Shoprite Holdings Limited - Credit Suisse
Transcript of Shoprite Holdings Limited - Credit Suisse
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
02 December 2013
EEMEA/South Africa
Equity Research
Food Retail (Food Retailing (Europe))
Shoprite Holdings Limited (SHPJ.J) INITIATION
Twinned catalyst required
■ We initiate coverage of Shoprite with a Neutral rating and a target price
of R185. We are positive on the stock on a long-term view, but believe
investors would require more concrete plans for the R7.7bn of capital raised
in FY 2012, before re-rating Shoprite.
■ Lower growth and returns already priced in. Our analysis suggests that
the current share price implies both lower returns and growth than what the
company has delivered in the past. Deploying excess cash into value-
accretive investments would provide upside potential to both metrics and
also the share price.
■ Broadly stable underlying returns. Contrary to what appears to be the
consensus perception, we do not believe that the underlying business has
suffered a meaningful deterioration in returns on capital. We believe that this
perception has raised concerns over the likely returns on new investments.
■ Valuation: At 20.6x our CY 2014 headline EPS estimate, Shoprite is not
expensive relative to our earnings growth forecast of 16.5% p.a. in 2014-
2017. It is also trading broadly in line with the EMEA and Latin American
retail sector average of 19.6x, based on our own and IBES consensus
estimates. We believe the group's superior track record warrants a superior
rating – something we would expect once investors can gain some
reassurance about the timing and quantum of its incremental investment
programme and its impact on future growth.
Share price performance
122
172
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Price Price relative
The price relative chart measures performance against the ALL
SHARE which closed at 45058.22 on 28/11/13
On 28/11/13 the spot exchange rate was R13.82/Eu 1. -
Eu .73/US$1
Performance Over 1M 3M 12M Absolute (%) -3.9 9.7 -6.5 Relative (%) -2.6 3.0 -25.4
Financial and valuation metrics
Year 06/13A 06/14E 06/15E 06/16E Revenue (R m) 92,747.3 103,305.6 116,240.5 131,035.8 EBITDA (R m) 6,745.14 7,889.73 9,320.25 11,006.19 Adjusted Net Income (R m) 3,610.4 4,154.4 4,846.2 5,667.0 CS adj. EPS (R) 6.74 7.73 9.01 10.54 Prev. EPS (R) — — — — ROIC (%) 28.28 27.77 28.83 30.57 P/E (adj., x) 26.22 22.89 19.62 16.78 P/E rel. (%) 161.8 146.8 142.8 135.5 EV/EBITDA 14.7 12.5 10.5 8.8
Dividend (06/14E, R) 3.88 IC (06/14E, R m) 15,202.07 Dividend yield (%) 2.2 EV/IC 6.5 Net debt (06/14E, R m) -2,257.2 Current WACC 10.9 Net debt/equity (06/14E, %) -12.9 Free float (%) 90.0 BV/share (06/14E, R) 32.5 Number of shares (m) 570.58
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating NEUTRAL* Price (28 Nov 13, R) 176.81 Target price (R) 185.00¹ Market cap. (R m) 100,884.15 Enterprise value (R m) 98,627.0
*Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.
Research Analysts
Pieter Vorster
27 11 012 80 64
Mukhtar Mustapha
27 11 012 8065
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 2
Shoprite Holdings Limited SHPJ.J Price (28 Nov 13): R176.81, Rating: NEUTRAL*, Target Price: R185.00
Income statement (R m) 06/13A 06/14E 06/15E 06/16E
Revenue (R m) 92,747 103,306 116,240 131,036 EBITDA 6,745 7,890 9,320 11,006 Depr. & amort. (1,351) (1,860) (2,325) (2,883) EBIT (R) 5,394 6,030 6,995 8,123 Net interest exp. (170) (95) (72) (28) Associates — — — — Other adj, — — — — PBT (R) 5,224 5,935 6,923 8,096 Income taxes (1,579) (1,780) (2,077) (2,429) Profit after tax 3,646 4,154 4,846 5,667 Minorities (18) (20) (24) (28) Preferred dividends — — — — Associates & other (18) 20 24 28 Net profit (R) 3,610 4,154 4,846 5,667 Other NPAT adjustments (18) (20) (24) (28) Reported net income 3,593 4,134 4,823 5,639
Cash flow (R) 06/13A 06/14E 06/15E 06/16E
EBIT 5,394 6,030 6,995 8,123 Net interest — — — — Cash taxes paid (1,594) (1,780) (2,077) (2,429) Change in working capital (2,428) (116) (143) (163) Other cash & non-cash items 1,511 1,860 2,325 2,883 Cash flow from operations 2,883 5,993 7,101 8,414 CAPEX (3,312) (3,730) (3,965) (4,338) Free cash flow to the firm (429) 2,263 3,136 4,076 Acquisitions — — — — Divestments 356 — — — Other investment/(outflows) (83) — — — Cash flow from investments (3,039) (3,730) (3,965) (4,338) Net share issue/(repurchase) 0 — — — Dividends paid (1,707) (1,890) (2,210) (2,856) Issuance (retirement) of debt 27 — — — Other (159) (95) (72) (28) Cash flow from financing activities
(1,838) (1,986) (2,282) (2,883) Effect of exchange rates 93 — — — Changes in Net Cash/Debt (1,901) 277 854 1,193 . Net debt at start (3,881) (1,980) (2,257) (3,111) Change in net debt 1,901 (277) (854) (1,193) Net debt at end (1,980) (2,257) (3,111) (4,304)
Balance sheet (R m) 06/13A 06/14E 06/15E 06/16E
Assets Cash and cash equivalents 6,139 6,408 7,262 8,455 Accounts receivable 3,428 3,818 4,296 4,843 Inventory 10,317 11,492 12,931 14,577 Other current assets 274 217 217 217 Total current assets 20,158 21,935 24,706 28,092 Total fixed assets 11,714 13,584 15,224 16,679 Intangible assets and goodwill 1,039 1,039 1,039 1,039 Investment securities — — — — Other assets 578 578 578 578 Total assets 33,489 37,137 41,548 46,389 Liabilities Accounts payable 12,723 14,172 15,946 17,976 Short-term debt 335 335 335 335 Other short term liabilities 327 327 327 327 Total current liabilities 13,385 14,833 16,607 18,637 Long-term debt 3,823 3,816 3,816 3,816 Other liabilities 1,029 1,029 1,029 1,029 Total liabilities 18,237 19,678 21,452 23,482 Shareholders' equity 15,184 17,371 19,983 22,767 Minority interest 68 88 112 140 Total equity & liabilities 33,489 37,137 41,548 46,389 Net debt (R m) (1,980) (2,257) (3,111) (4,304)
Per share data 06/13A 06/14E 06/15E 06/16E
No. of shares (wtd avg) 535 535 535 535 CS adj. EPS (R) 6.74 7.73 9.01 10.54 Prev. EPS (R) — — — — Dividend (R) 3.38 3.88 4.52 5.29 Div yield 1.91 2.20 2.56 2.99 Dividend payout ratio 50.11 50.26 50.16 50.16 Free cash flow per share (R)
(0.80) 4.23 5.86 7.62
Key ratios and valuation
06/13A 06/14E 06/15E 06/16E
Growth(%) Sales 12.1 11.4 12.5 12.7 EBIT 15.6 11.8 16.0 16.1 Net profit 18.7 15.1 16.7 16.9 EPS 11.1 14.5 16.7 16.9 Margins (%)
EBITDA margin 7.3 7.6 8.0 8.4 EBIT margin 5.8 5.8 6.0 6.2 Pretax margin 5.6 5.7 6.0 6.2 Net margin 3.9 4.0 4.2 4.3 Valuation metrics (x) EV/sales 1.1 1.0 0.8 0.7 EV/EBITDA 14.7 12.5 10.5 8.8 EV/EBIT 18.3 16.4 14.0 11.9 P/E 26.2 22.9 19.6 16.8 P/B 6.2 5.4 4.7 4.2 Asset turnover 2.8 2.8 2.8 2.8 ROE analysis (%) ROE stated-return on equity
25.7 25.4 25.8 26.4 ROIC 28.3 27.8 28.8 30.6 Interest burden 0.97 0.98 0.99 1.00 Tax rate 30.4 30.0 30.0 30.0 Financial leverage 0.27 0.24 0.21 0.18 Credit ratios (%) Net debt/equity (13.0) (12.9) (15.5) (18.8) Net debt/EBITDA (0.29) (0.29) (0.33) (0.39) Interest coverage ratio 31.7 63.3 96.8 293.4
Source: Company data, Thomson Reuters, Credit Suisse estimates.
