While WHL delivered reasonable results in 1H26, developments post-period may be more significant. The company announced the group CEO’s retirement, and expanded into food production by acquiring supplier in2food.
While management cited several benefits of the acquisition, we believe it carries some risk, as the retailer now incorporates extensive manufacturing activities into its business model. Our review of in2food’s growth over the past 20 years reveals that it is an amalgamation of at least ten diverse businesses. The consolidation of these suppliers led to in2food’s share of WHL Food sales increasing to around 10.6% by FY25. in2food’s 8 000-strong staff count is larger than CRG’s, and boosts the Food division’s staff by 35.1%, which underscores the added complexity.
Using proforma income statement estimates, we believe the purchase price may be around R1.5bn (at 6x P/E), which will likely be funded with debt.
While the transaction may have been motivated by defensive strategies, we think the added complexity of a mixed retailer/food producer may hurt the company’s performance, especially if the contribution of in-house sourcing increases over time. The shares’ P/E ratio may also be diluted, as food producers trade at a discount to retailers. We believe security of supply could be achieved in other, less costly ways – for example, via long-term supply contracts or right of first refusal.
FBH’s African business offers growth opportunities, as its smaller stores have higher trading densities than its larger SA stores. While space is rationalised in SA, there are opportunities for expansion in several countries, including Kenya, Tanzania and Zambia. FBH’s African stores have better GP and EBIT margins than the SA business, as they over-index in the higher-margin fashion category.