S. Africa Grocers at Cheapest in 3 Years With on Profit

South African grocers are trading at the lowest premium to the nation’s benchmark stocks index in three years as consumers struggle to repay debt as unemployment rises and accelerating inflation (SACPIYOY) curbs profit growth.

The FTSE/JSE Africa Food & Drug Retailers Index has declined 18 percent this year through Aug. 23 to trade at 22 times earnings. The 166-member FTSE/JSE Africa All Share Index (JALSH) has gained 10 percent for a price-to-earnings ratio of 20. That cut the gauge’s premium over the all-share to 12 percent on Aug. 23, the lowest since Aug. 24, 2010, after being valued at more than double the benchmark in June 2012.

“The consumer environment has become tougher,” Diane Laas, an equity analyst at Cape Town-based Investec Asset Management, which manages the equivalent of $105 billion, said by phone Aug. 22. “The earnings growth outlook for food retailers is looking slower.”

Shoprite Holdings Ltd. (SHP), Africa’s largest food retailer, is battling the worst sales growth in its main South African market in two years as the continent’s biggest economy expands at the slowest pace since a 2009 recession. Unemployment in the nation of 52 million people increased to 25.6 percent in the second quarter, the highest in two years, compared with 24.9 percent a year earlier. Inflation breached the upper end of the central bank’s target range for the first time in 15 months in July, cutting into consumers’ disposable income.

Almost 48 percent of “credit-active” South African consumers, or 9.53 million people, had impaired debt records at the end of June, while about a quarter of 71 million credit accounts weren’t been paid for three months or more, according to the Johannesburg-based National Credit Regulator.

Share Slump

The stock of Cape Town-based Shoprite has decreased 20 percent this year to trade at 24 times profit. Massmart Holdings Ltd. (MSM), the local unit of the world’s biggest retailer Wal-Mart Stores Inc., fell to its lowest in almost two years last week after saying first-half profit declined.

Shoprite is expanding outside its home market, where sales from 153 stores in 16 African countries jumped 28 percent in the fiscal year through June, the company said Aug. 20. A further 20 stores are due to open by June next year and an additional 27 thereafter.

The company trades at a premium to the all-share index because of its African expansion, Jean Pierre Verster, who helps to oversee the equivalent of $800 million at 36ONE Asset Management, said by phone from Johannesburg on Aug. 22.

Pick n Pay Stores Ltd., South Africa’s second-largest food retailer, trades at 34 times earnings, the highest on the four-member food and drug index, even after a 16 percent-slump in its stock this year, according to data compiled by Bloomberg.

Anticipated Recovery

Pick n Pay plans to cut management jobs to reduce operating costs after annual net income plunged 51 percent, the Cape Town-based company said Aug. 7, as it lost market share to competitors, including Shoprite. Richard Brasher, the former head of Tesco Plc’s U.K. unit, started as chief executive officer in February to lead a sales-growth revival.

“Investors are prepared to pay more for an anticipated recovery in the company’s profits,” Verster said. Brasher, 52, said in April that he is “optimistic” the retailer can improve the underlying margins of the business.

At Massmart, sales growth slowed to 8.9 percent in the 26 weeks through June 23 from 15 percent in the six months ending Dec. 23, the Johannesburg-based company said Aug. 22. The stock, which has slumped 19 percent this year, is trading at 22 times estimated profit, the highest valuation on the 11-member FTSE/JSE Africa General Retailers Index.

South Africa’s $384 billion economy is set to grow by 2 percent this year, according to the country’s central bank. Strikes over pay increases at the mines of the world’s biggest producer of platinum and fifth-largest gold miner have shaved 0.3 percent off the nation’s economic growth this year, President Jacob Zuma said June 13.

“None of the macro-economic signs in South Africa point to a respite soon,” Investec’s Laas said.

To contact the reporter on this story: Jaco Visser in Johannesburg at avisser3@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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