Our Research

The online retailer Shein has been gaining traction in South Africa, and we assess the risk it may pose to the SA clothing retailers. Its innovative use of technology revolutionises the buying process, but there is an opportunity for the local retailers to emulate some of these innovations. Shein’s delivery timeframe of 2 to 3 weeks is a significant drawback, and while its very competitive prices offset this, it may still only appeal to a particular customer that would be willing to wait for order fulfilment. The current model of individual airfreight orders cannot be scaled, and Shein will have to set up a local fulfilment centre if order volumes increase substantially. We think customs duty is one of the critical weaknesses of the Shein model in SA. Shein’s range dwarfs the local retailers, and its price points are extremely competitive. The SA retailers are unlikely to compete with Shein on range and pricing. However, they could emphasise other factors such as superior quality and availability (not waiting 3 weeks) as key selling points. While Shein is an impressive online retailer, we think it is unlikely that it will be a market disrupter in South Africa in the near term.

SPP’s FY21 results were disappointing with weak growth in the core SA grocery business and indications of rising expenses in its offshore businesses. The poor growth in the SA grocery was attributed to a high prior year base, liquor restrictions and the civil unrest. However, our analysis finds little evidence of a high base. Instead, we think the performance highlights the dependence of Spar SA on the risk appetite of franchisees. We think labour shortages (especially HGV drivers) could affect all SPP’s businesses in Europe. Both Spar Ireland and Switzerland showed a sharp increase in expenses in 2H21, which may be due to the labour shortage. SPP’s operating leverage increased sharply as the acquisitions added significant fixed costs to the business, while financial leverage has been stable due to low interest rates. We caution that a “perfect storm” of rising interest rates, a slowdown in topline growth and a weak ZAR, could be a significant challenge to SPP. Plans to raise a further R2bn in debt to fund investments in SAP and in Poland increase this risk, in our view.

The consumer market remains challenging with no signs of normalisation as fuel prices increase. Petrol price is expected to increase by 75c to R19.03/litre and diesel will increase by 73c to R16.92/litre in December. Inflation pressures continue mounting with the FAO food index increasing by 3.9 points to 133.2 points (implying an inflation rate of 31.6% y-y) in October, PPI inflation increased by 30bps to 8.1% y-y, while CPI inflation remained unchanged at 5.0%. In addition to the inflation pressure, the rand closed the month of November at R15.89 (-5% m-m weaker) against the USD. Against the backdrop of the inflationary pressures, consumers continued spending, retail sales growth turned positive with growth of +2.1% y-y in September (-1.3% y-y in August). The nominal food and beverage sales grew by +28.9% y-y in September (+51.3% y-y in August). Private Sector Credit Extension remains soft, increasing by 1.6% y-y in October. The growth rate of total building plans passed eased to +14.2% y-y in September 2021.

Life Healthcare delivered satisfactory results, aided by robust revenue generated per Hospitals and complementary services paid patient day and revenue earned per UK’s diagnostic imaging scan. Hospitals and complementary services paid patient days (PPDs) declined, even as acute hospitals’ occupancies improved marginally. We find that independent hospitals’ competitive pricing for preferred networks, have impacted patient volumes to the listed hospital groups. However, we believe the hospital groups are realising increases in revenue per PPDs above CPI, with LHC achieving at least 2% above CPI. The healthcare funders’ efforts to manage the cost of healthcare might have reduced admissions, but these efforts have not reduced the cost per admission. Covid-acuity is improving hospital case mix, enabling the hospital groups to generate high increases in revenue per PPDs.

TFG’s 1H22 results reflect the improving trading conditions, with TFG Africa’s comparable GPM in line with pre-Covid levels. The lower profitability of TFG Credit weighs on TFG Africa, and we think that sustained low interest rate levels may inhibit credit granting which could limit sales growth. TFG London is likely to remain a smaller business than before the pandemic. The shift from concessions should boost GPM though and we think there is still significant room for improvement in its GPM. TFG Australia performed well despite the periodic lockdowns, but the high space growth is surprising considering the difficult market conditions. TFG Design and Manufacturing has benefited substantially from government funding in previous years, and National Treasury has allocated R900m through the Growth Programme for the CTFL sector for the next 12 months. TFG’s local merchandise chain could benefit significantly from this funding.

In our weekly updates, we summarise key statistics in the spread of Covid-19 in South Africa. South Africa recorded 2 962 406 cumulative Covid-19 infections as at 28 November (+1.1% increase from 2 929 862 infections on 21 November), of which 2 847 771 are recoveries and 24 747 are active cases (from 19 147 active cases on 14 November). The recovery rate is currently 96.1%.

No dividend declared. (FY20: 16cps). OPM% down 160bps to 2.7%. Broiler farming performance and Layer farming operations below management’s expectations. Rest of Africa performance was strong supported by exceptional performance in Zambia.

Strong revenue growth +23.4 % y-y. GPM dropped by 40bps to 14.9%. Expenses stable with expense to sales ratio at 10.6% (LY:10.8%). OPM declined from 5.9% LY to 5.3%. Dividends of 151cps (LY: 50cps) declared.

Turnover growth increased by +144.3% y-y to R3 823m. Revenue is still 36% below pre-Covid levels of 1H20. OPM improved from -16.8% LY to 23.3% CY. Expenses to sales ratio dropped from 116.8% LY to 76% CY. No Interim dividend declared. Gross debt down 5% y-y.