108 2,621,449 -1,170,755 -2,134,680 -2,723,778 -3,239,416 -3,753,287 Change in Interest Bearing Debt 1,182,232 1,963,062 76,594 -188,980 199,518 -336,971 -368,856 Excess Cash & Cash Equivalents 355,222 -5,769,126 2,000,997 0 0 0 0 Shareholder for Dividend 1,523 104 1,479 -6,434 0 0 0 FCF from Financing 193,039 -1,188,667 863,303 -2,388,916 -2,569,191 -3,636,596 -4,156,548
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Appendix 5 - Key Ratios Forecast
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Financial Debt to Equity 0.9% 15.3% 29.3% 31.7% 27.1% 22.7% 21.1% 17.5% 14.5% 12.1% 11.1% 11.0%
Total Liabilities/Total Assets 70.0% 66.8% 65.5% 58.6% 54.5% 53.5% 53.4% 52.3% 51.3% 50.6% 50.3% 50.4%
Interest Cover Ratio 33.8 36.2 31.0 20.4 12.5 13.8 16.7 17.3 20.0 23.3 26.9 28.5
Debt to Assets Ratio 0.70 0.67 0.65 0.59 0.54 0.53 0.53 0.52 0.51 0.51 0.50 0.50
Total Assets Turnover 3.54 3.75 3.49 2.68 2.77 2.83 2.87 2.90 2.92 2.93 2.94 2.95
EBITDA Margin 6.2% 6.4% 6.8% 7.0% 7.3% 7.4% 7.5% 7.4% 7.4% 7.2% 7.1% 7.0%
Operating Profit Margin 4.9% 5.0% 5.4% 5.5% 5.8% 5.8% 5.8% 5.8% 5.7% 5.6% 5.5% 5.4%
Net Profit Margin 3.4% 3.4% 3.5% 3.7% 3.9% 4.0% 4.1% 4.1% 4.1% 4.0% 3.9% 3.8%
Return on Assets 12.1% 12.7% 12.2% 9.8% 10.8% 11.4% 11.8% 11.8% 11.8% 11.7% 11.5% 11.3%
Return on Equity 40.1% 38.3% 35.4% 23.8% 23.7% 24.6% 25.2% 24.8% 24.3% 23.7% 23.2% 22.9%
Earnings per Share 4.00 4.54 5.00 5.93 6.76 7.98 9.25 10.09 10.79 11.38 11.95 12.46
Dividend Payout 44% 46% 47% 47% 47% 50% 55% 60% 65% 68% 73% 75%
Dividends per Share 1.8 2.1 2.3 2.8 3.2 4.0 5.1 6.1 7.0 7.7 8.7 9.3
Cash Flow per Share 2.2 -0.7 -0.4 2.3 -1.6 4.5 4.8 6.8 7.8 8.4 8.7 9.0
Appendix 6 - Historical Liquidity Analysis
Liquidity Ratios 2008 2009 2010 2011 2012 2013 Current Ratio 1.05 0.98 0.95 0.91 1.49 1.50 Quick Ratio 0.53 0.42 0.39 0.35 0.82 0.73 Cash Ratio 0.34 0.26 0.20 0.16 0.61 0.46
Appendix 7 - ROIC Analysis
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Group
ROIC 83% 72% 44% 37% 37% 29% 30% 28% 28% 27% 26% 26% Average ROIC 70% 51% 36% 33% 30% 27% 28% 27% 27% 26% 25% 25%
Supermarkets SA
ROIC 58% 63% 43% 36% 39% 30% 31% 29% 28% 28% 27% 27% Average ROIC 50% 46% 36% 33% 32% 28% 29% 28% 27% 27% 26% 26% Supermarkets Non-SA
ROIC 87% 99% 50% 32% 36% 28% 30% 29% 29% 28% 27% 25% Average ROIC 70% 73% 37% 28% 27% 26% 27% 27% 27% 26% 25% 24% Furniture
ROIC 112% 61% 32% 33% 26% 20% 19% 18% 16% 15% 13% 12% Average ROIC 96% 42% 28% 32% 22% 19% 18% 17% 15% 14% 12% 11% Other Operating Segments
ROIC - - - 55% 82% 33% 33% 33% 33% 33% 33% 33% Average ROIC - - - 66% 41% 32% 32% 32% 32% 32% 32% 32%
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Appendix 8 - Historical Activity Analysis 2008 2009 2010 2011 2012 2013 Group Inventory Turnover 10.1 9.8 11.0 10.2 9.5 9.0 PPE & Intangibles Turnover 9.9 10.4 9.4 8.1 7.8 7.2 Total Assets Turnover 3.2 3.5 3.7 3.5 2.7 2.8 Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6 Supermarkets SA Inventory Turnover 10.3 9.8 11.0 10.3 9.6 9.1 PPE & Intangibles Turnover 9.3 9.7 8.8 7.8 7.3 6.7 Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6 Supermarkets Non-SA Inventory Turnover 9.1 9.9 11.2 10.3 9.5 8.9 PPE & Intangibles Turnover 9.9 11.6 10.4 7.4 7.1 6.7 Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6 Furniture Inventory Turnover 11.3 10.0 10.9 10.1 9.5 8.8 PPE & Intangibles Turnover 10.9 10.4 9.1 8.4 8.7 8.4 Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6 Other Operating Segments Inventory Turnover 9.5 9.4 10.7 9.9 9.1 8.5 PPE & Intangibles Turnover 86.1 91.9 50.2 23.3 34.1 35.7 Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6
