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The Finance Ghost: SAP-ping the life out of us

The Finance Ghost: SAP-ping the life out of us
From left: Multichoice offices in Johannesburg. (Photo: Gallo Images | Shopping carts outside a Spar supermarket. (Photo: Waldo Swiegers / Bloomberg via Getty Images) | Glencore headquarters in Zug, Switzerland. (Photo: Jose Cendon / Bloomberg via Getty Images)

If you speak to professional investors in the market, any announcement about a SAP project at a retailer terrifies them.

Burnt by Shoprite previously (and surely others as well), investors’ fears have been proven right once more by Spar. But the grocery wholesaler has problems that go beyond the IT systems and the impact this is having on the KwaZulu-Natal region in particular.

Diluted headline earnings per share are down by 30.2%, which is exactly what shareholders never want to see. If you believe that grocery retail is a defensive place to play, then this update is a good way to explain why it isn’t.

You see, although the product range may be defensive when it comes to staple groceries, the margins are thin and small pressures on gross margin or operating costs can drive big swings at net profit level.

This is an environment of big pressures, with Spar Southern Africa growing turnover by 5.6%. That doesn’t sound too bad, but core groceries were up 7.9% against price inflation of 10.8%. This means that volumes were down, as South Africans put less in their baskets as the price of food increased at a far higher rate than salaries.

Even Tops turnover was down by 1.9%, admittedly measured against a strong post-lockdown base. If shareholders read the net debt section of the Spar report, they may single-handedly give Tops a turnover boost as they turn off their computers and head off to a braai to feel better. It’s not every day that a grocery retailer breaches debt covenants, even if lenders are being patient for now.

Unsurprisingly, there’s no dividend.

What is ‘boet’ in Italian?

Before the separate listing of FMCG group Premier, the release of results by Brait would see the market focus on both the food business and the Virgin Active gym operations. But now that Premier’s results are available to the market irrespective of Brait’s calendar, the focus is fully on Virgin Active when Brait releases numbers.

Selling gym memberships is truly a war of attrition. In SA, the company sold 127,000 memberships over the six months to March, but had net membership growth of just 34,000.

In Italy, at least, retention was much stronger. Those rippling abs on the Amalfi Coast don’t come from mama’s pasta, much to the delight of Brait shareholders.

Speaking of shareholders, the discount to net asset value at Brait is more than 50%. That’s high even by investment holding company standards, although the management fees are a concern here, and with good reason. I’ve also long held the view that the valuation multiple that management puts on Virgin Active is too high, as this is far from a defensive business.

Can you say ‘ah, poo’?

Average revenue per user (Arpu) is a key metric in any subscription business, particularly where there are different pricing tiers. If you grow users but only in cheaper offerings, then Arpu can drop over time and the business becomes less lucrative.

At MultiChoice, Premium subscribers appear to be exercising their access to multiple choices and ditching DStv in favour of Netflix, Disney+ and even the fibre cost to make those happen, all for the same price as DStv. YouTube is free, of course.

The transition to streaming is going to define the future of MultiChoice.

The company is contributing Showmax in a new deal with Comcast that will use the Peacock technology to deliver what will hopefully be a high-quality streaming product that even includes the English Premier League. That’s great, but what about the rest of the sports bouquet? Can MultiChoice rely on SuperSport in its current form to keep propping up the story?

And in case you’ve never read results from Netflix or Disney, don’t make the mistake of thinking that streaming is lucrative in the early years. This is a cash furnace of note, which is why there’s no MultiChoice dividend. I struggle to build a near-term bull case for the group from an investment perspective.

The deal-making machine

Glencore announced that it is still trying to work different deal angles with Canadian group Teck, offering to buy the dirty coal business outright and combine it with Glencore’s existing coal assets, with a view to unbundling the enlarged business in years to come.

In the very same week, the company also announced the sale of its stake of roughly 50% in Viterra in exchange for $1-billion in cash and $3.1-billion in Bunge Limited stock. This gives Glencore a 15% stake in the merged business, with the common thread in these deals being that Glencore likes holding a smaller stake in a scaled business rather than a large stake in a small one. 

That’s a sensible approach. DM

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 R29.

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