122
172
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Price Price relative
The price relative chart measures performance against the ALL SHARE which
closed at 45058.22 on 28/11/13
On 28/11/13 the spot exchange rate was R13.82/Eu 1. - Eu .73/US$1
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 3
Key charts Figure 1: Shoprite has substantially outperformed PnP Figure 2: CFROI® has declined…
50
100
200
400
800
1600
3200
Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
1998
=10
0
SHOPRITE PICK N PAY STORES
15.7
21.2
17.6
15.7
13.9 13.0
16.7
21.3
18.2
16.6 17.7
16.3
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013
CFROI CFROI with 2007 cash and working capital ratios
Source: Thomson Reuters Source: Company data, Credit Suisse HOLT®
Figure 3: ...but lower returns largely due to capital raising Figure 4: Revenue growth – RSA supermarkets
-8.0
-6.0
-4.0
-2.0
-
2.0
4.0
6.0
8.0
10.0
12.0
2007 2008 2009 2010 2011 2012 2013
%
Cash % of sales Net working capital % of sales
Adjusted NWC % of sales
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 2013
% c
hang
e
RSA supermarkets Average
Source: Company data, Credit Suisse HOLT Source: Company data
Figure 5: Revenue growth – non-RSA supermarkets Figure 6: Medium-term revenue growth potential
-5
0
5
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 2012 2013
% c
hang
e
Non-RSA supermarkets In constant currencies
Constant currency average
9
10
11
12
13
14
15
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
2013
=10
0
RSA Non-RSA
Furniture Other
Revenue growth (RHS)
Source: Company data Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 4
Investment summary We initiate coverage of Shoprite with a Neutral rating and a R185 target price based on a
DCF valuation. Our FY 2014 HEPS estimate is R7.73 (+15% y/y), in line with consensus,
and reflects the current weaker consumer environment in South Africa. In FY 2015 and
FY 2016, we expect growth to accelerate again driven by better results from South Africa
and we forecast EPS of R9.01 (+16.6%) and R10.55 (+17%) respectively. These
estimates are marginally ahead of consensus.
We are long-term bulls of the stock and believe that revenue growth rates can recover to
the historical average of 15% per annum over the next 10 years, even if its South African
revenue growth slows to 10% per annum over the period (from a 15% average since
2005), provided that other African revenues continue to grow at 25% per annum.
Figure 7: Medium-term revenue growth potential
9
10
11
12
13
14
15
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
2013
=10
0
RSA Non-RSA Furniture Other Revenue growth (RHS)
Source: Company data, Credit Suisse estimates
Although we are optimistic about the prospects for consumer demand in Africa, growth
prospects for modern retailers are being restrained by a lack of investment in
infrastructure. The slow development of investment opportunities is also reflected in
Shoprite's slow deployment of the capital it raised to fund growth in FY 2012. Although we
do not see much potential downside risk in the stock at the moment, we believe the market
would need to see this capital being deployed in value-accretive investment opportunities,
which would by implication also address current growth concerns.
After substantially outperforming its peer group over the past 10 years, Shoprite has
underperformed both its peer group and the market over the last 12 months, declining 5%,
compared with a 20% increase in Pick 'n Pay, 6% at Woolworths and 5% from Spar. Over
a 10-year period, Shoprite's share price has compounded at 35% per annum, compared
with Pick 'n Pay's at 13% and Woolworths' at 27%.
Initiating with a Neutral
rating
Long-term bulls of Shoprite
More clarity required on
uses of capital
Shoprite has
underperformed over the
past year
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 5
Figure 8: Shoprite share price vs. Pick 'n Pay
50
100
200
400
800
1600
3200
Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
1998
=10
0
SHOPRITE PICK N PAY STORES
Source: Thomson Reuters
The relatively poor performance over the past year has resulted in a valuation that we
believe now not only discounts lower growth than the company has achieved historically,
but is also not a meaningfully value-accretive deployment of the nearly R8bn in capital it
raised in FY 2012.
Using Credit Suisse HOLT®, we show that the current valuation implies a scenario
between annual revenue growth of 12.75% per annum at current low levels of CFROI and
10.5% per annum at CFROI levels in line with 2010. This compares with average revenue
growth over the past 10 years of 15% and consensus growth of 13% pa over the next
three years.
Figure 9: Implied growth at 2013 CFROI Figure 10: Implied growth at 2010 CFROI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
% c
hang
e
%
CFROI Sales growth
0
5
10
15
20
25
30
0
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
% c
hang
e
%
CFROI Sales growth
Source: Credit Suisse HOLT Source: Credit Suisse HOLT
Other than the impact on CFROI of the FY 2012 capital raising, we do not believe that the
underlying returns on capital in the business have changed meaningfully over the past five
years. In our view, the perceived reduction in returns can largely be explained by the
interplay between cash and creditors in a retailer, with potentially large movements from
one balance sheet date to the next, depending on whether creditors were paid before or
after this date. By including cash in the working capital calculation, the underlying working
capital position and also underlying returns on capital remained much more stable than
what we believe market perceptions are.
Valuation now discounts
lower growth and returns
Underlying returns have
been more stable than they
appear
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 6
Figure 11: Cash and net working capital ratios Figure 12: Lease-adjusted ROCE at stable working capital
ratios
-8.0
-6.0
-4.0
-2.0
-
2.0
4.0
6.0
8.0
10.0
12.0
2007 2008 2009 2010 2011 2012 2013
%
Cash % of sales Net working capital % of sales
Adjusted NWC % of sales
26.2
28.1
26.3
23.122.4
20.8
26.4
29.228.7
26.626.0
24.7
15
17
19
21
23
25
27
29
31
2008 2009 2010 2011 2012 2013
%
Lease adjusted ROCE
Lease adjusted ROCE with 2007 working capital ratios
Source: Credit Suisse HOLT Source: Company data, Credit Suisse research
Based on our estimates, Shoprite is trading on a CY 2014E P/E multiple of 20.6x, which
does not seem unreasonable given our estimate of compound EPS growth over the
following three years of 16.5%. This P/E is also broadly in line with the EMEA and Latin
America retail average 2014 P/E of 19.6x. Relative to its own history, its forward P/E is at
the high end of its long-term historical range and at a 20% premium to its 5yr average 12m
forward P/E of 17.1x.
Figure 13: Shoprite 12m forward P/E
0
5
10
15
20
25
30
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
SH
P 1
2m f
orw
ard
P/E
(X
)
Source: RAVE, I/B/E/S
Owing to the stable cash flow growth of the retail industry, we believe it is appropriate to
value it using the discounted cash flow (DCF) methodology. We forecast explicit cash
flows for five years, after which the growth and free cash flow return on invested capital
faded to a final-year growth rate and WACC respectively over the competitive advantage
period. We calculate the competitive advantage period (CAP) by solving for the current
share price in our DCF model, the margins and revenue growth as implied by the current
share price in HOLT. Our DCF fair value is adjusted by the WACC to determine our 12-
month target price of R185.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 7
Risks
Investment risks include:
■ More effective competition from Pick 'n Pay under new management
■ Slower-than-anticipated rollout of African growth strategy
■ Lower returns on new investments
■ Continued weakness in South African consumer spending
■ Management succession
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 8
Which way now? After a strong multi-year run, the Shoprite share price has paused for breath over the past
year, declining 5% compared with a 20% rise in Pick 'n Pay, 5% for Spar and 6% for
Woolworths. However, this follows a period of substantial outperformance, with Shoprite
gaining 35% per annum over the past 10 years, compared with 13% for Pick 'n Pay, 27%
for Woolworths and 22% for Spar, since it listed in October 2004.
Figure 14: Shoprite vs. peers Figure 15: Shoprite vs. Pick 'n Pay
50
100
200
400
800
1600
3200
Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
1998
=10
0
PICK N PAY STORES SHOPRITE
WOOLWORTHS HDG. SPAR GROUP
50
100
200
400
800
1600
3200
Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-1219
98=
100
SHOPRITE PICK N PAY STORES
Source: Thomson Reuters Source: Thomson Reuters
Figure 16: Share price performance, % CAGR % Shoprite Pick 'n Pay Woolworths Spar
15yr 21.1 15.0 24.0 -
10yr 35.4 12.6 26.6 -
Spar listing Oct 2004 34.5 8.8 24.8 22.2
5yr 29.5 8.9 44.9 19.7
3yr 21.0 1.2 41.4 8.8
2yr 15.7 8.7 37.4 11.4
1yr (5.4) 19.9 6.3 5.3
Source: Thomson Reuters, Credit Suisse research
Shoprite's long-term outperformance against Pick 'n Pay has been remarkable and is a
function of its own financial performance and market share gains, as well as Pick 'n Pay
failing to execute on its new centralised business model.
In our view, the recent underperformance of Shoprite relative to its peers is partly a
reflection of investor concerns over the sustainability of its growth, but we believe mostly
due to concerns over what appears to be declining returns on capital. Furthermore,
whereas Shoprite has had the benefit of a struggling Pick 'n Pay donating market share
over the last five years, the next five years may well see a stabilisation of Pick 'n Pay's
position, in the process becoming a more effective competitor.
For Shoprite to resume its upward share price trajectory, we believe investors would need
to feel reassured that the deterioration in returns on capital seen over the past two years
will be reversed and Shoprite will be able to continue to deliver above-average growth
rates. Before we look at these two issues, we first need to assess what growth and returns
are implied by the current share price. We have looked at this from a revenue growth
perspective – ie, what revenue growth is required if there is no change in asset turns or
margins (flat CFROI), or what is the implied revenue growth if we assume that asset turns
improve to the five-year median.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 9
We use Credit Suisse HOLT as the basis for our analysis of returns and what is implied by
the current market value of Shoprite with respect to future returns and growth rates. HOLT
normally assumes a five-year forecast period before fading returns to the cost of capital.
