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Spar Group Ltd

Is it good for you?

Rob Enslin
2/28/2013

INTRODUCTION .....................................................................................................................................2
1.1
1.2

IDEA GENERATION: ...............................................................................................................................2


QUALITY ASSESSMENT: CONCLUSION ..............................................................................................................2

COMPANY OVERVIEW ..............................................................................................................................3


2.1
BUSINESS DESCRIPTION ...........................................................................................................................3
2.2
HISTORY .........................................................................................................................................5
2.3
BUSINESS DIVISIONS ..............................................................................................................................5
2.3.1
Overview ................................................................................................................................. 5
2.3.2
Contribution to revenue & profit .................................................................................................... 7
2.4
GEOGRAPHIC BREAKDOWN ........................................................................................................................8
2.4.1
Overview ................................................................................................................................. 8
2.4.2
Contribution to revenue ............................................................................................................. 10

QUALITY ANALYSIS ............................................................................................................................... 10


3.1
MARKET POSITIONING .......................................................................................................................... 10
3.1.1
Qualitative Score ..................................................................................................................... 10
3.1.1.1 Economic Moat ..................................................................................................................... 10
3.1.1.2 Market Share Analysis ............................................................................................................. 11
3.1.1.3 Financial Comparison .............................................................................................................. 11
3.1.1.4 Conclusion .......................................................................................................................... 12
3.2
BUSINESS MODEL ............................................................................................................................... 13
3.2.1
Qualitative Score ..................................................................................................................... 13
3.2.1.1 Centralised/Decentralised Business Model ..................................................................................... 13
3.2.1.2 Ease of understanding ............................................................................................................. 13
3.2.1.3 Forward looking strategy ......................................................................................................... 13
3.2.1.4 Vertical integration of the value chain ......................................................................................... 13
3.2.1.5 Conclusion .......................................................................................................................... 13
3.3
MANAGEMENT .................................................................................................................................. 14
3.3.1.1 Corporate Governance ............................................................................................................ 14
3.3.1.2 Ownership Structure ............................................................................................................... 15
3.3.1.3 Track-record ........................................................................................................................ 15
3.3.1.4 Managements Experience ........................................................................................................ 15
3.3.1.5 Conclusion .......................................................................................................................... 20
3.4
FINANCIAL STRENGTH .......................................................................................................................... 21
3.4.1.1 Revenue growth .................................................................................................................... 21
3.4.1.2 Margin analysis ..................................................................................................................... 21
3.4.1.3 Financial Leverage ................................................................................................................. 21
3.4.1.4 Ratio Analysis ....................................................................................................................... 22
3.4.1.5 Competitor Analysis ............................................................................................................... 23
3.4.1.6 Conclusion .......................................................................................................................... 24

SWOT ANALYSIS .................................................................................................................................. 24

INDUSTRY OUTLOOK ............................................................................................................................. 25


BUSINESS DRIVERS ................................................................................................................................... 25

OVERALL QUALITY CONCLUSION .............................................................................................................. 25

VALUATION ........................................................................................................................................ 27

SOURCES ........................................................................................................................................... 27

APPENDIX .......................................................................................................................................... 28
9.1
FINANCIAL STATEMENTS .................................................................................................................. 28
9.1.1
Income Statement .................................................................................................................... 28
9.1.2
Balance Sheet ......................................................................................................................... 29
9.1.3
Cash Flow Statement ................................................................................................................. 30
9.1.4
Ratios ................................................................................................................................... 30

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1 Introduction
1.1 Idea Generation:
Screening Tool
Theme
Other

1.2 Quality Assessment: Conclusion


Spar Group was identified on an ad hoc basis after considering a random selection of SA retail company valuation
multiples post the SA retail companies sell-off in January 2013. The company screened relatively cheaper
compared to its peers and its own history. A Quality Assessment Report was run and the following aspects were
identified.
Spar Group scored highly on quality with a score of 12/159. It also scored well on the screening tool at 14/159.

Source: Efficient Select

Its historical depiction of quality-to-valaution also presents an attractive picture.

Source: Efficient Select

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The picture below of earnings relative to price over time is supportive of a potential investment opportunitiy with
price recently dipping below earnings.

Source: Efficient Select

Spars fundamental scorecard was less impressive, scoring 331/422 overall. It scored weakly on market positioning
and financial strength. Intial perceptions are that its franchise model resulting in lower margins may explain this. A
more in-depth assessment will provide us with more information.

