Several South African companies have struggled to expand into other countries, and have had to throw in the towel after a few years. Similarly, some international groups have tried to expand into Africa and failed dismally.
The news in early May that Massmart CEO Guy Hayward had tendered his resignation, and an announcement a few weeks later that the group expects earnings to fall by as much as 50% in the six months to June, would have had many contemplating how Walmart’s investment in Massmart has performed since it announced the engagement at the end of 2010.
A few things conspired against the investment. Growth in the SA economy slowed, local competitors gained market share against Massmart’s offerings and, most of all, the rand weakened from R6.97 to the dollar at the time of the transaction to the current R14.41.
Walmart’s intention to bid for 52% of Massmart in 2010 saw the share price run up quickly to more than R140 per share, with Walmart eventually acquiring control of the owner of Game, Makro, DionWired and Builders Warehouse at R148 per share, which valued the stake at R16.5 billion.
At the time, the ruling exchange rate required that Walmart write a cheque for $2.3 billion. While the underlying businesses performed well for the next few years, paid reasonable dividends, and the share price increased to a high of R208 in 2013, the exchange rate saw to it that Walmart’s interest in Massmart never reached $2.3 billion again.
Declines and erosion
Lacklustre earnings growth over the last few years resulted in a steady decline in Massmart’s share price, and the profit warning last week depressed the price to below R66, which valued the Walmart stake at only R7.6 billion – less than half the purchase price in 2010. The current exchange rate of R14.41 has eroded the dollar value of the investment even further, to just $526 million. Walmart has lost nearly $1.8 billion of its investment, equal to 77%.
The dividends that Walmart collected did not nearly cover this loss. Converting the dividends since 2011 at the relevant exchange rates shows that Walmart would have collected some $252 million in dividends, of which the tax collector would have wanted its share.
The interim dividend of 68c and the final of 140c for the last financial year would have netted Walmart only $16.6 million – a depressing yield of only 0.7% on the purchase price of $2.3 billion.
Dollar value of dividends and Massmart shares
Three figures on the third page of Massmart’s latest annual report explain the state of affairs. Sales increased by only 2.9% to R90.9 billion in the year to March 2018, while profit before interest and tax fell by nearly 17% due to lower profit margins. Headline earnings declined more than 31%.
Massmart chair Kuseni Dlamini says in his review that the financial year was characterised by volatility in the political, regulatory and economic environment in SA, which accounts for more than 91% of the group’s sales.
“This had a negative effect on consumer and business confidence, impacting discretionary spend and, as a result, Massmart’s sales,” says Dlamini. “Persistently high levels of unemployment, limited GDP growth and low consumer confidence and spending weighed down on our business.
“The hike in fuel prices negatively impacted consumer spending, as did the decision by government to increase the Vat rate,” he adds.
Hayward, in his last commentary to shareholders, explained the effect of the difficult economic environment further, saying that deflation in prices of food and durable goods resulted in severe pressure on profitability as costs increased at a higher rate than sales.
A segmental analysis shows that Game and DionWired suffered the most from their customers’ difficulties during the financial year to March, with a 1.2% decline in sales for this Massdiscounters division translating into a decline of 91% in trading profit before interest and tax. Makro performed better, but still reported a decline of around 12% in trading profit.
Last week’s trading statement disclosed that the situation has not improved, with sales growth still low during the first 20 weeks of the new financial year. Management warned shareholders that headline earnings per share could be as much as 50% lower in the six months to June compared to the first half of the previous financial year if these conditions persist in the next two months.
Walmat not giving up on SA
Walmart will have to digest the realisation that it will receive even less in dividends this year. But the international group has not given any indication that it is thinking of giving up on Africa yet, as it has done in Brazil, despite the ominous statement in the last annual report that Walmart seeks to spend less capital on stores outside the US.
Walmart has announced that the highly experienced Mitchell Slape, who acted as CEO in an equally difficult India, will take over from Hayward. The figures in the annual report show that Africa is important, with Walmart operating 436 stores across the continent compared to 411 in Canada and 443 in China.
We can expect the new CEO to expand Massmart’s online presence given the direction Walmart is going in India, where it acquired the Flipkart retail portal. At the time it said the potential was huge considering that only 3% of the 1.3 billion people in India’s $3 trillion economy use online shopping.
Walmart noted in its annual report that e-commerce sales increased by 40% during the last financial year and doubled over the last two years. It also mentioned its success in China, where “same-day delivery often means one-hour delivery”.
Massmart is already doing quite well with online sales in SA, reporting growth of 56% in online purchases during the last financial year compared to the previous year. But a lot of work is necessary to win clients and investors back, and even more to get a mention of the SA interest in Walmart’s annual report.