However, for companies that show consistent cash returns on investment (CFROI) above
8% with low volatility, the period before fade is applied is extended to 10 years (extended
Competitive Advantage Period or eCAP) resulting in higher valuations. Consumer staples
companies, particularly branded consumer goods companies, make up the majority of
stocks that qualify for this. In HOLT, Shoprite was valued using eCAP from 2006 to 2012,
but it lost this status in 2013 owing to a reduction in CFROI in recent years. For the
purposes of this analysis, we continue to use 10 years as a forecast period on the basis
that if the decline in returns were indeed temporary (as we believe they are), eCAP would
once again apply.
Figure 17: HOLT implied revenue growth
CLARITY IS CONFIDENCEHOLT
11
SHOPRITE HOLDINGS LIMITED (SHP)
Current price - implied growth at unchanged CFROI
Sales, Margins & TurnsFood Retail Price: 177.49 (Nov 27, 2013)
Market Cap: 94.983 ZAR Warranted Price: 173.84 ZAR (-2%)
Source: Credit Suisse HOLT
Figure 17 shows that based on the HOLT valuation model, the shares are not pricing in
any improvement in CFROI, provided that revenues grow at 12.75% per annum for the
next 10 years, which does not seem to be overly demanding relative to the group's history.
Consensus estimates are for revenue growth of more than 13% per annum over the next
three years.
However, if it were able to improve asset turns back to the five-year median of 2.5x,
compared with 2x in FY 2013, but margins remain flat, the CFROI would improve to
17.7%, which is in line with FY 2010 levels. At this level of CFROI, the revenue growth rate
implied by the current share price falls to 10.5%, which we believe is undemanding relative
to both history and current consensus estimates.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 10
Figure 18: HOLT implied growth with improved CFROI
CLARITY IS CONFIDENCEHOLT
11
SHOPRITE HOLDINGS LIMITED (SHP)
Current price - implied growth at 5yr median asset
Sales, Margins & TurnsFood Retail Price: 177.49 (Nov 27, 2013)
Market Cap: 94.983 ZAR Warranted Price: 173.58 ZAR (-2%)
Source: Credit Suisse HOLT
If Shoprite can achieve both, i.e. improve CFROI back to 2010 levels and grow revenue at
12.75% p.a. for the next 10 years, then the HOLT-warranted price increases to R207,
which is 18% above current levels.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 11
Declining returns? Over the past five years Shoprite has grown its asset base significantly, adding 19% p.a.
in nominal terms and 13% in real terms, with real growth over the past two years at 27%
and 11%, respectively. Revenue growth has failed to track this growth and asset turns
have declined from a high of 3.06x in FY 2009 to 2.03x in FY 2013. Substantial EBITDA
margin growth from 6.2% in 2009 to 7.1% in 2013 was insufficient to offset the weaker
asset turns and the group's CFROI has declined from 21.2% in 2009 to 13.0% in 2013.
Following the high asset growth in 2012 and 2013, the 5yr incremental CFROI (CFROI on
assets added over the past five years) has declined to only 11.4%.
Figure 19: Shoprite CFROI, real asset growth and incremental 5yr CFROI
-10
-5
0
5
10
15
20
25
30
35
40
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
%
CFROI Incremental 5yr CFROI Real asset growth
Source: Credit Suisse HOLT, Credit Suisse research
From a Credit Suisse HOLT perspective, the large increase in CFROI in 2009 was mostly
a result of the absence of real asset growth owing to the financial crisis and was at a level
we would regard as abnormal given the long-term picture. We believe the declines in 2012
and 2013 were largely a result of the FY 2012 R3.4bn equity and R4.3bn convertible bond
issues and the HOLT practice of including cash in the asset base.
When viewed in isolation there appears to have been a significant deterioration in the
group's working capital metrics. From 2007, net working capital to sales worsened from a
negative 5.6% to +1% in 2013. This would have resulted in an incremental R6.1bn in
working capital, compared to what it would have been had the ratio remained constant.
However, until the 2012 capital raising, there appears to have been an offsetting reduction
in cash holdings, which we believe is a result of a shortening in creditor days from 47 days
in 2007 to 32 days in 2013, i.e. the cash is being used to pay creditors, although this may
well be a function of balance sheet cut-off dates not coinciding with the payment cycle.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 12
Figure 20: Shoprite net working capital and cash % of sales
-8.0
-6.0
-4.0
-2.0
-
2.0
4.0
6.0
8.0
10.0
12.0
2007 2008 2009 2010 2011 2012 2013
%
Cash % of sales Net working capital % of sales Adjusted NWC % of sales
Source: Credit Suisse HOLT
If we normalise the net working capital and cash position of Shoprite back to 2007 levels
and re-run the CFROI and incremental CFROI calculations, the group's return picture
looks a lot more stable.
Figure 21: Shoprite CFROI excluding cash and working
capital changes
Figure 22: Incremental CFROI excluding cash and
working capital changes
15.7
21.2
17.6
15.7
13.9 13.0
16.7
21.3
18.2
16.6 17.7
16.3
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013
CFROI CFROI with 2007 cash and working capital ratios
22.5
34.7
22.2
17.7
13.7 11.4
25.4
35.0
23.6
19.6 20.0
16.0
0
5
10
15
20
25
30
35
40
2008 2009 2010 2011 2012 2013
Incremental 5yr CFROI
Cash & working capital adjusted incremental 5yrCFROI
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Looking at more traditional return metrics, Shoprite's lease-adjusted ROCE has declined
from 28.1% in 2009, to 20.8% in 2013.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 13
Figure 23: Shoprite lease-adjusted return on average capital employed
26.2
28.1
26.3
23.122.4
20.8
15
17
19
21
23
25
27
29
2008 2009 2010 2011 2012 2013
%
Lease adjusted ROCE
Source: Company data, Credit Suisse research
In our view, these worsening returns reflect the deterioration in working capital metrics
discussed above, but since cash is typically excluded from traditional ROCE calculations,
the capital employed component does not benefit from the reduced operating cash
requirement that should accompany the lower creditor days. If we assume unchanged
working capital metrics as we did in the CFROI calculations above, the ROCE decline is
much more modest.
Figure 24: Shoprite lease-adjusted ROCE with 2007 working capital ratios
26.2
28.1
26.3
23.122.4
20.8
26.4
29.228.7
26.626.0
24.7
15
17
19
21
23
25
27
29
31
2008 2009 2010 2011 2012 2013
%
Lease adjusted ROCE Lease adjusted ROCE with 2007 working capital ratios
Source: Company data, Credit Suisse research
On balance, we do not believe that underlying returns on capital have deteriorated
meaningfully in recent years. We are, however, slightly perplexed as to why the company
felt the need to raise nearly R8bn of capital in FY 2012, most of which remains on the
balance sheet as cash. We believe that for the stock to re-rate from current levels, it would
require a value-accretive deployment of this cash. This is likely to be a function of growth
opportunities outside South Africa, which would in itself be a catalyst for a re-rating.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 14
Lower growth ahead? We believe a combination of weak consumer spending in South Africa, Shoprite's already
high market share, a potentially more effective competitor in Pick 'n Pay and a still
relatively small proportion of sales from the rest of Africa are contributing to investor
concerns over the growth prospects of the group.
Although these may be valid concerns, our analysis in the previous section shows that the
market is already pricing in lower revenue growth than the 2005-2013 average of 15% per
annum. Depending on the future level of CFROI, we believe Shoprite's current valuation
implies future growth of between 10.5% and 12.75%, with 10.5% implying a return to
FY2010 CFROI levels and 12.75% no recovery in CFROI, which we view as unlikely.
Shoprite has substantially outperformed the South African food retail sector, growing its
market share from 27.9% in the second half of CY 2007 to 35.4% in FY 2013, according to
Nielsen data quoted in company results presentations. Since FY 2005, its annual revenue
growth in South African supermarkets has averaged near 15%, although growth has been
lower over the past three years.
In the rest of Africa, the group has experienced strong revenue growth of 24.5% per
annum in constant currencies in 2005-2013, with revenue from this source accounting for
13% of FY 2013 group revenue.
Furniture, which contributed 4% to group revenue in FY 2013, recorded average revenue
growth of 8.5% over the same period.
Figure 25: Shoprite revenue growth – RSA supermarkets Figure 26: Shoprite revenue growth – non-RSA
supermarkets
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 2013
% c
hang
e
RSA supermarkets Average
-5
0
5
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 2012 2013
% c
hang
e
Non-RSA supermarkets In constant currencies
Constant currency average
Source: Company data Source: Company data
2013 has been a tough year for the South African consumer, with lower real wage growth,
fuel and electricity inflation, lower credit availability and lower growth in social grants,
placing pressure on consumer expenditure. For Shoprite, this translated in FY 2013 into
revenue growth of 9.8% in its South African supermarket business, compared with 12.9%
in FY 2012, but ahead of industry growth of 7.3%. In its Q1 trading statement, the
company reported a further slowdown in growth to 8.3% for Jul-Sep 2013. At its recent
analyst meeting held on 18 November 2013, management commented that although
October was a good month (we believe better than Q1), it remained cautious over the
upcoming Christmas trading season.
