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Shoprite share price reacts to disappointing news

While a soft performance for 1H 2019 was expected, the update produced was significantly worse than analysts had predicted.

Trading statement for the 26 weeks to December 2018

Salient features:
1. Low turnover growth resulted from low food inflation, rising rental / electricity costs, currency devaluations combined with lower non-RSA gross margins
2. Basic Headline earnings per share (adjusted for hyperinflation) expected 16% to 26% lower than prior years 26 week period
Shoprite would have seen Non-RSA operations (usually a strong contributor to group earnings) weighing on H1 2019 results, particularly that of Angola which has been hit with a heavy bout of hyperinflation (the Angola Kwanza has declined roughly 85% in 2018).

The South African operations in addition to the low food inflation and negative influences mentioned above (see salient features) would have seen industrial (strike) action in Gauteng further impacting the group’s performance locally.
While a soft performance for 1H 2019 was expected, the update produced was significantly worse than analysts had expected. While we are aware of a constrained consumer environment and the challenges which have and are facing the business, investors will start to question the efficacy of management. Markets will now have to look to 2H 2019 in hope of a turnaround in the business which after the announcement is realising a multi-year low. The group has indicated that the sales trend for January 2019 has however started to improve.

On the day of the trading update, we see the long term average broker rating for Shoprite (as determined by a poll of 11 analysts by Thompsons Reuters) maintaining a hold recommendation on the share. The disappointing update does however suggest we could start to see some rerating (to the downside) in the stock by market analysts.

Shoprite Holdings: Technical Analysis View

The trading update has induced an aggressive downside breakout for the share price of Shoprite Holdings. For now 14730 appears to be the relevant support level for the stock. A break below this suggests that the next level of support to consider is around the 12250 level. The negative bias remains provided that the price trades below gap resistance at 17600. Should the price manage to rebound off the 14730 support level and towards gap resistance, traders might consider waiting for a bearish price reversal before renewing short positions on the share.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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