SIMON BROWN: I’m chatting with Evan Walker now – he is at 36ONE Asset Management. Evan, good morning. I appreciate your early morning. We’ve had… retail updates starting to come fairly thick and fast. First was Truworths the Friday before last. The stock added 25% in two days. Was this a short squeeze? It was an okay update – it didn’t throw me that much. What are you and your team making of these updates you’ve seen so far?
EVAN WALKER: Morning, Simon. Yes, a big bounce in Truworths. I think a combination of short squeeze interests there. But no doubt the market was looking for way worse.
I think what we’ve underestimated in this market over the last six months from a pure retail trading perspective is the amount of stimulus that’s gone into the SA environment.
When I say stimulus, it’s a combination of all those UIF (Unemployment Insurance Fund) grants that we saw, all the UIF contributions, all the additional grant money, and then a huge amount of retrenchment money and early pension withdrawals that we’ve seen coming through the South African market.
So there’s been a huge amount of cash stimulus that the consumer has seen. We estimate this as a very, very big number.We think it’s over a hundred billion that came to the consumer’s pocket in the six-month period.
There was R67 billion just in what is referred to as Ters (Covid-Temporary Employment Relief Scheme) which was the UIF money, and which comes to an end now at the end of January.
And then there was the double grant for pensioners and the additional grants for disability, and so forth. And then the difficult number, Simon, to estimate is the amount of retrenchment money that was paid out to employees, unfortunately.
And then a big amount of money will come out of early withdrawal of pensions, unfortunately, which we’ve started to see. But we think that’ll still filter its way through into the consumer’s pocket for the next two, three months. So the full effect, unfortunately, of Covid and the retrenchments will only be seen towards the latter part of this year.
SIMON BROWN: You’re suggesting then we’ve got a couple more months of it…into the first quarter, maybe even with some lag in the first half of 2021. In other words, these retailers can carry on going on this, to your words, stimulus benefit that’s been coming into the economy?
EVAN WALKER: I think so. I think a lot of people under-estimated. We didn’t. We looked very carefully last year at the amount of money coming in. We were very nervous to be short a lot of these stocks because they are cheap. In the case of Truworths, which you mentioned earlier, the earnings expectations for this year were at R3/3.50, which is closer to R5, and we know they generate a lot of cash. So they’ll still pay dividend yields, and hence the bounce. They are still going to pay out pretty good dividends this year, so we are still cautious.
We think it’s going to be time again to put shorts back on these stocks towards the end of this quarter, but we waited for a bit of a crack, and we wait to see the actual amount of stimulus coming off the market.
We think we’ll see it now with the extension of Covid and these lockdown periods. Obviously retail’s very quiet into the first couple of weeks of this year. That might make offshore investors specifically a little bit more nervous. But certainly, for now, there is a lot of money floating around the system, which is counter-intuitive to what we see from an economic point of view.
SIMON BROWN: Are we then going to see it for the food retailers? I expected Shoprite’s update on Friday; it may come today or tomorrow. And, you know, with Brasher quitting last week, I had a look at the eight-year returns on our food retailers: they’ve been dismal. Will they benefit from some of this money, or perhaps to a lesser degree? Food is kind of normal and clothing is kind of like a bit of a spoil-yourself.
EVAN WALKER: Yes, exactly that. We saw the initial benefits that food got in Covid last year. The numbers were very good. But remember Simon, we are rolling into that base already come March.
So this is not a sector that we look to invest in. In fact, we are quite nervous.
Even for the outperformer in the sector, which has been Spar, given its very good acquisitions in Ireland and so on, we were nervous going into these bases, because they are big bases.
We don’t think people will restock up again. I would obviously think that all that retrenchment money has gone. So we’re very nervous about the sector overall.
From a long perspective this year we would stay away, and we would look to add some shorts.
On silly days these stocks are getting a little bit pushed. But, as I said, they’re not expensive and the dividend yields are still hot. So we are still cautious on the short side of these stocks, but certainly would not be long the sector going into 2021.
SIMON BROWN: If we wrap this all together, what you’re implying and suggesting is that if we look out to the second half of 2021, this is going to be really, really tough. There’s not going to be the stimulus money coming through. We’re still going to be under levels of lockdown, with a consumer who is really, really under pressure. And without this Ters money, without the retrenchment money, it’s going to be a painful half for the retailers.
EVAN WALKER: Yes. Simon. This sector we’ve invested in for a number of years purely on the fact that, at a starting point, the sector has way too much capacity, which was predominantly driven by 10 more years of overspend really from a government public-sector wage bill perspective, which we know has to begin to normalise.
This country cannot carry an 8% or 9% public sector wage increase in perpetuity.
I mean, we’ve had it for 10 years under the Zuma regime. We cannot afford that any more. And we cannot afford inflationary increases. We’ve had it now, obviously from a grant perspective. We’ve 18.5 million people on grants, which we cannot afford, and it’s going to have to normalise around 3% increases. So there really are no tailwinds for retailing in South Africa. It’s all headwinds going forward from a normal structural point of view.
And, unfortunately, retailers have rolled out a lot of capacity over the last five years, which we’ve seen come through the property space, which has been the biggest negative. It was a positive beneficiary for a number of years and now also going to see significant headwinds going forward. So it is not a sector from a structural point of view (that) we like. Obviously, there are always trading issues around, and there will always be stocks that do well. And there’s consolidation in the sector.
The only positive in the sector is consolidation, which has come through the likes of Jet, which was obviously bought by The Foschini Group. And there’s continued consolidation, as we’ve seen. The Mr Prices of the world have been buying smaller businesses in the sector. So there is consolidation, but overall it’s a sector which is saturated, effectively.
SIMON BROWN: Yes, we have seen that. There are tons. I think about Woolies; there are half a dozen within a five-minute drive. It’s just too many
Evan Walker, fund manager at 36ONE, I appreciate your early morning, sir.