While we do not anticipate a meaningful recovery in consumer spending anytime soon, we
also do not believe that the current discrepancy between food retail sales growth and
apparel retail sales growth rates is sustainable.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 15
Figure 27: South Africa nominal retail sales – y/y change in 3-month average
0%
5%
10%
15%
20%
25%
Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13
% c
hang
e
Food, Beverage & Tobacco Textiles, Clothing, Footwear & Leather Goods
Source: Stats SA, Thomson Reuters
Although revenue growth from South African supermarkets is likely to be lower, we believe it would still be able to deliver 10% per annum over the medium term, which is only marginally ahead of nominal GDP growth. Combined with 25% per annum revenue growth in the rest of Africa, 6% from Furniture and 10% from "other", this would reduce near-term revenue growth to around 12% per annum, which is slightly below consensus expectations of 13% p.a. over the next two financial years. However, as the contribution from the rest of Africa grows, group revenue growth can accelerate back to near 15% over a 10-year period. At these growth rates, non-RSA revenues will grow from 13% of group revenue in FY 2013 to a substantial 35% by FY 2023. Furthermore, as the African operations scale up, we believe its operating margins should at least match those achieved in South Africa, resulting in even better operating profit growth. In Figure 28 and Figure 29 we show how the revenue and profit make-up and growth might develop over the next 10 years based on these assumptions.
Figure 28: Medium-term group revenue potential Figure 29: Medium-term group operating profit potential
9
10
11
12
13
14
15
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
2013
=10
0
RSA Non-RSA
Furniture Other
Revenue growth (RHS)
9
10
11
12
13
14
15
16
17
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
2013
=10
0
RSA Non-RSA
Furniture Other
Operating profit growth (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We do not believe that the market is currently pricing in this potential for accelerating growth due to the rising contribution from sales outside of South Africa. If we assume the growth and margin variables above, the Credit Suisse HOLT-derived fair value of the stock increases to R207, 17% above the current share price. We show the resultant CFROI, growth and margin profile in Figure 30.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 16
Figure 30: HOLT valuation with accelerating growth
CLARITY IS CONFIDENCEHOLT
11
SHOPRITE HOLDINGS LIMITED (SHP)
Accelerating growth
Sales, Margins & TurnsFood Retail Price: 177.49 (Nov 27, 2013)
Market Cap: 94.983 ZAR Warranted Price: 207.15 ZAR (+17%)
Source: Credit Suisse HOLT
The question is whether it is realistic to assume 25% revenue growth for the non-RSA
supermarket operations over the next 10 years, as one could argue that the high growth
rates in recent years are a reflection of the relatively low starting base.
We would argue the opposite and say that African growth in recent years has been held
back by a lack of suitable infrastructure and availability of retail sites rather than a lack of
consumer demand, and that growth should accelerate as infrastructure develops, although
the timing of this is uncertain. We recognise that this is may be a long process, but the
potential upside is considerable.
Of Shoprite's current 954 supermarkets (excluding furniture, liquor, MediRite and Hungry
Lion), 153 are located outside South Africa across 16 countries, with 92 of those Shoprite
stores, 56 Usave and 5 Checkers. It has the largest number of stores in Namibia (41),
followed by Zambia (20) and Angola (17). Its stated current focus area for growth and
investment is the west coast of Africa, Angola and Nigeria in particular. It currently only
has seven stores in Nigeria, but the CEO, Mr Whitey Basson, has been quoted in the
press (Business Day, 21 August 2013) saying that he believes Shoprite could have 600-
800 stores in Nigeria over time. This compares with its current South African supermarket
base of 801 and should probably be viewed as a very long-term ambition rather than an
imminent target. In the near term, the group said that it plans to increase the number of
stores in Nigeria by 44 over the next three to four years and in Angola by 21 over the
same period.
Although we view the 600-800 stores as an ambitious number, the market opportunity in
Nigeria is substantial. Euromonitor estimates the total Nigerian grocery market in 2013 at
NGN3,867bn, which equates to US$24.4bn at current exchange rates, or R249bn, with
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 17
annual growth in 2007-2012 estimated at 10% in local currency. To put this into context,
we estimate the size of the South African grocery market at around R200-220bn in 2013.
Shoprite's total revenue from non-RSA supermarkets amounted to R11.7bn in FY 2013,
with relatively little of this from Nigeria.
Figure 31: Nigeria grocery retail sales
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
NG
N b
illio
n
Value % change
Source: Euromonitor
Euromonitor further estimates that informal (and largely untaxed) retailing accounts for 85-
90% of this total and that the total number of grocery retailers in Nigeria amounts to nearly
300,000. Within the formal segment, modern retail formats are estimated to account for
less than 1%% of total retail sales. The opportunity for Shoprite and other international
retailers lies in the formalisation of the sector and growth, of which there are a number of
drivers:
■ Government support – the government of Nigeria is generally supportive of the formal
retail industry, not only because of the lost tax revenue from the informal sector, but
also because it views investment in and development of the retail industry as an
important future driver of economic growth.
■ A large and growing young population that is urbanising at a fast rate. More than 50%
of the population was under 40 years old in 2012.
■ Rising disposable income – Euromonitor forecasts that the number of households with
disposable income between US$5,000 and US$15,000 will be more than 7m by 2020,
with real growth in total consumer expenditure close to 50% in 2012-2020.
■ Changing shopping habits – access to the internet and social media is changing
consumer behaviour in favour of modern retailing formats.
However, there are also significant growth deterrents, the most significant of which is the
availability of retail sites. Furthermore, lack of infrastructure at the ports is limiting growth,
with cargo sent from Cape Town taking nearly 120 days to get to stores in Nigeria. On top
of this, there are multiple layers of taxation and electricity shortages, which add to the cost
of doing business in the country and corruption remains a problem.
In order to help accelerate its own growth in Nigeria, Shoprite is following a similar strategy
to what it did in Angola by becoming an investor in development and has earmarked
$200m to build shopping malls and its own stand-alone stores. Over time, we would
expect the group to exit these investments through sale and leaseback agreements.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 18
Valuation Owing to the stable cash flow growth of the retail industry, we believe it is appropriate to
value it using the discounted cash flow (DCF) methodology. We forecast explicit cash
flows for five years, after which the growth and free cash flow return on invested capital
faded to a final-year growth rate and WACC respectively over the competitive advantage
period. We calculate the CAP by solving for the current share price in our DCF model, the
margins and revenue growth as implied by the current share price in HOLT. Our DCF fair
value is adjusted by the WACC to determine our 12-month target price of R185.
