The shareholders of David Jones have ‘voted overwhelmingly’ in favour of Woolworths’ scheme to buy all of the issued ordinary shares of David Jones. This comes after a battle with Solomon Lew, who with his 10 percent position in David Jones, was able to extract far more from Woolworths than it had initially intended to pay for the under-performing Australian retailer. Now that the expensive exercise has been given the go-ahead, it just needs the Federal Court of Australia to give its approval, which is expected on the 17th of July, and Woollies will officially be a player in the Australian market. Investment Analyst at Absa Invest, Chris Gilmour, was on the Power Lunch today to discuss the acquisition, and whether or not it will prove to be a success for Woolworths when so many other South African ventures into Australia have been unsuccessful. Chris also unpacks Shoprite’s current position, with great insight, especially in a tough consumer environment in South Africa and its expected knock-on effect. -LF
GUGULETHU MFUPHI: Shareholders of Australian retailer, David Jones, have officially approved a two-billion Dollar or R21bn takeover from South Africa’s Woolworths. Now an overwhelming 96.8 percent of David Jones’ shareholders voted in favour of the deal but for more analysis, we are now joined by Chris Gilmour, he’s an Investment Analyst at Absa Investments. Chris, it is always good to have you with us.
CHRIS GILMOUR: Thank you.
GUGULETHU MFUPHI: When we take a look, at the Woollies’ situation, it has been one filled with many tales, and one wonders exactly how a Woolworths’ investor should be positioning themselves. I know it is an expensive deal and one that’s been slightly complicated, with the role of Solomon Lew as well as some competition authorities, wanting confirmation of the Country Road evaluation. However, if you’re a Woollies’ shareholder, should you be sitting pretty at the moment?
CHRIS GILMOUR: Well, we hold Woollies shares on behalf of our clients and we’ve taken the view that this is a fantastic deal, for the longer term. You are quite right, Gugu. This is an expensive deal; make no mistake, and probably a bit more expensive than they wanted to in the first instance, because of the VAT they’ve had to take Mr. Lew, who’s been practicing some good, old-fashioned, green mill on the company. Nevertheless, I think it will be good, in the longer term. Other concerns that have been expressed during the course of this whole thing are the precious few South African retailers have managed to make a go of it in Australia and that is fair criticism. Having said that, I mean Woollies took a very, long-term view with Country Road. Remember when they bought it in late 1997, most observers said they were not going to make it, and there was a lot of concern, and it took a long, long time before they really got it right.
Today it is booming. It’s going exceptionally well and you can see it in the share price. Mr. Solomon Lew has done exceptionally well at buying at two Dollars and selling it out, presumably or hopefully, at 17 Dollars a share. I think that that’s looking good. They’ve demonstrated their ability to operate in Australia and we might look at Australia and think, ‘Southern Hemisphere, similar climate, it is quite similar.’ It is nothing of the kind. It is a very, very different environment. It is a completely different environment. I think so many South African retailers have fallen by the wayside. Now, the gritty Scotsman or who used to be the gritty Scotsman, Ian Moir who is now an Australian citizen. I think he’s demonstrated an exquisite ability to work properly in Australia. He used to run Country Road. He understands the market and I think that’s the key to all of this, is that Woollies really understands this market beautifully. That’s why I say, I think, although it’s expensive, they know exactly what they’re going to do. They’re going to take David Jones, which has been a serial under-performer for quite some time, and make it a performer at long last.
ALEC HOGG: Yes, Ian Moir certainly does have all the incentives in the world. His family still live in Australia, Chris, I’m sure you’re aware of that.
CHRIS GILMOUR: Yes.
ALEC HOGG: And, as you say, he’s an Australian citizen, so he travels up and down. Might that not also have had some influence in all of this? We know that businesses are run by people and, certainly, leaders of businesses do have a great influence in the strategy.
CHRIS GILMOUR: No, for sure, Alec, but having said that I think we’ve got to be cognisant of the fact that if you look at the rest of Africa, which where most retailers, most South African retailers, are placing their bets now, they are going in there in a very big way. Obviously, Shoprite, the first, almost 20 years ago, but Woollies experience in Africa has been a little bit chequered, particular with reference to Nigeria, six-months ago when they pulled out. Now look, I think this is a company that is keen to maintain its growth momentum, so with that in mind, I think there’s a fair degree of saturation approaching in South Africa. Now, our economy is not looking good. It hasn’t looked good for a while. Difficult to see where growth is going to come from, in the foreseeable future, so for the growth I think they need something really, quite big, and when I referred to this a while ago, as a BHAG, a Big, Hairy Audacious Goal, and Moir is not scared of this type of thing. I don’t think the kind of sentiments that you’ve described them as family sentiments, are really getting in the way at all. I think this is purely a hardnosed business decision that is necessary now, to take Woollies to the next level.