Source: Efficient Select

An analysis of risk and liquity indicate a maximum drawdown of 11.61% (suggesting that it is defensive in nature)
and a 30 day value traded percentage of 122.75% relative to Efficient Selects AUM representing a pass on liquidity.
Finally, based on 5 year historic data and an equal weighting towards PE, DY, PS, PB and PCF metrics, fair value was
estimated at 110.45 1/8 analysts had it on a buy rating, 5/8 on a hold rating and 2/8 on a sell rating.

2 Company Overview
2.1 Business Description
Spar Group Ltd. is a wholesaler and distributor of goods and services to SPAR grocery stores, Build It builders
merchandise outlets, and TOPS and SPAR liquor stores. The company operates seven main distribution centers
which are located close to the major metropolitan areas. These distribution centers service SPAR stores, Build It
outlets and TOPS and SPAR stores across South Africa and neighbouring countries.
Spars Business Model
SPAR operates under licence agreement with SPAR International in Amsterdam. This licence agreement covers
South Africa, Botswana, Namibia, Swaziland and Mozambique.
Independent retailers who elect to be part of the SPAR family sign a membership agreement with the Guild which
provides them with:
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Consolidated deliveries from distribution centres


Improved buying
Volume discounts
Store development advice
Retail consultancy service
Comprehensive computer services
International brand
Strong house brand
Regular promotions
Media exposure
Category management advice
Training

In turn the independent retailers undertake to adhere to certain standards and procedures as laid out in the
membership agreement.

Source: Spar Group

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Warehouse and Distribution


The group despatched 195.1 million cases through the seven SPAR distribution centres which reflected a healthy
6.4% increase on the volumes handled last year. Over the last five years volumes through our facilities have
increased by over 50%.
The rising fuel price has resulted in a renewed focus on more effective route management systems, improving truck
turnaround times, the increased use of bio-diesels, reviewing truck specifications and driver training in an effort to
further improve transport costs.
SaveMor Store Format
SaveMor is a new small store format to address the needs in the less populated rural towns and central business
districts in larger towns, where we cannot justify the cost of setting up a SPAR store. We now have 17 stores and
expect to open another 12 stores during 2013.
Pharmacy at SPAR
We continue to fine-tune this offering and, despite licencing challenges, opened 16 stores during the year. We plan
to open another 12 stores next year.
Corporate retail stores
Stores owned by the franchise are insignificant at 11 (out of a total of 1725). They are generally also only a result of
strategic reasons or distressed stores. In 2012, this part of the business made an operating loss of R28m.
The company's three friendly store formats, which are SPAR for neighbourhood shopping, SUPERSPAR for onestop, bulk shopping and KWIKSPAR for every day convenience, cater for all shopping preferences. It was founded in
1963 and is headquartered in Pinetown, South Africa. The company was unbundled from Tiger Brands and listed on
the Johannesburg Stock Exchange in 2004.

2.2 History
Back in 1932 in the Netherlands, a wholesaler named Adriaan van Well, started his organisation DESPAR. The idea
was simple: unite the efforts of both the independent wholesaler and retailer in order to mitigate the effects of
grocery chains which were fast taking over the market. The name of the organisation has changed slightly and it has
spread into 35 countries and 5 continents.
In South Africa, at the beginning of the 1960s, eight wholesalers got together and decided to introduce the SPAR
concept into the country. In 1963 it was launched to service some 500 small retailers and now, 46 years later, the
SPAR Group Ltd. operates out of seven modern distribution centres and services over 800 SPAR stores across
southern Africa.

2.3 Business Divisions


2.3.1 Overview
The SPAR Group operates 6 distribution centres and 1 Build it distribution centre. The distribution centres supply
and service independently owned SPAR, TOPS, Build it and Pharmacy at SPAR stores in southern Africa. Goods are
distributed to the stores by a fleet of trucks and trailers, which are owned by the SPAR group.

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Distribution Centres
DC 1

DC 2

DC 3

DC 4

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DC 5

DC 6

DC 7

Source: Spar Group

The Group owns three key retail brands that all operate in different spheres, namely SPAR, BUILD IT and TOPS.

2.3.2 Contribution to revenue & profit


The SPAR Group Limited acts as a wholesaler and distributor of goods and services to SPAR supermarkets, Build it
building materials outlets, and TOPS at SPAR liquor stores. Its franchise model means that 100% of revenues are
derived from their distribution centre.

