Our opinion on the current state of SHOPRITE(SHP)

Shoprite, Africa's largest grocery retailer and consumer goods company, has navigated intense competitive pressures in the market, which has historically prevented supermarkets from significantly marking up prices due to price competition. The company's share price experienced a significant dip, falling from a high of R275 in March 2018 to around R100 in July 2020, primarily due to market conditions and internal challenges. However, it has since shown a robust recovery, indicating resilience and a potential for future growth, especially with any improvement in the South African economy.

The influence of Shoprite’s chair, Christo Wiese, remains notable despite his reduced stake in ordinary shares to just over 10%. He retains significant control through 265 million deferred shares, amounting to 42% control of the company. This dynamic suggests a continued strong influence in the company's strategic direction.

Shoprite has strategically streamlined its operations by exiting markets in Uganda, Madagascar, Nigeria, and Kenya, focusing on regions where it can leverage its strengths more effectively. This is complemented by its agreement to acquire 56 Cambridge and Rhino food stores from Massmart, enhancing its retail footprint and market penetration.

The global downturn due to the COVID-19 pandemic has set a challenging economic backdrop, but recovery in global economies, particularly the American market, is expected to spur economic improvement across Africa. This prospect bodes well for consumer spending, which is crucial for Shoprite's business model focused on volume-driven sales.

Recent unrest and looting had a significant impact, with 119 of its stores severely affected. Despite these setbacks, the company reported a 13.9% increase in merchandise sales and a 7.6% rise in headline earnings per share (HEPS) for the six months ending 31st December 2023. The company also expanded its physical presence, opening a net of 369 stores over the past 12 months, reflecting aggressive growth and confidence in its business model.

Shoprite's management highlighted that despite the high base from the previous year, the growth in sales from its core business segment was significant, with an additional R12.4 billion in customer spending compared to the same period last year. This performance notably outpaces the rest of the market growth in South Africa, underscoring Shoprite's competitive edge and operational efficiency.

Given the stock's current valuation, which remains more than 13% below its record high of 27632c set on 8th January 2024, Shoprite appears undervalued. The technical analysis further supports this optimism; the share broke above its 200-day moving average on 2nd September 2020, when it traded at 11696c. Over the subsequent 3.5 years, the share has appreciated by 136%, reflecting substantial growth and investment potential.

Overall, Shoprite continues to demonstrate its capacity to navigate market challenges, adapt to changing economic conditions, and capitalize on growth opportunities. This positions the retailer as an attractive investment, particularly for those betting on a recovery in the African retail sector and broader economic improvement post-pandemic.