GUGULETHU MFUPHI: But isn’t it risky, given the fact that they’re kind of putting all of their eggs in one basket?
CHRIS GILMOUR: Well, I mean, I think the combination of Country Road and David Jones will account for about 40 percent of turnover and earnings in their large group. They will still be, predominantly, a South African retailer, although it is getting more, and more towards an Australian one. Put it together, you’re going to be talking about, and I’ve forgotten the exact superlative here, but about the fifth or sixth biggest, Southern Hemisphere department store. It’s got big, critical mass now.
ALEC HOGG: Yes, but Solomon Lew is still a lot bigger, with Myer Coals but, I guess that’s a story for another day. Just getting to Shoprite and the trading update today, Chris are they steaming ahead?
CHRIS GILMOUR: Alec, if you look behind some of those figures there, I think they’re up, in total, about ten-and-a-half percent, as far as turnover is concerned. But within that, locally, only about eight-and-a-quarter percent I think it was, and the rest of Africa, if you look at it in Rand terms, because we have a very, very weak Rand, obviously, up about 26 percent. Strip out the effect of the Rand, the weak Rand, and you’ve got something like constant, currency terms, about 16 percent up, so the rest of Africa is doing very well indeed. As I said, earlier, first mover advantage, but even with that first mover advantage Shoprite is still only getting about seven/eight/nine percent of the turnover and earnings, coming from the rest of Africa. Again, I think it will be fantastic in the longer term and these guys have paid their school fees in a very big way, so yes, I think it’s a reasonable result. I do however think that 8 percent growth locally does highlight the extreme pressure that consumers are under, especially at the lower end of the spectrum where Shoprite is concentrated, they’re taking a lot of strain.
GUGULETHU MFUPHI: And will that be exacerbated? We’ve got inflationary pressure, theres a potential MPC interest rate hike in line anytime soon. Could that exacerbate the situation, going forward for retailers?
CHRIS GILMOUR: Gugu, I think companies that do have predominantly, you know, the big slug of it at the bottom end of the market. I think those consumers are taking the biggest brunt, and as you rightly say, I think a hike in industries, for people who are over extended. That perhaps applies more to the kind of, burgeoning middle class, than it does to the people at the lower end of the spectrum. The interest rate side may not be such a big thing. I think what will affect them more than anything else are the higher fuel and food costs and administered costs coming through, so on their own personal costs; I think that’s going to be a big problem. Perhaps rather than the interest rate factor per say.
ALEC HOGG: Two years ago, the share price of Shoprite was at R200.00. It’s come down quite a lot since then and it perked up a little today, Chris. Is it one on your buying list?
CHRIS GILMOUR: It’s not on our buying list but I have to tell you, Alec, along with Woollies and Mr Price, it is among our three preferred retailers. I know a lot of local fund managers don’t like the retail sector at this point in time, after all the reasons I’ve just mentioned, but while I wouldn’t be necessarily going and buying Shoprite. We’re holding it. We’ve done extremely well with it for our clients, and we’ll continue to do so for the foreseeable future because, I think the longer-term prospects, particularly in the rest of Africa, looks so good. The question then arises, for all of these retailers; none of them are sitting on low PE’s, they are all rather expensive. Shoprite has come off probably a lot more than most. We have no real concerns about the company at all. It is doing everything right. It’s got pretty much the highest margin of any food and drug retailer in the country. I think all the metrics are looking extremely good but it is going to be tough, particularly locally, in the S.A. supermarket side.
GUGULETHU MFUPHI: Just on that, Chris, in a moment or two we’ll be speaking to the new country Manager of Group One, South Africa. From a retailer’s perspective, is E-Commerce the new growth area?
CHRIS GILMOUR: It’s a difficult one to answer properly. In terms of actual growth, yes, it is huge. The growth that is taking place is absolutely fantastic but, bear in mind; it is from an exceptionally low base. I can remember, in the late 90’s, when In the Bag kicked off. That was 15 years ago. It was going to be the next big thing because of lousy broadband, because of terrible delivery logistics; we haven’t really taken off yet. Until those are sorted out, I think its upside potential is going to be limited.
GUGULETHU MFUPHI: Upside potential limited, well thank you so much. That was Chris Gilmour; he’s an Investment Analysis at Absa Investments.
