The Finance Ghost: Bad valuations happen to good companies

The gloves are off in the retail market as Checkers wins an impressive bout against Woolworths in the high-LSM market. But with great success comes great expectations.
Let’s start with Shoprite, the darling of South African grocery retail. The trajectory of the group has been exceptional, winning market share across the board and showing what is possible in on-demand delivery with the brilliant Sixty60. The Checkers format finally took the fight to Woolworths Food in the high-LSM market.
Though the share price is only 7.5% higher over five years, that hides the real story. Shoprite’s African strategy hurt shareholders, and CEO Pieter Engelbrecht was handed the keys to a group that needed focus and an SAP systems overhaul. From about R120 just before the pandemic, the growth to the current R225 has been exceptional.
With great success comes great expectations. With great expectations comes a high trading multiple, which can set a share up for a nasty drop if things start to go wrong.
Although Shoprite’s headline earnings per share (Heps) were 7.8% higher and the dividend rose 10.3%, the market was spooked by a small decrease in the trading profit margin, with the share price down 7.5% on the day of results.
Another example was Capitec, which suffered a 9.4% drop after releasing a trading statement for the six months to August. Capitec’s price-book multiple is one of the miracles of our market, frequently over six times the multiples of the other banks.
Nobody can dispute Capitec’s growth story and impressive business. Unfortunately, valuing the company as if that growth will continue forever can only end in one way.
The bank expects Heps to be between 15% and 18% higher, hardly a poor result and commendable in the operating environment. It just wasn’t enough to support such high multiples, so the share price rolled over and long-suffering holders of short positions in Capitec celebrated.
New initiatives drain Discovery
In yet another example of a blue chip that dished out a hiding to its investors, Discovery dropped 10.1% on the day it released results for the year to June. I see it differently from Shoprite and Capitec, though, as Discovery is hardly a market darling. Don’t let that flashy building in Sandton fool you – the share price has dropped more than 22% in the past five years!
The irritation for investors is that there is no dividend because Discovery is investing a fortune in its new initiatives. Of the ...