Mr Price poised to outperform

Retailer continues to churn out fantastic numbers in a pressured environment – Intellidex.

This article was originally published in Moneyweb’s monthly investment magazine, The Investor – now available for download in PDF format.

Mr Price continues to churn out fantastic numbers in a pressured consumer environment. Its trendy and budget-conscious offerings seem to have won the hearts of many south African shoppers who continue flocking to its stores.

Central to Mr Price’s growth story are the value offerings which enable it to capture market share from customer trade-downs during market downturns while positioning it to maintain or even grow in a market upswing. And unlike its peers who sell mainly on credit, its sales are largely for cash, insulating the company from the cyclical nature of the credit market. With many consumers still heavily indebted and struggling to repay credit retailers, Mr Price is poised to continue outperforming its peers.

Headline earnings jumped 20% to 919.7c/share (2014:765c ) in the year to end-March, giving it an impressive average compounded growth rate of 27% a year since 2010. We are confident that the group will continue producing such above-average returns despite a murky retail environment outlook. However, even after factoring in largely optimistic forecasts, our discounted cash-flow model shows that the group’s share price is fully valued. Based on our valuations we therefore maintain our hold decision on its stock.

MR-Price-Graph-3

Retail sales for the year of R17.3bn were 13.5% higher than the comparable period of R15bn. The growth was achieved from price inflation of 4.3%, 5.5% growth in unit sales and 3.4% from changes in the product mix. Total group revenue grew 13.9% to R18.1bn (2014: R15.9bn) while operating profit increased 21.3%, resulting in a higher operating margin of 18% (2014: 15.96%). A final dividend of 369c/share (2014: 314c) was declared.

We expect retail trading conditions to remain challenging. Consumers, particularly in the lower-income groups, are being financially stretched by rising costs of living, moderating wage increases and the possibility of higher debt costs, forcing them to postpone or avoid spending where possible.

The Reserve Bank’s Monetary Policy Committee’s decision on interest rates when it meets in July will also have a significant effect on disposable incomes. While there was an uptick in consumer disposable incomes over the past few months due to lower inflation and fuel prices, an interest rate hike will ratchet up the pressure on consumers. Unemployment, labour relations and Eskom’s load shedding are the other persistent threats to growth in consumer spending.

Notwithstanding these challenges, we believe Mr Price is capable of maintaining the current growth momentum. Its fashion-value formula, which has so far shown resilience, should continue driving growth. We expect it to continue benefiting from trade-downs by the middle- and upper-income groups. Its international operations, which account for close to a tenth of group sales, should also support earnings growth.

The group still has room to open more stores in its existing markets. Management is planning to spend R3.5bn on capital projects over the next five years which is likely to help sustain the group’s growth strategy. These ambitions are supported by a highly cash-generative business model which saw the company close the year with R2.8bn in cash, outstripping its interest-bearing debt.

While we remain bullish on Mr Price’s prospects, we think the market has correctly priced its shares. After a strong run over the past few years it is now commanding a demanding forward price:earnings ratio of 28. At this level we feel there isn’t much upside left in the stock. We therefore maintain a hold recommendation.

MR-Price-Graph-4

Bull Factors

  • Budget-conscious offerings targeting customers mainly in the mid- to upper-income segments
  • Less exposed to bad debts due to cash model and management’s cautious approach to credit
  • High cash-generating business model enables group to fund growth initiatives without gearing

Bear factors

  • Slowdown in consumer spending
  • Increasing competition, including presence of international retailers
  • With most of its products being imported, its is exposed to currency volatility

Intellidex analyst: Orin Tambo

Nature of businessBackground: Mr Price is a fashion, sport and household goods retailer selling predominantly for cash. It operates through Mr Price, Mr Price Sport, Mr Price Home, Miladys, Sheet Street and Mr Price Money, with a footprint in SA and 13 other African countries.

DisclosuresThe analyst has no financial exposure to the instrument discussed. The opinion represents his true view. For Intellidex’s full disclaimer, methodologies and definitions please click here.

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