If you’ve ever traveled in Southern Africa, I’m sure you’ve spotted a Shoprite (SHP:SJ) store. Whether it be the bright red logo of their eponymous supermarkets, the upscale suburban Checkers stores, or their Hungry Lion fast food joints, the company’s dominant market presence is difficult to miss.
Clearly, Shoprite feeds a continent on the rise.
A Bountiful Harvest
This reality is anything but revelatory. The company’s share price has risen exponentially as the narrative of Africa’s emerging middle class captured investors’ imaginations.
If you had invested $10,000 in Shoprite shares in February 2003, they would be worth $246,000 today. That’s a 37.8% annualized return. And it doesn’t even include the dividends the company rewarded shareholders with throughout the years.
Unfortunately, we’re not time travelers. So, let’s stop grieving over our misspent youth, and figure out if Shoprite stock is worth holding for the next 10 years.
Like most of Africa’s largest companies, Shoprite calls South Africa home. It operates over 1200 stores there, and they contribute nearly 90% of the company’s total revenue.
Unfortunately for Shoprite, the Rainbow Nation’s economy has been in the doldrums. Unemployment rates are high, credit schemes have consumers over-stretched, and labor strikes have disrupted the supply chain. Sluggish growth in its South African operations is the main reason that the share price has dropped 15% since the start of the year.
“Sluggish” is certainly a relative term. Shoprite’s South African supermarkets still grew sales at a nearly 12% clip during the most recent six-month period. I know some Western grocers who’d go bananas over that sort of top line growth. (Yes, I’m looking at you Safeway and Tesco.)
While South Africa may be home base, Shoprite’s future lies further north in places like Nigeria, Kenya, and even the Democratic Republic of Congo. The company already operates in 16 of the largest sub-Saharan economies outside of South Africa.
The scale of the opportunity in these countries is enormous.
Here are a few figures to put it in perspective:
- According to research published by Merrill Lynch, 98% of the market for food in Nigeria is “informal.” This compares to a figure of 30-40% in South Africa.
- Roughly 60% of Nigerian households’ budgets is allocated to food.
- Outside of South Africa, Shoprite presently enjoys just a 7% share of Africa’s formal food market.
If we assume that between now and 2030:
- household income in countries like Nigeria will (on average) grow at 10% annually,
- households will reduce their food spend to 40% of their budgets,
- the formal market for food will grow to 30% of the total, and
- Shoprite boosts its market share to 12%,
Merrill Lynch estimates that Shoprite’s sales in frontier Africa could grow at a rate of 20% per year, reaching a figure of $32.1 billion.
As Shoprite consolidates its operations in this new territory, margins would likely widen, resulting in even more rapid earnings growth.
In the Bargain Bin?
So, what sort of growth assumptions are built into today’s stock price.
I normally cringe at the thought of buying a stock that sports a P/E ratio north of 25. Shoprite’s is 27. But I believe it may be worthy of the hype.
Let’s say that we will be content with a 10% annual return from our investment in Shoprite over the next 10 years. Using that 10% as our discount rate, an earnings growth rate of 11.5% (in dollar terms) would make buying shares at a price of R177.00 a worthwhile investment.
Is 11.5% annualized earnings growth an easy hurdle to clear?
Given that Shoprite operates in a defensive industry and boasts first-mover advantage in a region with sky-high potential, I believe the answer is clearly yes. It grew headline earnings at 12.5% during the most recent six months in spite of big expansion-related costs and a large foreign currency loss stemming from the devaluation of the Malawian kwacha.
So, while there may be bigger bargains hidden among the Johannesburg Stock Exchange’s hundreds of listings, this is a stock that investors with a long-term view should be watching very closely, if not owning.
[Disclosure: I have a beneficial interest in shares of Shoprite through my work with Africa Capital Group.]