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Retail stocks ‘expensive on a one-year view’

Evan Walker from 36ONE Asset Management reckons his company ‘will look for some cracks in the system into the second part of this year’.

SIMON BROWN: I’m chatting now with Evan Walker from 36ONE Asset Management. Evan, I appreciate the early morning time. We chatted at the beginning of the year around SA Inc, SA retailers, and expectations. Your view was in sort of two parts. The first part was probably good results in the current season, which I think we’ve seen. The second part was the caution flag. I want to get to the caution in a moment. 

The results that we have seen – have they pretty much come in line, better or worse than you were perhaps expecting earlier in the year?

EVAN WALKER: Hi, good morning Simon. I think the results have been better. There’s no doubt there’s been a lot of pent-up demand in the system in South Africa. Everyone who sat at home last year over this period has spent quite a considerable amount of money, and unfortunately, that money did come via government grants and retrenchment payments. 

We are still quite dubious about the second half of this year getting affected; the role off of grants came to an end at the end of May for certain issues. We haven’t seen any further introduction of those for the latter part of the year.

SIMON BROWN: That was your big concern. There were a couple of key drivers coming out of 2020. It was those extra grants you mentioned, it was that pent-up demand. We hadn’t been spending. It was retrenchment money coming into the system and so on. And that’s really good. Of course, that’s now all gone. And this boom we have seen is, frankly, perhaps quite perilous and could evaporate in a bit of a hurry.

EVAN WALKER: Simon, no doubt. We calculated the total extent of additional cash to the consumer last year rolling into this year being north R250 billion. Now that equates to about 15-16% of total retail spend in South Africa. And you could see it in the likes of something like Cashbuild. It’s like-for-like sales, and we quote that number, like-for-like, the ideated individual store sales. I mean, those from 2016 until 2020 were relatively flat and they’re currently running north of 20%. 

So you could see the extent of the money that came into the South African market in a short period of time. We estimate that just retrenchment-pay money and additional leave-pay payouts and so on were north of R40 billion. That’s a lot of money that comes into the hands of the consumer in a short period of time. Unfortunately, Simon, we lost 2.5 million jobs and those jobs aren’t coming back quickly. So we’re still very cautious. 

The whole sector is amazing – it’s up 40% this year to date. I think too much too soon. Obviously a lot of stocks have taken market share in this environment, the likes of Mr Price and Pep being beneficiaries of our market where there has been some consolidation. 

But we are still very cautious of top-line growth. And I think we’re beginning to see that now. We’ve seen Spar’s numbers from a food element slow significantly over the last quarter. Its volumes were actually down around 4 or 5% in the last quarter from a food perspective. So if that’s any indication of what’s to come from durables and semi-durables in the latter part of the year, I think it’s a reasonable expectation to start to see those volumes come off as well.

SIMON BROWN: Yeah. And R250 billion, which is a giant number, sort of pays off Eskom’s debt, almost. That’s 15%-odd of retail spend, just a simple sort of straight-line piece of maths. I appreciate it never is, but a simple straight-line piece of maths says we’re probably going to see revenues down for some of these retailers when they start reporting late this year and early into next year.

EVAN WALKER: We’ve seen it before, Simon. There’s no doubt. The big question now is: does government come with a national income grant? We are hearing these ramifications now that we could potentially see R300/month for people unemployed over the age of 19. That would be a significant driver of retail spend going forward and fill a big hole. But there still is a really big hole to fill from last year. And I think that this jobs environment is going to take years. Our hospitality sector and certainly these sectors of the economy are not going to come back for years – it’s going to take a long time. 

And then unfortunately I think companies have learned to work with fewer employees; it’s just the way it is. It’s very unfortunate in a marketplace like ours where we need to create so many more jobs.

SIMON BROWN: You’re right. I think a lot of places have just learned to manage with less. The last question. At 36ONE Asset Management you’ve got some hedge funds. Are you just neutral in this space or have you been building in this run-up some short positions in the retail space?

EVAN WALKER: No, we actually covered our shorts going into the period. We were uncertain of the stimulus and what it could do. We didn’t have any long positions, unfortunately. Our funds have beaten the market year to date, but with a sector that’s up 40%, we really haven’t participated in that. It just looks too much too soon to us. We are happy to sit out these distortions and we think this is a distortion that potentially is more market-share gain for the likes of possibly Pep and maybe Mr Price. But these are fully factored into the valuations that are running north of 20 times earnings. 

So for us, we would probably look for a little bit of a crack in the system. We think there’s still money floating around; interest rates are still low. So people that are earning have additional spend and we are seeing that still come through. We’ll wait for a couple of cracks. We think we’ll see cracks by August, September. We’re hearing anecdotally that May was a very tough month for a lot of consumer-based companies out there. It was a tough month. Obviously, we saw the potential advent of Covid again, so that does put a constraint on things. But we will start to wait for some cracks in the system because there’s no doubt these stocks are expensive on a one-year view for us, and we’ll look for some cracks in the system into the second part of this year. 

SIMON BROWN: They’re great stocks. They’ve had a great run, but they are expensive. And if we lose that retail spend, certainly there are some risks there. August/September – we’ll keep an eye on it. 

Evan Walker from 36ONE Asset Management, I appreciate the early morning, sir.

Listen to Wednesday’s full MoneywebNOW podcast here.

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