SHP delivered strong results for 1H22, underpinned by solid growth in Checkers and recovery of liquor sales. Checkers’ sales growth outpaced WHL Food in four of the past five years. In 2018 Checkers’ sales were 36.5% higher than WHL Food’s sales and Checkers has now widened its lead to 47.7%. We show that online sales serviced from stores are less profitable than customers doing their own shopping. With two-thirds of the online users being existing Checkers customers, we believe the growing portion of store sales cannibalised by the online platform could dilute margins. With Checkers performing well, we believe the Shoprite chain’s gross margin may need to be cross-subsidised as its lower-income target market could become more price-sensitive. Food inflation pressure is building and the spike in the oil price could cause a surge in transport costs. We believe SHP SA Supermarkets’ trading margins may be peaking and there could be downside risks in the near term. SHP’s rationalisation of its African footprint resulted in it remaining in less-volatile markets. We think these markets may not be as profitable as higher-risk markets such as Nigeria, where the lack of formal retail competition allowed higher margins. The trading margin of Non-SA Supermarkets averaged 5.0% between FY12 and FY17, and we doubt that those margins can be achieved with the remaining portfolio of countries.