Appendix 9 - Number of Stores Evolution per Business Unit
Business Unit 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F
Supermarkets SA
Shoprite 302 310 319 331 339 361 411 431 441 446
Checkers 119 130 141 154 162 168 174 179 184 189
Checkers Hyper 24 24 22 26 28 29 32 33 34 35
Usave 91 129 169 189 215 243 284 304 319 329
Supermarkets Non-SA
Shoprite 71 73 76 78 85 92 101 111 121 131
Checkers 4 4 4 4 5 5 11 16 21 26
Usave 25 25 28 34 44 56 61 68 78 88 Furniture 236 264 280 300 314 336 361 371 381 391
Other Operating Segments 368 390 594 645 849 889 906 921 936 946
Total Stores 1240 1349 1633 1761 2041 2179 2341 2003 2074 2135
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Appendix 10 - World Comparables – Supermarkets (Thousands of US Dollars)
Name Beta Levered MV Equity BV Debt D/E Country Tax Rate Beta Unlevered Casino Guichard Perrachon 0.73 130,506,863 167,382,983 128.3% France 33.3% 0.39 Jeronimo Martins 0.90 124,691,517 10,181,136 8.2% Portugal 25.0% 0.85 Sainsbury 0.57 123,291,804 38,652,717 31.4% United Kingdom 23.0% 0.46 Tesco 0.48 47,318,037 16,691,520 35.3% United Kingdom 23.0% 0.38 Dia -0.24 5,709,531 16,135,668 282.6% Spain 30.0% -0.08 Metro 1.33 156,762,249 110,223,724 70.3% Germany 29.6% 0.89 WM Morrison 0.25 107,188,475 42,109,416 39.3% United Kingdom 23.0% 0.19 Colruyt 0.02 96,255,566 381,463 0.4% Belgium 34.0% 0.02 Koninklijke Ahold 0.71 197,789,162 46,399,110 23.5% Netherlands 25.0% 0.60 Whole Foods 0.91 243,132,107 274,830 0.1% United States 40.0% 0.91 Kroger 0.51 226,045,071 79,419,562 35.1% United States 40.0% 0.42 BIM Birlesik 0.75 62,150,646 77,152 0.1% Turkey 20.0% 0.75 Magnit 1.87 257,694,205 17,687,810 6.9% Russia 20.0% 1.77
Appendix 11- World Comparables – Furniture (Thousands of US Dollars)
Name Beta Levered MV Equity BV Debt D/E Country Tax Rate Beta Unlevered Stanley Furniture 0.75 54,409 0 0.0% United States 40.0% 0.75 Leggett & Platt 1.07 4,179,851 957,500 23.0% United States 40.0% 0.94 Herman Miller 1.16 1,758,211 250,000 14.0% United States 40.0% 1.07
Appendix 12 - National Comparables 2013 Data (Thousands of Rands)
Company Name Pick n Pay Spar Massmart Woolworths Ticker PIK SJ Equity SPP SJ Equity MSM SJ Equity WHL SJ Equity Total Assets 132,237,998 96,594,995 227,702,006 121,880,003 Total Debt 1601,900 0 3,309,900 8,320,000 D/E 7.1% 0.0% 10.1% 15.2% Market Capitalization 22,674,754 102,978,180 32,820,168 54,772,176 Book Value of Equity 23,075,999 28,833,999 48,021,002 59,040,000 Enterprise Value 23,186,160 21,693,821 35,620,127 53,988,143 Total Sales 61,032,899 45,637,200 61,209,100 35,227,001 Gross Profit 10,971,200 4,013,100 11,252,000 13,553,000 EBITDA 1,828,800 1,650,000 2,948,500 4,209,000 EBIT 894,200 1,563,100 2,337,800 3,454,000 Net Income 561,800 1,124,300 1,215,900 2,597,000
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Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by “José Maria Costa Macedo Nóbrega de Lima”, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use.
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