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    Local retail shares from a foreign perspective

    Global fund managers, Orbis highlighted the major price movements that South African retail shares have had over the last 9 years. Over this period of time, investors in local retailers have seen exceptional returns as prices have moved up dramatically.

    There has been a classic double whammy for investors over this time period.

    A double whammy is where company earnings move up AND there is an expansion in the valuations, providing exceptional returns.

    The table below reflects the increase in these selected retail investments.

    For example, Shoprite’s earnings have increased 9 times from 6.8 cents to 61.9 cents, while the valuation on these earnings has also expanded from 7,8 times to 22,9 times, moving the price up 27 times!

    Mr Price’s earnings expanded 7 times, but the price moved up 20 times. These exclude dividends.


    Source : Orbis, I Net Bridge

    These prices are in US cents translated at the prevailing exchange rates.

    December 2001 just happened to be a period of extreme weakness for the rand relative to foreign currencies.

    It was at this time that South African investors were scrambling to move funds offshore as the rand was at R12 to the US dollar and R17 to the pound. In other words the entry level for foreigners was, with the benefit of hindsight, extremely attractive.

    Over the past 10 years consumer spending improved as credit was extended from a relatively low base. This has subsequently contracted, but what continues to attract foreigners is the future emerging market growth in consumption.

    A lot of the exceptional return has to do with the low base. At the time with extreme rand weakness, it was not that obvious to both local and foreign investors that local retailers would do well over the next 9 years.

    From these more expensive levels, even with reasonable growth prospects, it is unlikely that the next 10 years will produce 20 to 27 times returns, despite the fact that these are very well run businesses.

    Vincent Heys is going to be in Jhb next week, Monday to Wednesday. If you are a financial advisor, looking to work more closely with Seed, please do not hesitate to contact us on Vincent@seedinvestments.co.za

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2010-10-04, 16:58:03, by ian Email , Leave a comment
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