The Finance Ghost: Bad valuations happen to good companies

The Finance Ghost: Bad valuations happen to good companies
(Photo: Gallo Images / Misha Jordaan)

The gloves are off in the retail market as Checkers wins an impressive bout against Woolworths in the high-LSM market. But with great success comes great expectations.

Let’s start with Shoprite, the darling of South African grocery retail. The trajectory of the group has been exceptional, winning market share across the board and showing what is possible in on-demand delivery with the brilliant Sixty60. The Checkers format finally took the fight to Woolworths Food in the high-LSM market.

Though the share price is only 7.5% higher over five years, that hides the real story. Shoprite’s African strategy hurt shareholders, and CEO Pieter Engelbrecht was handed the keys to a group that needed focus and an SAP systems overhaul. From about R120 just before the pandemic, the growth to the current R225 has been exceptional.

With great success comes great expectations. With great expectations comes a high trading multiple, which can set a share up for a nasty drop if things start to go wrong. 

Although Shoprite’s headline earnings per share (Heps) were 7.8% higher and the dividend rose 10.3%, the market was spooked by a small decrease in the trading profit margin, with the share price down 7.5% on the day of results.

Another example was Capitec, which suffered a 9.4% drop after releasing a trading statement for the six months to August. Capitec’s price-book multiple is one of the miracles of our market, frequently over six times the multiples of the other banks. 

Nobody can dispute Capitec’s growth story and impressive business. Unfortunately, valuing the company as if that growth will continue forever can only end in one way.

The bank expects Heps to be between 15% and 18% higher, hardly a poor result and commendable in the operating environment. It just wasn’t enough to support such high multiples, so the share price rolled over and long-suffering holders of short positions in Capitec celebrated.

New initiatives drain Discovery

In yet another example of a blue chip that dished out a hiding to its investors, Discovery dropped 10.1% on the day it released results for the year to June. I see it differently from Shoprite and Capitec, though, as Discovery is hardly a market darling. Don’t let that flashy building in Sandton fool you – the share price has dropped more than 22% in the past five years!

The irritation for investors is that there is no dividend because Discovery is investing a fortune in its new initiatives. Of the R2.1-billion in operating losses at these initiatives, R990-million is attributable to Discovery Bank. The group aims to spend 10% of operating profit on new initiatives. In the past year, the rest of the business made about R11.5-billion in operating profit, so the investment was more like 18%.

That’s significant risk-taking, sending a clear message to the market that Discovery won’t settle down and become an ex-growth dividend payer like Old Mutual.

Another concern for the market is the potential equity capital raise by Discovery to fund the Ping An Health business. This is an overhang that scares many investors away, as they would rather wait for certainty on the capital raise. Equity is often raised at a discount to entice investors.

The counterargument is that Discovery is building an exciting group with a full suite of financial services. For now at least, the market has spoken and the view is bearish.

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Always something messy on the JSE

Adding to its long and sordid track record as one of South Africa’s most hated companies, Tiger Brands has recalled Purity Essentials Baby Powder after trace levels of asbestos were detected.

The share price closed more than 6% lower on the day, bringing positive recent momentum crashing back down to Earth.

Kiss of death for Conduit Capital

When it comes to investors who bring the kiss of death, Sean Riskowitz is a cut above the rest. The latest casualty is Conduit Capital, which has essentially been killed by the regulators for having inadequate reserves.

After Constantia Insurance Company was placed under provisional curatorship, the listed group tried to fight the decision. But brokers and underwriting managers ran for the hills and the business collapsed. This business is 94.4% of Conduit Capital’s revenue, so the future of the listed entity is highly uncertain.

Make no mistake: listed companies can be even riskier than private companies. 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 countrywide for R25.


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