Massmart (MSM) – A new Game

Although MSM’s FY21 results were weak, there are signs that better performance may lie ahead. We are particularly encouraged by the new Game format, which we think provides a much-needed refresh and a stronger unique selling proposition in mall locations. However, we remain concerned that Game’s gross margin is too low, and we argue that a step-change in GPM can only be achieved by structural adjustments in its category contributions. We demonstrate that Game can lift its GPM from the current 27% to c.33%, by reducing the contribution of the lower-margin categories liquor, food and electronics. Game can also address its persistent low inflation (its product inflation was 0.5% p.a. over the past 16 years), by reducing its exposure to TVs and electronics, which could ease the pressure to compensate for low inflation with higher volume growth.

MSM’s gross debt remains high at R6.5bn while its cash balance dropped sharply in FY21. To improve its gearing, the Walmart loan of USD125m was replaced by a R2bn perpetual bond, which is classified as equity in terms of IFRS. However, we are concerned that the economic characteristics of the perpetual bond mean it is still a burden on the company.