Massmart has a portfolio of retail and wholesale stores divided into four divisions, namely Massdiscounters, Masscash, Masswarehouse and Massbuild, each focused on the distribution of high-volume, low-margin, low-cost, mainly branded consumer goods for cash. Massmart operates in the general merchandise, food, liquor, home improvement and building materials sectors of the market and has 330 stores in 13 countries across sub-Saharan Africa.
On 31 May 2011, the competition tribunal approved the acquisition of a controlling 51 percent stake in Massmart by Wal-Mart, the biggest global retailer in the world, making Massmart a subsidiary of the Wal-Mart group.
What we do not like
The share price is already discounting all the benefits that the Wal-Mart relationship could potentially bring to the group and is banking on the Massmart management team executing well on all its strategic projects.
We expect Massmart to find it a lot tougher to build substantial scale in the food retail sector compared to what it has experienced in the fragmented and unorganised home improvement, building material and general merchandise industries.
The share is trading on a forward price-to-earnings (PE) ratio of 22.7X, well above its historic average PE of 15.8X.The share price has increased 171 percent since its June 2008 financial year end, while the diluted headline earnings per share (HEPS) excluding the Wal-Mart transaction cost has declined by five percent. Including the Wal-Mart transaction cost, it has actually declined 37 percent over the same period.
We feel that the Massmart share price is priced for perfection and investors are discounting too much blue sky at the current share price.
What we like
Massmart has a portfolio of strong trading brands like Game, Dion Wired, Makro and Builders Warehouse, which are highly recognisable and top-of-mind for consumers as destination stores for the categories in which they trade.
Massmart’s partnership with Wal-Mart provides it with access to leading edge global retail technologies, intellectual capital and global retail best practices. It will also allow Massmart to piggyback on the back of Wal-Mart’s global procurement and sourcing platform, enabling it to provide customers with more product choice and even better prices.
The business is well run with a strong management team that has a clear focus on improving the efficiency of the business as well as increasing its competitive advantage relative to competitors.
Article continues on page two: the biggest risks to this valuation...