Best of Ghost Mail - market movers in retail, agriculture and activism

In this edition of Best of Ghost Mail, we take a look at how the gap between Pick n Pay and Shoprite has really opened up recently. There’s also a nod to Kaap Agri’s excellent performance, showing that you need to look beyond the household names as an investor. Finally, shareholder activism pays!

Can Pick n Pay ever close the gap?

Shoprite Holdings (JSE: SHP) is a favourite among investors and with good reason. Ever since the grocery giant stopped worrying about the rest of Africa and started focusing on its home market, the results have been exceptional.

Markets are all about timing and even Shoprite is no different. If you held the stock for the past 10 years, your compound annual growth rate (CAGR) is only 2.7%. That’s about as exciting as trying to pick your favourite brand of baked beans. Over 5 years, the CAGR is -0.5%, which means you went backwards if we exclude dividends!

Since mid-2020, in the depths of the pandemic and with Shoprite making enormous progress in South Africa thanks to efforts like Sixty60, the share price has increased by around 130%. Obviously, hindsight is perfect.

 Shoprite Holdings (JSE: SHP) 

Pick n Pay (JSE: PIK) has always been the awkward cousin in this relationship, trading on a high valuation multiple despite nobody really being able to explain why. Despite having traditional strength among mid-market shoppers, it was actually the Boxer format (targeting lower-income earners) that gave Pick n Pay something to smile about in recent years.

In the past three years, the performance gap to Shoprite has really opened up. In that period, Shoprite is up 92% and Pick n Pay has lost nearly 25% of its value. And they say that stock picking doesn’t matter…

The question is: will the gap ever close? And what would be the driver of that?
In grocery retail, it really is a game of inches. If you haven’t watched that famous scene from the movie Any Given Sunday, now you have a good reason to make amends and find it on YouTube. The inches that Pick n Pay needs are all around them, yet they are incredibly tough to come by. With a more efficient supply chain and strength across the income brackets, Shoprite can use its various businesses to apply huge pressure on competitors. Even Woolworths

Food has been feeling the heat, let alone Pick n Pay!

Recent numbers from Pick n Pay don’t tell a great story, with volumes down in the South African business and a weirdly poor performance from Boxer. Pick n Pay attributes that issue to distortions in the base period, noting that Boxer’s growth was strong in January. Investors have been spooked though, with the share price down over 20% in the past month.

There is one positive in the story: Pick n Pay Clothing. We know that Mr Price and Pepkor struggled over the Black Friday and festive season. Pick n Pay Clothing seems to have picked up some of that market share, with sales up 6.2% over that period. The more important measure is that standalone stores were up 11.4%, as the clothing offering within the supermarkets was hindered by system upgrades during the year.

As cute as the clothing business is, Pick n Pay investors need the company to successfully compete where it matters most: the grocery business. It won’t be easy.

Pick n Pay (JSE: PIK)

Look beyond the household names

I’ve said it many times and I’ll say it again: investing isn’t the Loeries. No matter how great a company’s branding might be, it has very little bearing on its attractiveness as an investment. It all comes down to the financials and especially the valuation of the company. 

Where there is a mismatch in what the market thinks vs. how the company is really performing, you find an opportunity.

There are smaller companies on the JSE that are performing beautifully and trading at modest multiples as well. A perfect example is Kaap Agri (JSE: KAL), trading on a Price/Earnings (P/E) multiple of around 7.6x. Based on the latest quarterly performance, that’s worth a closer look.

Despite this inflationary environment, like-for-like expenses were only 2.5% higher. If we exclude the impact of load shedding, expenses actually fell by 1.8%! You would be forgiven for thinking that revenue would suffer when expenses are being so tightly controlled. Instead, we have a situation where like-for-like revenue increased by 17.8% over the same period!

Kaap Agri has guided that its full-year result is likely to be at the upper range of medium-term targets. Despite this impressive performance, the share price is down 14% in the past year. Recent momentum has been promising, up 7% in the past six months. With a juicy dividend yield on top of this, this is a great example of a JSE mid cap that seems to be criminally ignored by investors.

As always – do your own research!

Kaap Agri (JSE: KAL)

Shareholder activism can be lucrative

Looking abroad, Nelson Peltz is sitting in a great position with his stake in Disney ($DIS). This comes after he put the friendly cartoons aside and entered into battle with CEO Bob Iger, who returned to Disney after pandemic CEO Bob Chapek made a number of decisions that hurt shareholders. One such decision was to spend endlessly on the streaming business, truly taking the mickey with shareholder money.

Iger’s return was cautiously welcomed by the market, but Peltz wasted no time in making sure that decision making at Disney improves. He bought a lot of shares at $92 per share and put pressure on Iger, leading to a restructuring plan that will see 7,000 employees cut from Disney. The dividend might even be back later this year, which is far more in line with what Disney investors want to see.

With the share price at $108 and up 21.5% this year, Peltz is proof that shareholder activism can make bucketloads of money! I’m glad that I kept my Disney shares and came along for that ride.

 Disney (US:DIS)

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Sources – EasyResearch, Finance Ghost 

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