Spar (SPP) – Trim European ambitions

Although SPP delivered weak results for 1H24, there were some positive developments, most notably a clearer path to resolving its financing issues. The sharp cut in capex, an exit from Poland by September, offloading loss-making corporate stores, and working capital improvements should alleviate its financing challenges.

Management said strategic decisions regarding its European operations would be finalised by June 2025. In our view, the investment case for Spar Switzerland is not compelling and may continue to be a drag on the group’s performance. This division was only able to generate positive topline growth with the abnormal trading conditions during the pandemic, and we believe its OPM is likely to remain under 2%. We argue that small-format stores, which account for 62% of Spar Switzerland’s trading space, are less profitable in a high-labour-cost market like Switzerland. We show that Spar Switzerland staff productivity is significantly lower than Spar Ireland and Spar SA.

Spar Switzerland is also more capital-intensive than the other regions and delivers the lowest ROA in the group. Moreover, its leverage ratio of 5.18 is considerably higher than the group ratio of 3.07. We calculate that excluding the Swiss business, the group leverage ratio would be 2.21, within the normal covenant ratio. We find that the Swiss debt ballooned mostly due to the weakening rand.

An exit from Spar Switzerland could free up capital, lower SPP’s gearing, and allow management to focus on the core SA and Irish businesses. It could also render unnecessary other levers management is considering to improve liquidity, such as property disposals, sale and leaseback, or the securitisation of debtors.