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 47 weeks to 25th August 2023 the company reported sales growth of 5,9% with wholesale grocery sales up 8,1% and Tops liquor sales down 0,6%. Price inflation was 10,1%. Build It turnover was down 3,6% and BWG combined turnover was up 8,5% in euros. The company said, "The impact of the SAP implementation at KZN amounted to an estimated loss of turnover to the Group of R1.4 billion for the period, being approximately R786 million for the six months ended 31 March 2023 as previously reported, and an additional R638 million for the five months to August 2023". In a trading statement for the year to 30th September 2023 the company estimated that HEPS would fall by between 43% and 53%. The company blamed the unsuccessful implementation of a new SAP IT system in Natal, increased impairments and the sale of the group's assets in Poland. There was also lower-than-expected growth and increased finance costs. 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.