The election results have buoyed South African retailers, with Shoprite seen as the best of the bunch.

According to Hashmeel Suka, Investment Analyst at FNB Wealth and Investments, the mood in South African markets has been improving amid growing political confidence, leading to increased local and foreign investment.

With the announcement of the Government of National Unity, which will contain the ANC, IFP, DA, and more, the JSE All Share index has returned ~4.6%.

The Personal Care, Drug and Grocery Stores sub-index has improved ~9.3%, while the Retailer’s index has delivered an impressive ~20.2%.

Price Returns All Share Index Retailers Personal Care Shoprite Spar Woolworths PnP
1 year 10% 13% 22% 28% 4% -5% -51%
3 Year* 3% 3% 6% 8% 0% -2% -22%
5 Year* 7% 1% 6% 11% -9% 6% -18%

When looking at South Africa’s retailers, Suka said that Shoprite stands head and shoulders above the rest.

“Shoprite has consistently delivered robust earnings and revenue growth over the past few years, with increased customer visits (expanding market share) and an improved average customer spend across the core Shoprite and Checkers brands, underpinned by competitive pricing measures as well as favourable marketing initiatives,” added Suka.

“Another strong point of contention is the Checkers Sixty60 service, which has become a dominant force in the online/on-demand shopping arena.”

“The business is now looking to expand beyond just non-discretionary items by also including durable goods in its delivery service offering, and this is quite promising for the group over the long term.

Overall, he said that Shoprite is operationally sound, is highly cash generative and has a strong balance sheet.

Before this week’s strong rally in share prices in South Africa, Shoprite’s counter was trading within the fair value range at a forward price-earnings (PE) ratio of ~19 times.

Despite the current valuation starting to look rather high (Forward PE of ~21 times), Shoprtie remains FNB’s preferred choice in the sector.

1-Year Share Price Performance (rebased to 100)

The worst performer

Overall, Pick n Pay has clearly been the worst performer amongst the retailers.

For the financial year ended 25 February 2024, Pick n Pay recorded a R3 billion loss.

Pick n Pay has been impacted by severe operational losses caused by sustained consumer pressure and high energy and supply-chain costs.

Significant asset impairments (amid ongoing restructuring initiatives) and a substantial debt burden have also hurt the group.

There are one or two positive elements, such as solid Clothing and Boxer divisions.

Hashmeel Suka, Investment Analyst at FNB Wealth and Investments

Moreover, the balance sheet could improve following an R4 billion rights offer (expected imminently) and the separate listing of Boxer (expected later this year).

“Nevertheless, there is still significant execution risk at play, specifically in the much-needed turnaround of the core grocery segment,” said Suka.

“Pick n Pay has traded relatively cheaply over the past year or so but can remain so for a long time, or at least until it shows meaningful headway is being made in its core grocery turnaround strategy.”

“Following a decent rebound in the share price this week it could be argued that the substantial near-term risks are no longer fully priced in.”