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The Finance Ghost: TFG, Virgin Active and Shoprite numb...

DM168

PHANTOM SHARES

The Finance Ghost: Numbers from TFG, Virgin Active and Shoprite add up

(Photo: Gallo Images / Sharon Seretlo)

Great updates from Shoprite and horrible numbers from Massmart carry nearly the same certainty as death and taxes these days. Retail is a difficult game where small mistakes can become huge disasters later on. It becomes extremely difficult once you are on the back foot.

Shoprite is on the front foot, posting 11.4% growth in Checkers and Checkers Hyper and 12.1% growth in Usave. Those formats are at opposite ends of the LSM spectrum, so Shoprite knows how to resonate with both higher- and lower-income shoppers. The only blemish in this interim result was that Furniture has seen a 6.5% decrease in sales. Group headline earnings per share increased by a whopping 25.5%, although growth has been flattered by a recovery in the liquor trade.

At the other end of the happiness scale, we find Massmart with a drop in sales in 2021 of 1.9%. Adjusting for insurance proceeds related to the riot would take this closer to a flat revenue performance, but that’s nowhere near acceptable. Game remains the pink elephant in the room, with sales down 8.7%. A decrease in sales often means a deterioration in gross margins and this time is no different, with a drop of 45 basis points in group gross margin even after adjusting for inventory write-downs in the riots. With a headline loss of more than R1.5-billion, the horrors at Massmart never seem to end.

Virgin Active may pump iron, but will it pump cash?

Virgin Active had a rough time during the pandemic. Initially, people simply weren’t allowed to exercise. When that situation changed, they were only allowed to exercise while wearing masks!

Unsurprisingly, the memberships dwindled, and the balance sheet looked like it had just spent 10 hours in the sauna. The harsh reality of many South Africans losing at least part of their income didn’t help.

With significant fixed costs of running a chain of gyms, Virgin Active found itself in real trouble. This is when being part of a large, listed group can be the difference between life and death.

With Covid firmly relegated to the pre-Ukraine era, Virgin Active has reinvigorated the balance sheet with a R1.8-billion capital raise. It’s very encouraging to see support for the capital raise from Brait, Titan (Christo Wiese), the DK Consortium (the founders of Real Foods Group) and Virgin Group.

Speaking of Real Foods, founder Dean Kowarski will be taking over as CEO of Virgin Active. He replaces Matthew Bucknall, who has been at the helm for 25 years as CEO and co-founder of Virgin Active. You may not know the Real Foods brand, but you certainly know Kauai, which is the key asset in Real Foods.

To achieve full alignment with Kowarski, Virgin Active is acquiring the restaurant chains (Kauai and Nu) from Real Foods for £28.6-million.

This will be settled by the issuance of further shares in Virgin Active.

This iconic gym and health club business needed a fresh start. This is a resounding show of support from the shareholders and one that sends a positive message about its prospects.

The Foschini Group is focusing on its home market

There was a time in the market when local listed companies showed no interest in acquiring South African private companies. Instead, they all ran off to places like Australia and the UK and promptly lost a fortune.

That situation has changed. This is good news for private equity funds like Westbrooke Investments and Actis, which can bulk up local businesses and sell them to listed companies.

The Foschini Group (TFG) clearly sees the potential in the South African market, confirmed by the acquisition of Tapestry Home Brands from the aforementioned private equity houses for R2.35-billion, which equates to an EV/ebitda multiple of 6.51x. This brings Coricraft, Volpes, Dial-a-bed and The Bed Store into the group.

TFG is in the process of localising its supply chain. Tapestry Home Brands has substantial local manufacturing facilities, and locally produced items account for 47% of sales. The obvious synergies from this deal include Tapestry benefitting from TFG’s established online shopping channels and its experience in selling on credit.

Although TFG shareholders won’t be asked to give approval for the deal as it is too small, the same cannot be said for the Competition Commission. That regulatory hurdle still needs to be cleared.

And finally … should we be worried about labour unrest?

Sibanye is dealing with a strike in its local gold operations. At this stage of the commodity cycle and with inflationary pressures on our workers, you should keep a close eye on developments in this space. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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