Short Sellers Besiege South Africa Retailers as Growth Slows

  • Customer debt, high valuations key factors behind bearishness
  • Lewis Group second-most shorted stock across emerging markets

Short sellers are taking aim at South Africa’s weakening economy by punishing the country’s retailers.

Companies from Lewis Group Ltd. to Pick n Pay Stores Ltd. rank among the emerging-market stocks with the most shares out on loan to traders betting they will fall, according to data from Markit Ltd. Traders are anticipating that retail chains have unsustainable valuations and their reliance on purchases driven by loans leaves them more at risk from slowing growth than banks and other industries closely tied to the economy.

With South Africa’s economy forecast to grow at the slowest pace since 2009, banks are cutting back on new lending to consumers whose outstanding loans already amount to almost 77 percent of their disposable income. The weakening economic outlook is undermining job security and consumer confidence, according to Mohammed Nalla of Nedbank Ltd., the country’s fourth-largest lender.

“Rising debt-service costs will further erode disposable incomes,” said Nalla, the head of strategic research at Nedbank in Johannesburg. “Pedestrian levels of credit extension with even tighter lending standards from banks may continue to exert a hard cap on the consumer’s ability to spend.”

Elevated Multiples

A stock index of South African general retailers was at 14.3 times the projected earnings of its constituents this week, reflecting a 57 percent premium to a similar gauge of banks. Investors increasingly perceive that to be too pricey, given that growth in private credit extension has slowed from a 10.2 percent annual rate in December to 6.6 percent in June. The Johannesburg retail stocks measure declined 2.3 percent on Wednesday.

“Previously elevated earnings multiples on some retail stocks have persisted as the sector continues to look expensive relative to global peers,” Nalla said.

Tighter Regulation

The divergence between retail valuations and the macro-economic outlook, while a plausible reason for high levels of short interest, isn’t new, said Bradley Preston, who helps oversee $1.5 billion at Mergence Investment Managers Pty Ltd. in Johannesburg. Legislative changes in the past six months are pushing retailers to conduct stricter checks on borrowers’ affordability levels, he said. 

“The new rules are proving to be quite a challenge and limiting new credit,” Preston said. “We, depending on our fund, are leaning more on the side of selling than buying South African stocks, though there are some relative opportunities as well.”

Worst-hit is Lewis Group, the Cape Town-based furniture retailer. More than a fifth of its shares available for trading have been shorted, the second-highest level in emerging markets after Panamanian airline Copa Holdings SA. Both Nalla and Preston said Lewis faces specific compliance issues related to the sale of financial products and provisions for bad loans that add to the pressure on its shares. Lewis officials didn’t immediately respond to an email and a phone call requesting comment.

South Africa’s National Credit Regulator has referred Lewis to a tribunal over alleged breaches on costs and fees charged to customers, claims the retailer has said are without merit.

“There are some company-specific stories like Lewis,” Preston said. “But the market is now taking a hard look at the credit exposure and the earnings multiples of retailers.”

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