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.
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