Figure 32: Shoprite DCF valuation Risk Free Rate 7.8%
Equity Risk Premium 5.5%
Debt Spread 2.0%
Tax rate 28%
Beta 0.8
Final year growth rate 8%
CAP 18.00
Target Debt & Equivalents/ Total Capital 20%
Target WACC 10.95% 0.00%
Present value of FCF's 87 452
Less: Net debt (1 980)
Less: Minorities 211
Add: Associates 130
Equity value 89 351
Per share 167
12m forward 185
Upside 5%
Year 2013 2014E 2015E 2016E 2017E 2018E Intermediate 2031E Terminal value
Sales 92 747 103 306 116 240 131 036 147 912 167 317 583 166 583 166
Sales growth (%) 11.4 12.5 12.7 12.9 13.1 10.1 7.9
Operating profit 5 359 6 030 6 995 8 123 9 353 10 805
Depreciation 1 351 1 860 2 325 2 883 3 550 4 016
Amortisation 0 0 0 0 0 0
EBITDA 6 710 7 890 9 320 11 006 12 903 14 820
Working capital change (1 893) (116) (143) (163) (186) (214)
Operating cash flow 4 817 7 773 9 178 10 843 12 717 14 607
Tax (1 501) (1 688) (1 959) (2 275) (2 619) (3 025)
Capex (3 312) (3 730) (3 965) (4 338) (4 453) (5 037)
Net acquisitions (83) 0 0 0 0 0
Other cash flows 173 0 0 0 0 0
FCF 95 2 355 3 254 4 230 5 645 6 544 93 243 9 851
PV of FCF 2 188 2 726 3 193 3 841 4 013 57 180 1 565 14 310
Cumulative DCF 2 188 4 914 8 107 11 948 15 961 73 141 73 141 87 452
Equity value 4 087 6 813 10 007 13 847 17 860 75 041 75 041 89 351
Per share (R) 7.6 12.7 18.7 25.9 33.4 140.2 140.2 167.0 Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 19
Credit Suisse HOLT® valuation
Figure 33: Shoprite HOLT valuation using Credit Suisse-linked estimates
Current Price: ZAR 177.49 Warranted Price: ZAR 193.60 Valuation date: 29-Nov-13
Sales Growth (parallel % point change to forecasts) Jun-12A Jun-13A Jun-14E Jun-15E Jun-16E
-2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 14.4 12.1 11.4 12.5 12.7
EBITDA Mgn, % 6.7 7.1 7.6 8.0 8.4
Asset Turns, x 2.15 2.03 1.98 1.95 1.93
CFROI®, % 13.9 13.0 12.2 12.7 13.1
Disc Rate, % 5.1 4.9 4.9 4.9 4.9
Asset Grth, % 26.7 11.5 7.0 7.3 8.5
Value/Cost, x 4.5 3.4 3.1 2.7 2.4
Economic PE, x 32.6 26.2 25.4 21.6 18.6
Leverage, % 12.1 13.3 14.1 15.1 16.3
More than
10%
downside
Within 10%More than
10% upside
Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
* Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense
2.0% 25% 41% 59% 80%
1.0% 4% 18% 34% 52%
-16% -3% 12%
103%
9% 25% 43%
73%
HO
LT
-
C
red
it S
uis
se
An
aly
st
Sc
en
ari
o D
ata
SHOPRITE HOLDINGS LIMITED (SHP)
EB
ITD
A M
arg
in (p
ara
lle
l %
po
int
ch
an
ge
to
fo
rec
as
ts)
-2.0% -57% -49% -40%
0.0% -17% -5%
-29% -17%
-1.0% -37% -27%
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Sales Growth (in %)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Operating Margin and EBITDA (in %) - see note*
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Asset Turns (x)
0.00
5.00
10.00
15.00
20.00
25.00
2004200620082010201220142016201820202022
Historical CFROI
Historical
TransactionCFROI
Forecast CFROI
Forecast
TransactionCFROI
Discount Rate
CFROI & Discount Rate (in %)
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2004200620082010201220142016201820202022
Historical Asset
Growth Rate
Historical Growth
Incl Intang
Forecast Growth
Forecast Growth
Incl Intang
Normalised
Growth Rate
Asset Growth (in %)
Source: Company data, Credit Suisse HOLT
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 20
Financials Figure 34: Shoprite divisional outlook Year to Jun R'm 2012 2013 2014E 2015E 2016E 2017E 2018E
Revenue 82 731 92 747 103 306 116 240 131 036 147 912 167 317
RSA supermarkets 64 584 70 926 76 699 84 601 93 202 102 610 113 003
Non-RSA supermarkets 9 174 11 729 15 456 19 279 24 178 30 212 37 608
Furniture 3 400 3 562 3 771 3 947 4 064 4 155 4 241
Other 5 572 6 531 7 380 8 413 9 591 10 934 12 465
Operating profit 4 665 5 394 6 030 6 995 8 123 9 353 10 805
RSA 3 887 4 503 4 867 5 495 6 240 7 024 7 904
Non-RSA 466 613 801 1 059 1 389 1 780 2 292
Furniture 175 131 104 118 122 125 127
Other 136 148 258 323 373 424 482
Operating margin (%) 5.64 5.82 5.84 6.02 6.20 6.32 6.46
RSA 6.02 6.35 6.35 6.50 6.70 6.85 6.99
Non-RSA 5.08 5.22 5.18 5.49 5.74 5.89 6.09
Furniture 5.16 3.67 2.77 3.00 3.00 3.00 3.00
Other 2.44 2.26 3.49 3.84 3.89 3.88 3.87
Revenue growth (%) 14.4 12.1 11.4 12.5 12.7 12.9 13.1
RSA supermarkets 12.9 9.8 8.1 10.3 10.2 10.1 10.1
Non-RSA supermarkets 25.4 27.9 31.8 24.7 25.4 25.0 24.5
Furniture 11.1 4.7 5.9 4.7 3.0 2.2 2.1
Other 18.4 17.2 13.0 14.0 14.0 14.0 14.0
Operating profit growth (%) 17.0 15.6 11.8 16.0 16.1 15.1 15.5
RSA 17.7 15.8 8.1 12.9 13.6 12.6 12.5
Non-RSA 12.2 31.4 30.7 32.2 31.1 28.2 28.7
Furniture 33.5 -25.6 -20.1 13.4 3.0 2.2 2.1
Other -1.0 8.4 74.8 25.1 15.5 13.7 13.7
Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 21
Figure 35: Shoprite income statement
Year to Jun R'm FY2012 FY2013 2014E 2015E 2016E 2017E 2018E
Revenue 82 731 92 747 103 306 116 240 131 036 147 912 167 317
% change yoy 14.4% 12.1% 11.4% 12.5% 12.7% 12.9% 13.1%
Cost of Sales (65 753) (73 316) (81 373) (91 085) (102 029) (114 634) (129 482)
% change yoy 14.1% 11.5% 11.0% 11.9% 12.0% 12.4% 13.0%
Gross Profit 16 978 19 431 21 933 25 155 29 007 33 277 37 835
% change yoy 15.7% 14.4% 12.9% 14.7% 15.3% 14.7% 13.7%
SGA expenses (11 223) (12 686) (14 043) (15 719) (17 608) (19 783) (22 345)
Other operating income (see breakdown below) 2 325 2 608 3 038 3 479 3 921 4 425 5 005
Operating leases (1 940) (2 234) (2 489) (2 800) (3 157) (3 563) (4 031)
Employee benefits (6 530) (7 195) (8 074) (9 091) (10 177) (11 335) (12 570)
Other operating expenses (5 077) (5 865) (6 519) (7 306) (8 195) (9 310) (10 750)
Net expenses (COS+SGA) incl D&A (12 313) (14 037) (15 902) (18 160) (20 884) (23 925) (27 030)
EBITDA - reported 5 755 6 745 7 890 9 436 11 399 13 494 15 490
% change yoy 17.0% 17.2% 17.0% 19.6% 20.8% 18.4% 14.8%
EBITDA - normalised 5 653 6 710 7 890 9 436 11 399 13 494 15 490
% change yoy 16.8% 18.7% 17.6% 19.6% 20.8% 18.4% 14.8%
Depreciation & amortisation (1 090) (1 351) (1 860) (2 441) (3 276) (4 142) (4 685)
Trading profit - reported 4 665 5 394 6 030 6 995 8 123 9 353 10 805
Impairments & other charges (94) (31) 0 0 0 0 0
Exchange rate gains / (losses) (8) (4) 0 0 0 0 0
Profit on disposal of property 0 0 0 0 0 0 0
Operating profit (EBIT) - reported 4 563 5 359 6 030 6 995 8 123 9 353 10 805
% change yoy 16.8% 17.4% 12.5% 16.0% 16.1% 15.1% 15.5%
Operating profit (EBIT) - normalized 4 665 5 394 6 030 6 995 8 123 9 353 10 805
% change yoy 15.6% 11.8% 16.0% 16.1% 15.1% 15.5%
Share of profit from associates 0 5 0 0 0 0 0
Finance income 142 259 237 262 317 404 538
Financing costs (224) (429) (332) (332) (332) (332) (332)
Net financing costs (81) (170) (95) (70) (15) 72 206
Net profit before tax (PBT) 4 481.7 5 193.9 5 934.9 6 925.6 8 108.4 9 424.8 11 010.4
