A look at Truworths international Ltd

In February Truworths published its results for the 26 weeks ending in December with a 3% drop in HEPS to 392.6c, a 7% increase in cash generated from operations to R2.2 billion, with an interim dividend of 270c/share.

Truworths Group retail sales (including office retail) was up 21% with cash sales growing by 53% and credit sales remaining the same, all though the cash growth is non-comparable as it emanates from UK retailer Office Holdings Ltd (contributing 27% of revenue).

There are three immediate factors that have posed and will continue to pose as headwinds to the company in the near future; affordability regulation, Brexit and the subsequent strengthening of the Rand (and weakening of the Pound). Credit sales have been effected due to legislative changes pertaining to how credit providers assess their credit worthiness and further afford credit to clients, essentially putting a stranglehold on revenue in a time when most consumers are already cash-strapped or under pressure. The currency depreciation evident in the Pound (GBP) and strength in the Rand (ZAR) has essentially made the purchase of the offshore acquisition more expensive and reduced the initially expected impact of offshore revenue to the bottom line. Store space is expected to grow marginally in the next year and continued consumer pressure fueled by high inflation and cost of debt will continue to permeate through an already challenging retails sector.

Throw in a healthy dose of strong competition from other brands, the lack of clarity around Brexit and local regulation and it seems likely that you would be inclined to investigate opportunities elsewhere. However it is not all doom and gloom as the share offers the most attractive value and dividend yield in its sector with a PE of 13.5 and dividend of 5.07%. Bearing in mind the exposure of other companies in the sector to similar regulatory challenges it may be fair to say that the biggest long term risk is that through Brexit, given this Office should still help deliver stronger earnings through cash sales in the interim.

Technical Analysis:

Technically the chart of the Truworths share price is a technicians educational dream with a number of talking points, starting from the left in July of 2016:

The Death Cross of the 50 day moving average below the 200 day moving average is considered a bearish signal in that we can see a decline in the short-term momentum of an instrument or stock with the expectation of future dclines to come. During this time it was interesting to note the increase in volume during the initial selloff, followed by a gradual decline in trading volumes as the share price rose to challenge resistance at the 200 day moving average, remaining in overbought territory before dropping back into neutral in line with the declining share price.

The inverse head and shoulders pattern, a sign of a potential bullish reversal appeared after a steady decline in the share price of over 45% from the high in May in 2016 of 11250c to a low in November of the same year of 6121c. A break of the neckline at 7400c on higher volume in December verified the trend reversal.

The most recent price action represents a bullish consolidation in the share price, with a bullish breakout move above the 50MA and 200MA, with a Golden Cross evident in the aforementioned; denoting a bullish trend signal and an increase in the short-term momentum. The lower volume is in line with the current consolidation which has an upside bias where we can see a long real bodied candle, supporting the breakout above 8500c. Whilst the share price is overbought it can remain this way for some time in an upward trend.

The Trade:

An interim dividend of 270c for the share is expected on the 8th of March and the expected adjustment in share price could be an opportunity for buyers to to get in at a lower price. Conversely those wanting to benefit from receiving the dividend have until the close of the market on the 7th to trade into a position. A close above the confluence of the short term horizontal and diagonal resistance at 8990c would signal a breakout of the current consolidation targeting an initial upside move to 9500c. A close below 8600c would be considered a failure for the current setup, with further downside expected.

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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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.