It has been a tough couple of years for Botswana’s consumer goods industry.
Citizens of the Southern African nation have been tightening their belts in response to a slowdown in mining activity and resulting job losses. Retailers’ profit margins have gone from thin to microscopic.
The sector’s troubles are reflected in Sefalana’s share price. The stock of Botswana’s leading wholesaler has plunged 34% since November 2016. But strengthening economic tailwinds, an increasingly diverse geographic footprint, and innovative marketing strategies have me thinking that the share’s a bargain for patient investors.
A Smoother Road Ahead
With less cash jingling in Batswana’s pockets, Sefalana’s profitability suffered. The company saw revenue from its domestic consumer goods segment stagnate during its 2017 fiscal year, while gross profit slid 23%. The trend continued in the most recent six months, with segment revenue growing less than 1% and pre-tax profit tumbling 39%.
The local operation’s weak performance was the main culprit behind Sefalana’s 3% drop in first-half earnings per share.
But the next couple years should be a lot less gloomy.
The African Development Bank expects Botswana’s GDP growth to accelerate to 5% in 2018 thanks to vibrant hotel, transport, and communication sectors and a gradual recovery in the mining industry. The rebound is propelled by a combination of historically low interest rates, heavy investment in electricity generation, and improved water infrastructure.
Becoming a Regional Player
Despite the brightened outlook, Sefalana’s management is in the midst of a drive to lessen the company’s dependence on its home market.
Sefalana entered neighboring Namibia three years ago and now operates 14 stores in the country. They’ve been very well received. The Namibian operation contributed 27% of the group’s pre-tax profit during the past six months – up from 22% a year ago. Management intends to open six more Namibian stores during the next few years while expanding several of its existing outlets.
The company also jumped into the South African market this year. It invested R250 million in a consortium that intends to purchase a number of local retail chains. In return, Sefalana will receive a fixed R50 million per year over the next five years, after which it can convert the investment into a 30% ownership stake. The investment’s already made a big impact on the bottom line, accounting for 15% of profit before tax during the first half of 2018.
Other expansion projects include a recent debut in Lesotho, where it anticipates opening its second store next month, and property investments in Zambia.
Few other African retailers have been as inventive with their marketing efforts as have Sefalana.
Two years ago, the company launched an online shopping platform that promises door-to-door delivery of more than 32,000 products within 24 hours. The program proved so popular in its Gaborone pilot market that it was recently extended to Francistown and will soon be available in Maun, too.
Sefalana is also trying to boost the value of each store visit through a partnership with Botswana Post. In-store Botswana Post kiosks offer customers a range of services that includes pension distribution, license renewals, and money transfers.
A Healthy Balance Sheet
The stock’s appeal is bolstered by a minimal debt load and a large stash of cash.
Over the past twelve months, Sefalana’s long-term debt to equity ratio has dropped from 10.7 to a roomy 7.5. This gives management lots of flexibility as it considers how to finance the company’s expansion. It also enjoys BWP583 million worth of cash sitting in the bank.
The liquid balance sheet and improved cash generation allowed the board to double the interim dividend, which gives the stock a dividend yield of 3.8%.
A Nice Price
Sefalana shares presently sports a price-to-book ratio of 1.5 – the lowest it has been in several years.
Over the past five years, the company’s book value per share has grown at an annualized rate of 22.5% in spite of a tough operating environment. That’s a very rapid rate, and we’d be wise not to bank on it being sustained over the next five years.
So, let’s assume that growth slows to an average of 18% between now and the end of 2022. If it should do so, we will pocket an annualized total return of 16.5% even if the stock’s price-to-book ratio slides to 1.2.
Too optimistic, you say? Perhaps. Let’s assume things go badly and Sefalana’s book value per share grows at just 11.0% and the P/B ratio plunges to 1.0. If such a gloomy scenario comes to pass, we’ll collect an annualized return of 6.7%. A return like that isn’t going to make you rich, but it won’t hurt you too badly either.
In my view, Sefalana’s a safe bet to be a market beater over the next five years.
How about you? Let’s hear your thoughts in the comments.
Disclosure: At time of publication, I held no position in any stock mentioned above.
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