Our opinion on the current state of SPAR(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. 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. Its diversification into Ireland and Switzerland gives it a solid rand-hedge component which does not appear to be reflected in its multiple.
In its results for the year to 30th September 2024, the company reported turnover up 4% and headline earnings per share (HEPS) up 11,1%. The company said, "...gross profit margin for SPAR South Africa, including SPAR, Tops and Build it, decreased from 8.7% to 8.5%. BWG Group saw a slight increase in its overall gross profit margin from 15.1% to 15.2%, driven by a more favourable category mix. Improved margin management within the wholesale and TopCC cash and carry business saw SPAR Switzerland's gross margin improve from 17.8% to 18.3%."
In our view, the share remains underpriced at current levels and represents something of a bargain. We originally advised waiting for a break up through its long-term downward trendline - which happened on 12th June 2024 at a price of 11065c. It has subsequently moved up to 14031c.
On 4th September 2024, the group said that it would pay an estimated R2,7bn to settle the debts of its Polish operations in order to sell them to a local retailer for R185m. At the time, the once-off cost caused the Spar share price to drop sharply. However, this move to exit the Polish market could refocus the group's efforts on more profitable ventures, potentially supporting a recovery in the share price over the long term.
