Bloodbath for stocks geared to consumers

• Analyst David Shapiro blames structural decay brought about by 30 years of bad government

Fund managers are struggling to recall a week as bad as this one on the JSE in which consumerfacing stocks such as Spar and Tiger Brands plunged after detailing the effects of a worsening economy and increasingly cashstrapped consumers on their bottom line.

Fund managers are struggling to recall a week as bad as this one on the JSE in which consumerfacing stocks such as Spar and Tiger Brands plunged after detailing the effects of a worsening economy and increasingly cash-strapped consumers on their bottom line.

Stocks have fallen rapidly many times before, including during the global financial crisis in 2008, the Covid-19 pandemic and in response to apartheid sanctions.

But this time SA’s poor governance is to blame and analysts have little hope that the government can turn around the trend of problematic foreign policy, load-shedding and ailing infrastructure.

Retail wholesaler Spar’s share price fell about 24% this week and food producer Tiger Brands is down 20%. Pick n Pay has slumped just more than 6% this week and is down 45% this year. Mr Price’s share price has fallen 20% this year and Pepkor, owner of Pep, Ackermans and Russells, is down almost 27%. Dis-Chem is about 24% lower.

Sasfin analyst David Shapiro says stocks plunged previously for political reasons such as apartheid or because of what was happening in world markets.

Those times were different as we knew the economy could bounce back, he says. “This is structural decay brought about by 30 years of bad government. There is no easy fix.”

SA consumers are facing interest rates at 14-year highs after 10 successive rate hikes totalling 4.75 percentage points. The country is also experiencing the worst load-shedding on record and decaying water and rail infrastructure.

Gryphon analyst Casparus Treurnicht says retailers run excellent operations, but they are facing a weak economy and infrastructure problems.

“On the input or supply side our infrastructure problems are making it hard for these operators to be efficient. On the demand side, they are facing a distressed consumer.

“In other words, our producers and distributors are being squeezed from both sides.

“Make no mistake, our retailers are fantastic operators, but you cannot expect all your windows to remain whole when the neighbourhood has gone bad.”

The movement in the prices of consumer-facing stocks is a reflection of the deteriorating profitability of the companies, says Protea Capital Management CEO Jean Pierre Verster. And there is no guarantee of things getting better. “It should be added, a recovery is not certain.”

Spar, a wholesaler of food and liquor to retailers, issued a weaker-than-expected trading update on Wednesday, warning that sale volumes of groceries dropped when it increased prices. It also detailed problems with an SAP software installation at a distribution centre. Its high debt means rising interest rates are an extra burden to it.

SA food producer Tiger Brands has acknowledged that consumers are finding it increasingly difficult to survive and buy nonessential foods, and are also buying the cheapest brands.

Meanwhile, Pick n Pay is facing tough competition from Shoprite and grappling with the costs of load-shedding. It already has the lowest operating margin among food retailers.

Companies that offer credit are also down as investors fear bad debt, with even fewer credit sales expected in the near future.

Furniture business Lewis, which sells primarily on credit, has seen its share price drop almost 20% this year. Capitec, which recently increased provisions for bad debt, and is one of the more expensive banking shares, is down 27% in the year to date. Capitec has a high portion of short-term unsecured lending on its books.

Makwe fund managers Makwe Masilela says that he finds it “extremely difficult to recall a comparable situation”.

Masilela and Shapiro say that they expect further deterioration in share prices as consumers continue to struggle with loadshedding and a cost-of-living crisis.

Masilela says: “The worse will still come at the rate [at which] our load-shedding is happening. There’s a good chance that we’ll get a recession. Almost every institution has downgraded our economic growth projections.”

Treurnicht says that he does not see the government addressing the issues at hand, so it is very possible that there is more bad news to come.

“Once a stock has halved it can keep halving forever. I think one can earn better returns by sitting on the sidelines for now and earn interest from cash and bonds.”

Shapiro says the government’s promises can be fulfilled only through decisive action, not through mere PowerPoint presentations.

“The cost of government’s incompetence is crippling.

“On top of that, foreign investors are abandoning the country — not only because of our failing economy, but because of our hypocrisy and duplicity.”

One company that has done slightly better is Shoprite, owner of consumer discount brands uSave and Checkers. Shoprite has increasingly captured the high-end and middle-class market, while expanding into baby, pet, camping and clothing goods. All Weather Capital analyst Chris Reddy says: “They have the best management team by a country mile.”

Shoprite has had issues with software in the past, and lost money in Africa, but they have learnt from their mistakes, he says. However, it too is down this year, by almost 13%.

ONCE A STOCK HAS HALVED IT CAN KEEP HALVING FOREVER. I THINK ONE CAN EARN BETTER RETURNS BY SITTING ON THE SIDELINES FOR NOW