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Woolworths delivers good news; JSE interims a concern

Martin Smith from Anchor Capital asks: with the JSE ‘delistings that are going to happen and have happened … where’s the growth going to come from?’

 

SIMON BROWN: I’m chatting now with Martin Smith, portfolio manager at Anchor Capital. Martin, good morning. I appreciate the early morning time. 

Woolies gave us an update to their update. They’d given us a trading update. They came back and said, no, no, we’ve got even better news. It’s frankly really strong, although of course, it’s the year to end June. Good-looking numbers. The market really liked it. And it then sort of pulled up Shoprite and others at the same time.

MARTIN SMITH: Yes, absolutely, Simon. If we look at the adjusted Heps number, it probably comes in around R3.40-odd. If we look at the mid points, the consensus was we were looking for about R3.00. So a very, very strong beat from Woolies. As we know, the retailers usually trade kind of together, so it did pick its head up like we saw with Nedbank yesterday and the banks. So yes, very, very positive from Woolworths. It’s one that we’ve pretty much warmed up to over the last call it six to nine months. We weren’t particularly bullish on it for a while, much to some of our clients dismay because they have a good experience at the Woolworths shops and they never understood why we didn’t want to buy the share. But it’s one that we really, really like, and I think there’s a lot of optionality in the business. I think there’s optionality out of David Jones. Their fashion and beauty division has underperformed for a while and I think they’re looking to sort that out. Even Country Road we think can be a nice kicker to the value of the business.

SIMON BROWN: You make a great point there. I’ve been holding Woolies for a while, so I’ve suffered all of that Australian misadventure. But to a shareholder coming in now, that misadventure has been written down – mostly – so the cost is behind you. They start getting it right and they start getting clothing right. Actually, there’s a potential as a new investor for a really good business going forward over the next couple of years.

MARTIN SMITH: Absolutely. That’s exactly the view that we’ve got. In terms of David Jones, we think that they can get some cash coming out of it, or even potentially maybe selling it at some stage. It was also a bit of a – I want to say ‘tangled structure’ – but for David Jones and Country Road the structure that was in place wasn’t particularly simple. It seems to have untangled that, which again gives optionality going forward. So I think there’s potential here. And again, it’s one that we’ve really liked in the last six to nine months. It’s not looking particularly expensive, not looking particularly cheap, but I think it’s a good shot for the next little while.

SIMON BROWN: Yes. That Goldilocks place. JSE results out for six months ending June. They’d warned us there was going to be some pressure on the results. Obviously the first half of last year, with the pandemic, the collapse in markets, massive volumes, the recovery, revenue down 6%, net profit down 28%. That’s the leverage effect. Heps down 26% as well. The high base cost was not unexpected, but I also don’t see where they’re necessarily going to grow revenue significantly at this point in the market.

MARTIN SMITH: I think you’ve pretty much summarised why I’m lukewarm on the share. They spoke about it in the update as well. They had a very high base from last year and they spoke about a stronger rand also affecting things, and lower interest rates. But again, where are the volumes going to come from? That’s my big thing. Foreigners may start to come into our market a bit more. We see volumes pick their heads up. I am just going to be lukewarm on the share. 

Something I was also thinking about this morning was the delistings that are going to happen and have happened if you get something like Imperial that’s potentially on the horizon and other delistings that have happened over the last six to 12 months. Yes, to your point, where’s the growth going to come from? I did listen to an interview with the CEO and the rhetoric there was that there are spending money on new initiatives. I think R200 million year to date was the number that was used. They are trying to find ways to grow, but until I see some numbers come through I think I’m happy to sit on the sidelines.

SIMON BROWN: Yes, very much when markets are booming foreigners are buying or selling, whatever the case may be. It works, but otherwise, I’m not sure where it comes from.

Martin Smith, portfolio manager at Anchor Capital, I appreciate your early morning time. 

Listen to Friday’s full MoneywebNOW podcast here.

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And so they should…….R60 for 4 ( four) nectarines

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