Our opinion on the current state of SPP

Spar (SPP) runs a chain of supermarkets across Southern Africa with 2402 stores. It also operates the Build-It chain in hardware and building materials and the Tops Liquor chain. It has operations in Southern Ireland under the name "BWG" which operates through 1392 stores and the Spar chain of 388 stores in Switzerland. The company is expanding into Poland with the acquisition of 80% of Piotr i Pawel which has 77 delicatessens, for 1 euro. This operation is expected to break even in about 2 years as its outlets are converted into Spar stores. Spar spent about 80m euros to stabilise the Polish company. As a group, Spar is a very serious competitor in the South African retail industry, making extensive use of franchising to expand its network. The development of the new Polish enterprise has been frustrated by COVID-19. It trades on a multiple of around 11,65 which should be compared with Shoprite on 23,53. Its diversification into Ireland and Switzerland gives it a solid rand-hedge component which does not appear to be reflected in its multiple. On 9th December 2022 Spar responded to allegations of discrimination and having granted fictitious and fraudulent loans worth about R11m to a small group of franchisors. On 19th January 2023 the company said that its auditors had assessed that one of the loans represented a reportable irregularity. Spar normally issues loans to enable franchisors to acquire loans to buy stores. In its results for the year to 30th September 2023 the company reported turnover up 10,1% and headline earnings per share (HEPS) down 47,7%. The company said, "Of the factors negatively impacting operating profit, approximately R1.4 billion is considered non-recurring. Increased net finance costs due to rising interest rates significantly impacted profit before tax. Trading was negatively impacted by the general consumer environment as well as continued electricity load shedding. Internally measured wholesale price inflation was 9.7% for the reporting period. Our building materials business, Build it, reported a decline in turnover of 4.3%". In our view, the share is now under priced at current levels and represents something of a bargain - but investors should wait until the share breaks up through its long-term downward trendline - which appears imminent.