Our opinion on the current state of SPAR(SPP)Spar (SPP) runs a chain of supermarkets across Southern Africa with 2,402 stores. It also operates the Build-It chain in hardware and building materials and the Tops Liquor chain. Additionally, it has operations in Southern Ireland under the name "BWG," which operates through 1,392 stores, as well as the Spar chain of 388 stores in Switzerland.
As a group, Spar is a serious competitor in the South African retail industry, making extensive use of franchising to expand its network. The development of its new Polish enterprise has been frustrated by COVID-19. Its diversification into Ireland and Switzerland provides it with a solid rand-hedge component, which does not appear to be reflected in its valuation.
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 stated, "...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 an update on the 18 weeks to 31st January 2025, the company reported group turnover down 1.6% and retail sales up 3.4%. The company stated, "Growth was particularly robust in our lower-income grocery stores with subdued growth in our middle- and higher-end stores. Sales growth was impacted by the planned closure of 13 grocery stores in our South Rand Region."
In our view, the share is now underpriced at current levels and represents 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 11,065c. It has subsequently moved up to 13,450c.
On 4th September 2024, the group announced 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.