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Revenue by Business Segment


Spar Group Ltd. (SPP-ZA)
Distribution Centre (100.00%)

Distribution
Centre
(100.00%)

Source: FactSet Fundamentals

2.4 Geographic Breakdown


2.4.1 Overview
It is important to note that the Spar brand originates outside of South Africa (from the Netherlands). In the 1960s
eight wholesalers got together and decided to introduce the SPAR concept into the country. In 1963 it was
launched to service some 500 small retailers.
Today, Spar International is represented in 35 countries and 5 continents around the world. Spar South Africa
services Swaziland, Botswana, Mozambique, Namibia, Zimbabwe and Zambia through its distribution centres in
South Africa.
-

As mentioned, the geographic split is based on where the DC is situated. Below is how management reports
geographic segmentation.

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Source: Spar Group

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2.4.2 Contribution to revenue


Revenue by Geographic Segment
Spar Group Ltd. (SPP-ZA)
South Africa (100.00%)

South Africa
(100.00%)

Source: FactSet Fundamentals

3 Quality Analysis
3.1 Market Positioning
3.1.1 Qualitative Score
3.1.1.1
3.1.1.1.1

Economic Moat
Supplier Power

Supplier power with suppliers is average to above average. Being a large established retailer, it is in the suppliers
best interests to maintain a good working relationship with Spar. There is however demand from Spars
competitors and therefore not complete bargaining power with suppliers.
3.1.1.1.2

Buyer Power

Bargaining power by buyers is high. Cost conscious consumers are sensitive to price changes and have the ability to
shop at Spars competitors with relative ease. Buyer bargaining power is therefore high.
3.1.1.1.3

Degree of Rivalry

Degree of rivalry amongst Spars competitors is fierce. Primary competitors include: Shoprite, Pick n Pay,
Woolworths,Game, Ultra Liquor, Cashbuild and Solly Kramer.
3.1.1.1.4

Threat of new entrants

Threat of new entrants is moderate. Competitors are likely to arise from developed market players seeking new
avenues of growth, similar to what we saw with Walmart-Massmart. Supply-side economies of scale and access to
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supplies products along with large capital requirements in setting up the distribution channels protect Spar
marginally.
3.1.1.1.5

Threat of substitutes

The most likely substitute is online shopping. Whilst the concept has been around for some time, the number of
people switching over to online shopping has started to increase. Technology, including smart phone and tablet
devices, have assisted this change. Spars current structure is however easily adaptive to online sales as it relies on
a centralised distribution model.
3.1.1.1.6

Overall pricing power

Overall, Spar has a low degree of pricing power. Due to the generic product (i.e. foods) that Spar sells, its pricing
power ability is limited.
3.1.1.2

Market Share Analysis

3.1.1.2.1

5 year change in market share

Whilst the calculation below is incomplete in that it does not include all competitors, including Spars main
competitors, calulating market share based on revenue shows a healthy pattern for Spar. A similar pattern exists
for Shoprite at the expense of Pick n Pay.
Revenue
Spar
Shoprite
Pick n Pay
Woolworths

2012
43557
20.7%
82731
39.4%
55331
26.3%
28604
13.6%

2011
38814
20.6%
72298
38.3%
51946
27.5%
25582
13.6%

2010
34844
19.3%
67402
37.4%
54735
30.3%
23393
13.0%

2009
31962
19.7%
59319
36.5%
49862
30.7%
21175
13.0%

2008
26742
19.1%
47652
34.1%
45381
32.5%
20065
14.3%

210223

188640

180374

162318

139840

100.0%

100.0%

100.0%

100.0%

100.0%

Source: FactSet Fundamentals

3.1.1.2.2

Market Concentration

The food retail market in South Africa is concentrated. According to a Thomas White Global Investing Survey in July
2011, Shoprite, Pick n Pay, Spar, Massmart and Metcash constitute 80% of retail sales.
3.1.1.3
3.1.1.3.1

Financial Comparison
5 Year Margin Analysis

Operating margins have improved over the past 5 years whilst net profit margin has been flat/marginally weaker.
This a positive signal as Spar has also been able to grow market share over the period.
Gross Margin (%)
Operating Margin (%)
Pretax Margin (%)
Net Margin (%)

5 Yr. Av.
8.30
3.01
3.63
2.48

Sep '12
8.52
3.46
3.48
2.43

Sep '11
8.96
3.60
3.62
2.45

Sep '10
7.92
2.84
3.75
2.63

Sep '09
8.04
2.46
3.59
2.33

Sep '08
8.08
2.70
3.73
2.55

Source: FactSet Fundamentals

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3.1.1.3.2

5 Year Average ROE

Return on equity (ROE) over the past 5 years has been strong, averaging 40.33%. Net income has grown slower
relative to equity, indicating that Spars high ROE is not a function of gearing with debt.
5 Yr. Av.
Net Income
% growth

9.21%

Sept '12

Sept' 11

Sept '10

Sept' 09

Sept '08

1058.9

952.6

915.8

745.2

681.6

11.16%

4.02%

22.89%

9.33%

2838

2490

2187

1940

13.98%

13.85%

12.73%

30.38%

41.87%

38.41%

Equity
% growth

ROE

13.78%

40.33% 37.31% 38.26%

1488

45.81%

Source: FactSet Fundamentals

3.1.1.3.3

5 Year Average ROA

Return on assets (ROA) has been stable over the past 5 years with assets growing at an average pace of 11.48%
compared to net income growth of 9.21%.
5 Yr. Av.