% change yoy 15.6% 15.9% 14.3% 16.7% 17.1% 16.2% 16.8%
Taxation (1 439) (1 579) (1 780) (2 078) (2 433) (2 827) (3 303)
Taxation as a % of PBT 32.1% 30.4% 30.0% 30.0% 30.0% 30.0% 30.0%
Profit for the year (continuing ops) 3 042.8 3 615.3 4 154.4 4 847.9 5 675.9 6 597.4 7 707.3
% change yoy 20.3% 18.8% 14.9% 16.7% 17.1% 16.2% 16.8%
Profit / (loss) for the year (discontinued ops) 0 0 0 0 0 0 0
Profit for the year 3 042.8 3 615.3 4 154.4 4 847.9 5 675.9 6 597.4 7 707.3
% change yoy 20.3% 18.8% 14.9% 16.7% 17.1% 16.2% 16.8%
Margins (%)
Cost of sales margin 79.5% 79.0% 78.8% 78.4% 77.9% 77.5% 77.4%
Gross profit margin 20.5% 21.0% 21.2% 21.6% 22.1% 22.5% 22.6%
SGA margin 14.9% 15.1% 15.4% 15.6% 15.9% 16.2% 16.2%
EBITDA margin - reported (normalised) 7.0% 7.3% 7.6% 8.1% 8.7% 9.1% 9.3%
Trading profit margin 5.6% 5.8% 5.8% 6.0% 6.2% 6.3% 6.5%
Operating profit margin 5.5% 5.8% 5.8% 6.0% 6.2% 6.3% 6.5%
Net profit before tax 5.4% 5.6% 5.7% 6.0% 6.2% 6.4% 6.6%
Net profit margin 3.7% 3.9% 4.0% 4.2% 4.3% 4.5% 4.6% Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 22
Figure 36: Shoprite balance sheet Year to Jun R'm FY2012 FY2013 2014E 2015E 2016E 2017E 2018E
Assets
Non-current assets
PPE 9 669 11 714 13 584 15 108 16 170 16 481 16 834
Goodwill & Intangible assets 894 1 039 1 039 1 039 1 039 1 039 1 039
Operating lease asset 11 12 12 12 12 12 12
Investments in assoc.s, subsidiaries and jvs 104 130 130 130 130 130 130
Other non-current financial receivables 4 10 10 10 10 10 10
Deferred tax assets 414 425 425 425 425 425 425
Total non-current assets 11 095 13 331 15 202 16 725 17 787 18 099 18 451
Current assets
Inventories 8 680 10 317 11 492 12 931 14 577 16 454 18 613
Debtors and other receivables 2 702 3 428 3 818 4 296 4 843 5 467 6 184
Loans and receivables 16 19 19 19 19 19 19
Current tax assets 81 175 175 175 175 175 175
Other current assets 0 24 24 24 24 24 24
Cash and equivalents 7 939 6 139 6 408 7 380 8 973 12 013 15 600
Total current assets 19 419 20 101 21 935 24 824 28 609 34 150 40 614
Total assets 30 906 33 489 37 137 41 549 46 397 52 249 59 065
Assets held for sale 392 57
Total shareholders' equity 12 808 15 252 17 459 20 097 22 915 26 453 30 606
Share capital and premium 4 319 4 319 4 319 4 319 4 319 4 319 4 319
Treasury shares (320) (320) (320) (320) (320) (320) (320)
Other reserves 543 1 080 1 080 1 080 1 080 1 080 1 080
Retained income 8 203 10 104 12 291 14 905 17 695 21 201 25 317
Ordinary shareholders' equity 12 745 15 184 17 371 19 985 22 775 26 281 30 397
Minority interest 63 68 88 112 140 172 209
Liabilities
Current liabilities
Creditors and other payables 12 712 12 723 14 172 15 946 17 976 20 291 22 953
Interest bearing short term debt + bank overdrafts 52 335 335 335 335 335 335
Provisions 139 134 134 134 134 134 134
Shareholders' loans and shareholders for pref share dividends 5 6 6 6 6 6 6
Current tax liabilities 151 187 187 187 187 187 187
Total current liabilities 13 058 13 385 14 833 16 607 18 637 20 952 23 614
Non-current liabilities
Preference shares - liability component 0 0 0 0 0 0 0
Interest bearing long term debt 4 007 3 823 3 816 3 816 3 816 3 816 3 816
Provisions 339 254 254 254 254 254 254
Operating lease liability 520 577 577 577 577 577 577
Deferred tax liabilities 152 197 197 197 197 197 197
Total non-current liabilities 5 040 4 852 4 845 4 845 4 845 4 845 4 845
Total liabilities 18 098 18 237 19 678 21 452 23 482 25 797 28 459
Total equity and liabilities 30 906 33 489 37 137 41 549 46 397 52 249 59 065 Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 23
Figure 37: Shoprite cash flow statement Year to Jun R'm FY2012 FY2013 2014E 2015E 2016E 2017E 2018E
Cash flows from operating activities
Operating profit 4 563 5 359 6 030 6 995 8 123 9 353 10 805
Depreciation + amortisation 1 200 1 412 1 860 2 441 3 276 4 142 4 685
Less: Investment income (82) (39)
Impairments 79 0 0 0 0 0 0
Other cash flows 436 173 0 0 0 0 0
Cash operating profit 6 195 6 905 7 890 9 436 11 399 13 494 15 490
Changes in working capital 649 (1 893) (116) (143) (163) (186) (214)
Other changes in capital (289) (535)
Cash generated from operations 6 555 4 478 7 773 9 294 11 236 13 308 15 276
Cash generated from operations (from accounts) 6 555 4 478 7 773 9 294 11 236 13 308 15 276
Tax paid (1 885) (1 594) (1 780) (2 078) (2 433) (2 827) (3 303)
Net cash from operating activities 4 670 2 883 5 993 7 216 8 804 10 481 11 973
Cash flows from investing activities
Replacement / maintenance capex - ppe (759) (703) (837) (942) (1 062) (1 199) (1 356)
Expansionary capex - ppe (2 359) (2 610) (2 893) (3 022) (3 276) (3 254) (3 681)
Proceeds from disposal of ppe and intangible assets 149 369 0 0 0 0 0
Proceeds from disposal of investment property 0 (4) 0 0 0 0 0
Other investing activities 34 (9) 0 0 0 0 0
(Acquisition) / disposal of subsidiary and jvs (177) (83) 0 0 0 0 0
Net cash (used in)/from investing activities (3 111) (3 039) (3 730) (3 965) (4 338) (4 453) (5 037)
Cash flows from financing activities
Proceeds / (repayments) from interest-bearing borrowings 10 13 0 0 0 0 0
Proceeds / (repayments) from shareholders' loans 0 0 0 0 0 0 0
Minority loan and dividend payments received 65 14 0 0 0 0 0
Finance costs (126) (327) (332) (332) (332) (332) (332)
Finance income 159 283 237 262 317 404 538
Capital distribution / dividends paid (1 434) (1 707) (1 890) (2 210) (2 858) (3 060) (3 553)
Proceeds from ordinary share issues 3 410 0.01 0 0 0 0 0
Proceeds from convertible bond issues 4 348 0 0 0 0 0 0
Net cash (used in)/from financing activities 6 433 (1 723) (1 986) (2 280) (2 873) (2 988) (3 348)
Movement in cash before exchange rate changes 7 992 (1 878) 277 972 1 593 3 040 3 588 Source: Company data, Credit Suisse estimates
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 24
Global retail valuation Figure 38: Global retail valuation comparisons
Company CS Cur. Share Target Upside Market
Rating Price Price +/- Cap. (USDm) 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E
2012C 2013C 2014C 2012C 2013C 2014C 2012C 2013C 2014C
South Africa
^JD Group Ltd NR ZAR 28.69 NR ###### 648 6.6 6.7 6.0 7.2 7.4 7.2 8.1% 7.9% 8.0%
^Lew is Group NR ZAR 65.60 NR ###### 634 6.3 6.1 5.9 6.8 6.7 6.5 7.6% 7.8% 8.1%
Mr. Price N ZAR 157.50 147.50 -6% 3 897 17.7 14.7 12.4 28.2 23.1 19.6 2.4% 2.9% 3.5%
^MassMart Holding NR ZAR 145.00 NR ###### 3 101 10.3 9.0 31.0 23.5 21.0 2.9% 2.8% 3.3%
Pick n Pay O ZAR 48.85 62.00 27% 2 312 13.8 12.3 9.7 42.6 37.9 26.5 1.9% 1.8% 2.6%
^Steinhoff International Holdings NR ZAR 40.00 NR ###### 7 505 10.1 7.9 7.2 12.5 10.6 9.4 2.0% 2.2% 2.6%
Shoprite Holdings Limited N ZAR 176.81 185.00 5% 9 938 15.8 13.5 11.5 27.6 24.4 21.1 1.8% 2.1% 2.4%
