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South African Food Retailers, Favored on Inflation, JPMorgan Cazenove Says

South African food retailers including Shoprite Holdings Ltd. and Spar Group Ltd. are favored over local clothing and furniture retailers as food inflation accelerates, according to JPMorgan Cazenove.

“Investors should be overweight the food retailers, as we believe that the sector could re-rate and outperform the discretionary counters as food inflation picks up,” Johannesburg-based analyst Sean Holmes wrote in a note to investors today. Higher electricity costs and fuel prices “will add impetus to food prices over the next six months,” he said.

Eskom Holdings Ltd., which supplies about 95 percent of South Africa’s electricity, on Feb. 24 won permission to raise fees by 24.8 percent this year. The price of gasoline, which is regulated by the Department of Energy, has risen for four consecutive months.

The central bank of Africa’s biggest economy has cut its benchmark interest rate seven times to 6.5 percent since December 2008 to help pull the economy out of its first recession in 17 years. Consumer spending, which accounts for two-thirds of expenditure, has been slow to respond to the recovery after 870,000 jobs were lost last year and bad debts increased.

Shoprite, South Africa’s biggest food retailer, had its price estimate raised 2.8 percent to 98.02 rand at JPMorgan, while Spar, the grocery and liquor retailer, was increased by 17 percent to 93.82 rand.

Woolworths Holdings Ltd., a food and clothing retailer, Shoprite and JD Group Ltd., which sells furniture, are JPMorgan’s top picks in the South African retail industry, Holmes said.

JD Group has dropped 21 percent this year, matching the decline in the FTSE/JSE Africa General Retailers Index. The retreat in JD Group’s share price has been “overdone” and the stock “still offers good value to longer-term investors,” according to the note.

To contact the reporters on this story: Janice Kew in Johannesburg at jkew1@bloomberg.net.

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