Sept '12
1058.9

952.6

9.21%

11.16%

4.02%

9895

8302

7529

6540

11.14%

19.19%

10.27%

15.12%

12.10%

11.48%

10.70%

11.47%

12.16%

11.39%

Net Income
% growth
Assets
% growth

ROA

Sept' 11

Sept '10

Sept' 09

Sept '08

915.8

745.2

681.6

22.89%

9.33%
5834

11.68%

Source: FactSet Fundamentals

3.1.1.3.4

5 Year Average EPS growth

Five year earnings growth has been good. Diluted EPS has grown at a 5 year average growth rate of 16.7%. What is
also impressive is that earnings growth has been positive for all 5 years even during the financial crisis, reflecting its
defensive characteristics.
5 Yr. Av.
EPS (diluted)
EPS (diluted) Growth (%)

16.67

EPS (basic)
EPS (basic) Growth (%)

17.43

Sep '12

Sep '11

Sep '10

Sep '09

Sep '08

Sep '07

5.71

5.21

5.06

4.26

3.91

2.99

9.44

3.00

18.83

9.09

30.60

29.05

6.16

5.56

5.36

4.39

4.07

3.13

10.82

3.66

21.98

8.09

29.87

30.15

Source: FactSet Fundamentals

3.1.1.4

Conclusion

Evidence above suggests good market positioning. On all factors analysed above, Spar measures satisifactory to
well.
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3.2 Business Model


3.2.1 Qualitative Score
3.2.1.1

Centralised/Decentralised Business Model

Spar makes use of a decentralised distribution model. As mentioned above, Spar operates seven main distribution
centres which are located close to the major metropolitan areas.
3.2.1.2

Ease of understanding

Spar Group has a very understandable business model. It can be discribed as a whole distribution business with 7
distribution centres. Its stores are franchised out. This has allowed the Group to achieve scale as well as owner
managed businesses therefore the incentive and customisation of each owner is high.
3.2.1.3

Forward looking strategy

The groups six strategic outcomes include:


A world-class replenishment system for retailers
Competitive pricing of products
Provide a comprehensive product range
Build world-class brands
Develop the best retailers
Realise new business growth
The strategic imperatives which will enable the achievement of the outcomes include:
Delivering excellence in fresh food departments
Optimising their supply chain from supplier through to the retailer
Providing expert retail leadership and support to their retailers
Being leaders in their retail communities
Creating a competitive price perception with consumers
Sustaining SPARs future growth through identifying and realising new business opportunities
3.2.1.4

Vertical integration of the value chain

Yes through its distribution system, in-store restuarants and recently added Tops bottle stores and Build-it stores.
3.2.1.5

Conclusion

Spars business model can be summarised as effective and well structured for fast expansion if applied outside of
RSA. Its owner managed businesses model acts as an inherant quality control. It is less profitable than owning the
stores 100% but benefits as a differenciated product offering (i.e. each Spar store is unique and suited to the
region).

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3.3 Management
3.3.1 Qualitative Score
3.3.1.1

Corporate Governance

CEO and Chairman different


Yes: The roles of the Chairman and the Chief Executive Officer are separated and a clear division of authority exists
between these roles.
Chairman is an independent non-executive director
Yes
Majority of directors are non-executives (i.e. greater than 50%)
Yes: The current percentage of non-executive directors is 73%
Corporation seen as a responsible corporate citizen
Yes: Spar has established a clear social and ethics responsibility strategy for their business.
Audit Committee only consists of independent non-executives and Chairman is not included
Yes with explanation: Management has attended audit committee meetings but only by invitation. This is
acceptable with best practice.
Secondly, the Chairman, Mr. MJ Hankinson up until recently served on the audit committee. He resigned from the
audit committee in August 2012.
Remuneration Committee - salaries are in line with shareholder's interests
Not sure: Spar has stated that they do not disclose the remuneration of the three highest paid executives who are
not directors as they believe this would reveal sensitive information to competitors.