^Spar Group NR ZAR 129.00 NR ###### 2 200 12.4 11.2 21.8 19.4 17.6 3.4% 3.8% 4.2%
The Foschini Group U ZAR 100.85 90.50 -10% 2 237 7.2 6.9 6.5 12.1 11.5 10.4 4.9% 5.1% 5.6%
Truw orths International Limited O ZAR 81.00 92.50 14% 3 701 13.7 12.8 11.5 15.0 13.7 12.3 4.5% 5.2% 5.3%
Woolw orths Holdings Limited O ZAR 73.96 87.50 18% 6 168 16.5 13.2 11.0 24.7 19.4 16.1 2.9% 3.5% 4.3%
Average 12.0 10.6 9.3 20.9 18.0 15.2 3.9% 4.1% 4.5%
LatAm
GRUPO COMERCIAL CHEDRAUI ORDU MXN 42.28 40.00 -5% 3 118 10.9 10.4 9.6 27.1 25.0 23.6 0.5% 0.0% 0.0%
Walmex U MXN 33.97 37.00 9% 45 831 14.0 12.2 10.6 25.9 22.4 18.6 1.6% 3.6% 2.6%
Soriana N MXN 41.80 48.00 15% 5 756 10.4 10.3 9.4 21.0 20.5 18.7 0.7% 0.0% 0.8%
Brasil Foods S.A. O BRL 50.54 55.00 9% 19 029 21.9 12.7 10.3 54.0 22.1 18.1 0.0% 1.1% 1.4%
International Meal Company Holdings O BRL 20.00 31.00 55% 729 11.6 8.4 6.5 48.2 19.8 13.2 0.3% 1.3% 1.9%
Cencosud SA N CLP 1935.40 3 000 55% 10 290 13.3 11.4 10.5 23.7 20.5 15.9 1.1% 1.5% 1.5%
^AREZZO INDUSTRIA N ZAR 29.39 40.00 36% 257 80.7 63.9 52.7 26.9 21.0 17.1 1.8% 1.9% 2.2%
^Lojas Americanas N BRL 15.87 20.00 26% 6 212 10.2 9.4 7.8 37.2 32.7 26.5 0.4% 0.7% 0.9%
^B2W U BRL 14.20 10.00 -30% 974 8.8 7.2 5.2 13.0- 12.7- 18.5- 0.0% 0.0% 0.0%
^Lojas Renner N BRL 62.82 74.00 18% 3 413 11.0 9.8 7.8 22.3 19.6 16.9 3.3% 3.3% 3.5%
^Marisa S.A. N BRL 19.45 23.00 18% 1 557 8.2 7.4 6.3 15.7 15.7 12.7 1.5% 2.4% 2.7%
^Natura N BRL 42.90 52.00 21% 7 983 12.6 11.8 10.6 21.5 20.7 18.8 4.6% 4.6% 4.8%
Almacenes Exito O COP 30980.00 34 000 10% 7 195 15.1 11.4 9.7 34.3 24.2 20.8 1.0% 1.0% 1.0%
S.A.C.I. FALABELLA N CLP 4928.40 5 100 3% 22 610 15.5 13.4 11.5 26.3 22.3 18.7 0.0% 0.0% 0.0%
Ripley Corp SA N CLP 399.47 640.00 60% 1 465 9.6 8.4 7.4 11.3 10.4 8.9 2.4% 2.7% 2.9%
^Hypermarcas O BRL 18.80 23.00 22% 5 128 16.9 15.0 13.1 57.0 37.1 23.7 0.9% 0.8% 1.1%
Grupo Famsa O MXN 23.43 31.00 32% 788 10.4 9.3 8.4 19.9 15.1 13.0 0.0% 0.0% 0.0%
Average 16.1 13.4 11.4 28.6 20.8 16.2 1.1% 1.3% 1.5%
Russia
Magnit O USD 66.50 70.00 5% 33 294 22.9 19.2 15.9 38.9 33.6 26.4 0.4% 0.5% 1.1%
X5 Retail Group N USD 16.88 18.00 7% 4 579 7.3 7.2 6.4 40.2- 16.8 14.0 0.0% 0.0% 0.0%
Average 15.1 13.2 11.2 -0.7 25.2 20.2 0.2% 0.3% 0.6%
EMEA
BIM N TRY 44.00 44.05 0% 6 641 26.4 22.5 18.6 40.3 34.3 28.5 1.6% 2.5% 3.0%
Migros O TRY 17.60 26.70 52% 1 558 11.4 10.9 9.1 92.4 39.9 25.0 0.0% 0.0% 0.0%
Average 18.9 16.7 13.8 66.3 37.1 26.7 0.8% 1.2% 1.5%
Europe
Average 9.0 8.9 8.1 18.1 20.3 15.5 1.6% 1.6% 1.9%
United States
Average 7.9 7.8 8.1 17.1 18.3 14.8 1.8% 1.5% 1.3%
Asia
Average 10.7 9.7 8.4 21.5 21.0 18.3 1.7% 1.8% 2.1%
Australia
Average 9.6 9.4 8.9 15.8 15.6 14.7 5.6% 5.3% 5.2%
Canada
Average 9.0 8.1 7.8 18.5 17.2 15.7 1.4% 1.6% 1.6%
Global Average (incl SA) 12.0x 10.8x 9.7x 22.9x 21.5x 17.5x 2.0% 2.1% 2.2%
Global Average (excl SA) 12.0x 10.9x 9.7x 23.2x 22.0x 17.8x 1.8% 1.8% 2.0%
EMEA Average 15.3x 13.5x 11.4x 28.9x 26.8x 20.7x 1.6% 1.9% 2.2%
EMEA & LatAm Average 15.5x 13.5x 11.4x 28.8x 25.3x 19.6x 1.5% 1.7% 2.0%
EV/EBITDA (x) P/E (x) Dividend Yield
Source: Company data, Thomson Reuters, Credit Suisse estimates for all companies except those market ^ = I/B/E/S consensus data Priced
as at close 28 November 2013
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 25
Global retail margins Figure 39: Global retail margins
Company Reuters
2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E
2012C 2013C 2014C 2012C 2013C 2014C 2012C 2013C 2014C 2012C 2013C 2014C
South Africa
^JD Group JDGJ.J 7.0% 6.2% 6.7% 5.7% 4.7% 5.2% 5.7% 4.7% 5.2% 3.0% 2.8% 2.9%
^Lew is LEWJ.J 24.6% 24.1% 23.6% 23.6% 22.8% 22.3% 23.6% 22.8% 22.3% 16.9% 16.3% 15.8%
Mr. Price MPCJ.J 16.9% 18.0% 18.5% 15.4% 16.6% 17.0% 15.4% 16.6% 17.0% 11.3% 12.3% 12.7%
^MassMart MSMJ.J 4.2% 4.3% 2.7% 3.1% 3.1% 2.7% 3.1% 3.1% 1.6% 1.9% 1.9%
Pick n Pay PIKJ.J 3.1% 3.2% 3.7% 1.6% 1.6% 2.0% 1.6% 1.6% 2.0% 1.1% 1.0% 1.3%
^Steinhoff SHFJ.J 12.2% 12.3% 12.6% 9.9% 10.1% 10.5% 9.9% 10.1% 10.5% 6.4% 6.5% 7.1%
Shoprite SHPJ.J 7.1% 7.5% 7.8% 5.7% 5.8% 5.9% 5.7% 5.8% 5.9% 3.8% 4.0% 4.1%
^Spar SPPJ.J 3.7% 3.7% 3.5% 3.4% 3.4% 3.5% 3.4% 3.4% 2.5% 2.5% 2.5%
Foschini TFGJ.J 26.3% 24.6% 23.3% 23.7% 22.3% 21.6% 23.7% 22.3% 21.6% 13.8% 13.0% 12.8%
Truw orths TRUJ.J 28.6% 27.6% 27.7% 27.0% 26.1% 26.2% 27.0% 26.1% 26.2% 24.9% 24.7% 24.8%
Woolw orths WHLJ.J 11.8% 12.4% 13.2% 9.6% 10.1% 10.7% 9.6% 10.1% 10.7% 7.3% 7.7% 8.1%
Average 15.3% 13.1% 13.2% 11.7% 11.5% 11.6% 11.7% 11.5% 11.6% 8.4% 8.4% 8.5%
LatAm
GRUPO COMERCIAL CHEDRAUI ORD CHDRAUIB.MX 6.7% 6.7% 6.9% 4.7% 4.7% 4.8% 4.7% 4.7% 4.8% 2.3% 2.4% 2.4%
Walmex WALMEXV.MX 9.8% 10.2% 10.5% 7.8% 8.2% 8.5% 7.8% 8.2% 8.5% 5.6% 5.8% 6.2%
Soriana SORIANAB.MX 7.0% 7.1% 7.2% 5.1% 5.2% 5.4% 5.1% 5.2% 5.4% 3.4% 3.5% 3.6%
Brasil Foods S.A. BRFS3.SA 8.2% 12.6% 13.8% 4.8% 9.9% 10.5% 4.8% 9.9% 10.5% 2.9% 6.2% 6.8%
International Meal Company Holdings IMCH3.SA 13.1% 14.7% 15.2% 5.8% 8.8% 10.0% 5.8% 8.8% 10.0% 3.0% 5.8% 7.0%
Cencosud SA CEN.SN 7.2% 7.2% 7.5% 6.6% 5.7% 5.8% 6.6% 5.7% 5.8% 2.2% 2.5% 3.1%
AREZZO INDUSTRIA ARZZ3.SA 15.7% 16.7% 17.4% 14.8% 15.8% 16.5% 14.8% 15.8% 16.5% 11.1% 11.9% 12.8%
Lojas Americanas LAME4.SA 13.9% 13.8% 14.5% 12.0% 11.7% 12.0% 12.0% 11.7% 12.0% 3.6% 3.4% 3.9%
B2W BTOW3.SA 6.8% 7.1% 8.7% 4.8% 5.3% 6.8% 4.8% 5.3% 6.8% -3.5% -2.9% -1.3%
Lojas Renner LREN3.SA 18.5% 18.3% 18.2% 15.1% 14.4% 13.7% 15.1% 14.4% 13.7% 9.2% 8.7% 8.5%
Marisa S.A. AMAR3.SA 17.3% 16.3% 16.9% 12.3% 11.0% 11.5% 12.3% 11.0% 11.5% 8.0% 6.1% 6.8%
Hypermarcas HYPE3.SA 22.4% 22.0% 23.3% 19.9% 19.7% 21.0% 19.9% 19.7% 21.0% 5.3% 7.2% 13.8%
Natura NATU3.SA 23.8% 23.4% 23.1% 21.6% 20.9% 20.5% 21.6% 20.9% 20.5% 13.6% 12.9% 12.6%
Almacenes Exito IMI.CN 8.5% 10.2% 10.9% 4.8% 6.9% 8.0% 4.8% 6.9% 8.0% 3.8% 4.8% 5.2%
S.A.C.I. FALABELLA FAL.SN 15.1% 15.1% 15.4% 12.7% 12.7% 13.0% 12.7% 12.7% 13.0% 7.5% 7.7% 8.0%
Ripley Corp SA RIP.SN 9.5% 9.7% 10.3% 6.6% 6.9% 7.4% 6.6% 6.9% 7.4% 5.2% 5.1% 5.6%
Hypermarcas HYPE3.SA 22.4% 22.0% 23.3% 19.9% 19.7% 21.0% 19.9% 19.7% 21.0% 5.3% 7.2% 13.8%
Grupo Famsa GFAMSAA.MX 13.0% 13.3% 13.4% 10.4% 10.6% 10.7% 10.4% 10.6% 10.7% 3.0% 3.6% 3.8%
Average 12.9% 13.3% 13.9% 10.3% 10.7% 11.2% 10.3% 10.7% 11.2% 4.9% 5.5% 6.6%
Russia
Magnit MGNTq.L 10.6% 10.1% 10.0% 8.0% 7.7% 7.8% 8.0% 7.7% 7.8% 5.6% 5.2% 5.4%
X5 Retail Group PJPq.L 7.1% 7.0% 7.3% 1.2% 4.1% 4.3% 1.2% 4.1% 4.3% -0.7% 1.7% 1.9%
Average 8.8% 8.6% 8.6% 4.6% 5.9% 6.0% 4.6% 5.9% 6.0% 2.4% 3.4% 3.6%
EMEA
BIM BIMAS.IS 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.3% 3.4% 3.4%
Migros MGROS.IS 6.2% 5.9% 6.3% 4.2% 3.9% 4.3% 4.2% 3.9% 4.3% 0.5% 1.1% 1.6%
Average 5.6% 5.4% 5.6% 4.1% 4.0% 4.1% 4.1% 4.0% 4.1% 1.9% 2.2% 2.5%
Europe
Average 10.2% 10.2% 10.4% 7.5% 7.4% 7.6% 7.5% 7.4% 7.6% 5.2% 5.1% 5.3%
