Shoprite cleaning house?

Author: Nompumelelo Qwabe

The Shoprite group in their most recent trading update announced an exit of their Nigerian operations following several approaches by interested parties. The group currently has a total of 24 stores in the region which they first ventured into a decade ago. The region presented growth opportunities which have since failed to materialize.

Shoprite’s underperformance in Nigeria was largely due to long term difficulties of operating in the country and ongoing forex pressure. Supply chains in the Non-RSA segment are prolonged which requires large investment in inventory, these long working capital cycles ultimately led to the dilution of overall group returns. The overall expansion strategy into Africa required extensive capital outlay contributing to the increased gearing levels of the company as well.

The decision to restructure overall non-performing assets in Shoprite’s Non-RSA segment was communicated by management last year as a response to the group’s return on capital invested in Africa being below expectations together with trading margins in the segment declining. An alternate approach to operations such as disposals, JV’s and franchise models are currently being looked at for the segment at large. This would potentially aid in improving capital return and free cash flow which in my view would be a positive catalyst for a re-rate of the counter.

Shoprite has not been alone in their pains in Africa, peer Pick n Pay has also faced issues outside RSA borders. These struggles in Africa were made worse by the lockdowns implemented in response to the coronavirus pandemic. In this current Covid environment strong balance sheets are the order of the day to insulate businesses and cleaning up operations are welcomed.

Nevertheless, I am still positive on Shoprite getting their Africa strategy right and see the region as potential value for the group in the long term. The question however is what would be a fair multiple for this business now that the Africa turnaround has potentially been pushed back even further and the RSA region is for all intents and purposes at the maturity stage?