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. The company has operations in Southern Ireland under the name "BWG," which operates through 1392 stores, and the Spar chain of 388 stores in Switzerland. Spar 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 two years as its outlets are converted into Spar stores. Spar spent about 80 million euros to stabilize 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. 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 six months to 31st March 2024, the company reported turnover up 7.9% and headline earnings per share (HEPS) down 7.6%. The company said, "While the continuing Group delivered an operating profit of R1.6 billion with a marginal positive improvement on the prior comparative period, net finance costs negatively impacted profit before tax which declined by 11.2%. SPAR Southern Africa reported a total increase in wholesale turnover of 4.8% for all business units. BWG Group (Ireland and South West England) delivered a solid trading performance with turnover increasing by 5.7% for the period in EUR terms, and 16.0% in ZAR terms. Turnover for the Swiss business declined by 4.6% in CHF terms (increased by 8.7% in ZAR terms)."
In our view, the share is now underpriced at current levels and represents something of a bargain. We advised waiting for a break up through its long-term downward trendline, which now appears to have happened on these latest results.
Spar's diversified operations across different regions and sectors provide a degree of stability and a hedge against the rand. The company's performance in Southern Africa, despite the economic challenges, and its solid results in Ireland and Switzerland, suggest a robust underlying business. The Polish acquisition, though initially challenging, represents a long-term growth opportunity. Given these factors, Spar appears to be a good investment at its current price, especially after breaking its long-term downward trendline.