United States
Average 8.3% 8.3% 8.7% 5.5% 5.4% 5.8% 5.5% 5.4% 5.8% 2.9% 2.6% 3.1%
Asia
Average 11.8% 11.6% 11.8% 8.0% 7.8% 8.1% 8.0% 7.8% 8.1% 5.0% 4.4% 4.5%
Australia
Average 11.9% 12.2% 12.6% 9.0% 9.2% 9.7% 9.0% 9.2% 9.7% 5.9% 6.0% 6.2%
Canada
Average 6.2% 6.3% 6.3% 4.2% 4.2% 4.3% 4.2% 4.2% 4.3% 2.5% 2.5% 2.5%
Global Average (incl SA) 10.1% 9.9% 10.1% 7.2% 7.3% 7.6% 7.2% 7.3% 7.6% 4.3% 4.5% 4.8%
Global Average (excl SA) 9.5% 9.5% 9.7% 6.6% 6.8% 7.1% 6.6% 6.8% 7.1% 3.8% 4.0% 4.3%
EMEA Average 9.9% 9.0% 9.2% 6.8% 7.1% 7.3% 6.8% 7.1% 7.3% 4.3% 4.7% 4.9%
EMEA & LatAm Average 10.7% 10.1% 10.3% 7.7% 8.0% 8.3% 7.7% 8.0% 8.3% 4.4% 4.9% 5.3%
EBITDA margin EBIT margin (before one-offs) EBIT margin Net margin
Source: Company data, Thomson Reuters, Credit Suisse estimates for all companies except those market ^ = I/B/E/S consensus data
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 26
PEERs map PEERs is a global database that captures unique information about companies within the
Credit Suisse coverage universe based on their relationships with other companies – their
customers, suppliers and competitors. The database is built from our research analysts’
insight regarding these relationships. Credit Suisse covers over 3,000 companies globally.
These companies form the core of the PEERs database, but it also includes relationships
on stocks that are not under coverage.
Figure 40: Shoprite PEERs map
Source: Credit Suisse PEERs
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 27
Companies Mentioned (Price as of 28-Nov-2013)
Almacenes Exito (IMI.CN, peso30980.0) Arezzo Industria e Comercio SA (ARZZ3.SA, R$29.39) B2W (BTOW3.SA, R$14.2) BIM (BIMAS.IS, TL44.0) Brasil Foods S.A. (BRFS3.SA, R$50.54) Cencosud SA (CEN.SN, CLP$1935.4) GRUPO COMERCIAL CHEDRAUI ORD (CHDRAUIB.MX, $42.28) Grupo Famsa (GFAMSAA.MX, $23.43) Hypermarcas S.A. (HYPE3.SA, R$18.8) International Meal Company Holdings (IMCH3.SA, R$20.0) JD Group Ltd (JDGJ.J, R28.69) Lewis Group (LEWJ.J, R65.6) Lojas Americanas S.A. (LAME4.SA, R$15.87) Lojas Renner S.A. (LREN3.SA, R$62.82) Magnit (MGNTq.L, $66.5) Marisa S.A. (AMAR3.SA, R$19.45) MassMart Holding (MSMJ.J, R145.0) Migros (MGROS.IS, TL17.6) Mr Price Group Limited (MPCJ.J, R157.5) Natura Cosméticos S.A. (NATU3.SA, R$42.9) Pao de Acucar (PCAR4.SA, R$108.5) Pick N Pay Stores Limited (PIKJ.J, R48.85) Ripley Corp SA (RIP.SN, CLP$399.47) S.A.C.I. FALABELLA (FAL.SN, CLP$4928.4) Shoprite Holdings Limited (SHPJ.J, R176.81, NEUTRAL, TP R185.0) Soriana (SORIANAB.MX, $41.8) Spar Group (SPPJ.J, R129.0) Steinhoff International Holdings (SHFJ.J, R40.0) The Foschini Group (TFGJ.J, R100.85) Truworths International Limited (TRUJ.J, R81.0) Walmex (WALMEXV.MX, $33.97) Woolworths Holdings Limited (WHLJ.J, R73.96) X5 Retail Group (PJPq.L, $16.88)
Disclosure Appendix
Important Global Disclosures
Pieter Vorster and Mukhtar Mustapha, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Shoprite Holdings Limited (SHPJ.J)
SHPJ.J Closing Price Target Price
Date (R) (R) Rating
04-Oct-11 112.70 116.00 N *
02-Dec-11 134.71 124.00 U
29-Feb-12 136.00 125.00
01-Jun-12 138.10 128.00
31-Oct-12 178.30 142.00
20-Feb-13 176.50 NR
28-Aug-13 158.05 145.00 U *
28-Nov-13 176.81 NR
* Asterisk signifies initiation or assumption of coverage. N EU T RA L
U N D ERPERFO RM
N O T RA T ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 28
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (54% banking clients)
Neutral/Hold* 41% (50% banking clients)
Underperform/Sell* 15% (41% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock rat ings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Shoprite Holdings Limited (SHPJ.J)
Method: Owing to the stable cash flow growth of the retail industry, we believe it is appropriate to value it using the discounted cash flow (DCF) methodology. We forecast explicit cash flows for five years, after which the growth rate free cash flow return in invested capital is faded to the final year growth rate and WACC respectivle over the competitive advantage period (CAP). We calculate the CAP by solving for the current share price in our DCF model, the margins and revenue growth as implied by the current share price in HOLT. Our DCF fair value is adjusted by the WACC to determine our 12-month target price of R185. For Shoprite, we use a 10.95% WACC, 18-year CAP and a final year growth rate of 8%.
Risk: Risks to our target price include: (i) Execution risks across Africa. (ii) Management succession planning (iii) More effective competition from Pick 'n Pay in South African market (iv) Increased competition from Walmart through Massmart holding (vi) Food price volatility (vii) Prolonged weakness in South African consumer spending
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (WHLJ.J, LREN3.SA, CHDRAUIB.MX, CEN.SN, HYPE3.SA, IMCH3.SA, PJPq.L, IMI.CN, LAME4.SA, WALMEXV.MX, GFAMSAA.MX) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 29
Credit Suisse provided investment banking services to the subject company (LREN3.SA, CEN.SN, IMCH3.SA, PJPq.L, IMI.CN, LAME4.SA, WALMEXV.MX, GFAMSAA.MX) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (WHLJ.J, LAME4.SA) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (IMI.CN, WALMEXV.MX, GFAMSAA.MX) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (LREN3.SA, CEN.SN, IMCH3.SA, PJPq.L, IMI.CN, LAME4.SA, WALMEXV.MX, GFAMSAA.MX) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LREN3.SA, NATU3.SA, CHDRAUIB.MX, CEN.SN, HYPE3.SA, IMCH3.SA, PJPq.L, IMI.CN, BIMAS.IS, LAME4.SA, WALMEXV.MX, GFAMSAA.MX, FAL.SN) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (WHLJ.J, LAME4.SA) within the past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (IMCH3.SA).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (SHPJ.J, TRUJ.J, TFGJ.J, MPCJ.J, PIKJ.J, WHLJ.J, SORIANAB.MX, AMAR3.SA, BTOW3.SA, LREN3.SA, NATU3.SA, CHDRAUIB.MX, CEN.SN, HYPE3.SA, IMCH3.SA, PJPq.L, IMI.CN, BIMAS.IS, LAME4.SA, WALMEXV.MX, MGNTq.L, GFAMSAA.MX, RIP.SN, ARZZ3.SA, MGROS.IS, BRFS3.SA, FAL.SN) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (PJPq.L, BIMAS.IS, MGNTq.L).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (CEN.SN, HYPE3.SA, IMCH3.SA, IMI.CN, WALMEXV.MX, GFAMSAA.MX, ARZZ3.SA) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities Johannesburg (PTY) Ltd ........................................................................................... Pieter Vorster ; Mukhtar Mustapha
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 30
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
02 December 2013
Shoprite Holdings Limited (SHPJ.J) 31
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
XX6013EU.doc