Analyst recommendation

 As at 31 January 2025

Executive Summary

1. This is the pre-eminent food retailer in South Africa, with the best margins and the most effective management, but
its sheer size limits the potential for above industry growth (even market share gains will become limited) and its
valuation is full.
2. Key points in the investment thesis are:
a. Group revenue growth of 9.5%, however, this was mainly driven by acquisitions as like-for-like revenue growth
was 6.3%. Internal selling price inflation of 1.9% implies an increase in like-for-like volume growth.
b. The impact of loadshedding is improving as the company adapts, as well as a reduction in loadshedding hours.
FY24 had approximately R1bn in loadshedding costs and this is expected to decrease substantially in FY25 if the
utility continues its current path.
c. Supermarkets RSA opened a net 248 stores over the past 12 months to a total of 2 485 stores.
d. Shoprite’s internal price inflation was 1.9% for H1 FY25 compared to H1 FY24 7.7%. Shoprite still maintains
strong margins and creates space for volume growth on top of expanding their store footprint.
3. Have an intrinsic value of R278 per share (downside of 1.8%) and recommend a hold position.
a. In our base case we have an exit multiple of 11.6 times in line with the 10-year average.
b. Looking at EBIT growing at CAGR 7.4% between FY25 to FY27 driven by price increases, store growth and
lower food inflation.
c. Small downside on valuation due to stretched multiples, which remain higher amongst industry peers and history.
4. What would make us change our minds?
a. Price rerating to more normalised levels.
b. Inflation returning to normal allowing management to execute on price control thereby allowing a more balanced
price-mix.
c. Improvement in macro environment in South Africa, such that employment growth returns

Analyst thesis

We value Shoprite’s shares by forecasting the 2026 EBIT and apply a EV/EBIT multiple on a bear, base and bull case scenario. These enable us to calculate an intrinsic value for each scenario, which is are then weighed according to a probability assigned to each scenario to determine the final probability-weighted intrinsic value. Over a 10-year time horizon, which includes the impacts of the Covid era, we see Shoprite’s EV/EBIT multiple is above its average of 12.8x. In our base case, we apply an exit multiple of 11.6x EBIT and a revenue growth rate of 6.2%, gross margins of 24% and EBIT margins of 5.5% and assign a 50% probability. The bear case assumes a slightly multiple of 10.5x with a 20% probability. In the bull case we assign a multiple of 12.7x which is above its long-term average but below where it sits currently at 13.5x and assign 30% probability owing to management’s continued efforts to grow the business and maintain margins, however, this is quite stretched and should have some mean reversion. With this we come to an intrinsic value of R278 which is a 1.8% downside to the current share price and recommend a hold position.

Results

Results summary

On 3 September 2024, Shoprite released its fullyear financial results for year end 30 June 2024.
1. Total sales grew by 12% year-on-year to R240.7 billion and a like-for-like increase of 6.3%.
2. Gross profit grew by 11.7% to R57.8 billion. Gross profit margin remained stable at 24%.
3. Market share growth of R6.5 billion, 64 months of uninterrupted market share gains taking total market share to
approximately 35%.
4. Diluted HEPS grew 7.4%.
Dividend of 712 cents, an increase of 7.4% year-on-year, however the dividend yield is below competitors

Valuation

Table 3: Valuation

Table 6: Valuation multiples

Source: FactSet