Source: Spar Group

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3.3.1.2

Ownership Structure

3.3.1.3

Track-record

Management has created shareholder wealth


Yes: Spars share price has appreciated by 129.45% over the past 5 years; CAGR: 18.1% (427.5% over the past 10
years).
Management has delivered on expectations
Yes: Management has produced EPS growth of 17% p.a. over the past 5 years, strong ROE and ROA and have
executed on their Tops and Build-it store layouts.
3.3.1.4

Managements Experience

The Spars management is the executive committee of Spar responsible for ensuring the development,
implementation and execution of Group strategy. The SMB meets 3 times a year.

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Source: FactSet Fundamentals

3.3.1.5

Conclusion

Spar Group meets the requirements of the new Companies Act and have applied the principles contained in the
King Report (King III). The structuring of the board and committees are all also within reason. The only aspect of the
management and the board of directors is surrounding remuneration, where there is less transparency.
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3.4 Financial Strength


3.4.1 Qualitative Score
3.4.1.1

Revenue growth

CAGR since 2003 has been 15.7%


Sep '12
Sales/Revenue

Sep '11

Sep '10

Sep '09

Sep '08

Sep '07

Sep '06

Sep '05

Sep '04

Sep '03

43 557.40 38 814.00 34 844.20 31 962.10 26 742.20 21 704.00 17 009.60 13 598.96 11 985.15 10 121.05
12.2%

11.4%

9.0%

19.5%

23.2%

27.6%

25.1%

13.5%

18.4%

Source: FactSet Fundamentals

3.4.1.2

Margin analysis

Margins have remained relatively stable over the past 5 years, with its operating margin improving. Notice the
colour chart regarding direction: FYE 2011 was the peak. Margins overall are thin typical of a food retail business,
high volumes, small margins.
5 Yr AVG

Sep '12

Sep '11

Sep '10

Sep '09

Sep '08

Sep '07

Gross M argin (%)

8.30

8.52

8.96

7.92

8.04

8.08

8.19

Operating M argin (%)

3.01

3.46

3.60

2.84

2.46

2.70

2.65

Pretax M argin (%)

3.63

3.48

3.62

3.75

3.59

3.73

3.66

Net M argin (%)

2.48

2.43

2.45

2.63

2.33

2.55

2.41

Profitability

Source: FactSet Fundamentals

3.4.1.3

Financial Leverage

Below are the 5 year average numbers used as inputs to calculate operating leverage, financial leverage and
subsquently, total leverage. Total leverage of the income statement is low at 1.02. Financial leverage is low.
As a cross-check, Spar has a 5 yr Avg Debt/Assets ratio of 3.8%.
Degree of Operating Leverage

=
=
=

Degree of Financial Leverage

=
=

% change in operating income


% change in sales
162.12%
100.69%
1.61

% change in EPS
% change in EBIT
102.47
162.12

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Degree of Total Leverage

0.63

% change in EPS
% change in sales

102.47%
100.69%

3.4.1.4

Ratio Analysis

3.4.1.4.1

1.02

Du Pont Analysis

Net profit margin: stable


Asset turnover: improving
Equity leverage: mixed
Overall: ROE is strong and improving, attributed to asset turnover increasing. This is an indication of more
efficient use of company assets. It is important to point out that Spar has very little debt, therefore its high ROE
is not a result of gearing.
Net
Income

Sales

Sales

Assets

Assets

ROE

Equity

2008

2.5

4.40

3.49

38.4

2009

2.3

4.68

3.33

35.8

2010

2.6

4.63

3.44

41.4

2011

2.5

4.89

3.37

41.2

2012

2.4

4.58

3.92

43.1

5 Yr. Av.

2.46

4.64

3.51

39.99

Source: FactSet Fundamentals

3.4.1.4.2

Profitability Analysis

Overall assessment of figures below are good with the caveat that margins are thin. ROA, ROE and ROC are
impressive.
5 Yr. Av.

Sep '12

Sep '11

Sep '10

Sep '09

Sep '08

Sep '07

Gross Margin (%)

8.30

8.52

8.96

7.92

8.04

8.08

8.19

Operating Margin (%)

3.01

3.46

3.60

2.84

2.46

2.70

2.65

Pretax Margin (%)

3.63

3.48

3.62

3.75

3.59

3.73

3.66

Net Margin (%)


Return on Assets (%)

2.48
12.25

2.43
11.64

2.45
12.03

2.63
13.02

2.33
12.04

2.55
12.52

2.41
12.17

Return on Equity (%)

44.17

39.76

40.74

44.38

43.48

52.48

52.25

Return on Total Capital (%)

38.53

38.92

35.79

36.56

36.45

44.93

47.21

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Source: FactSet Fundamentals

3.4.1.4.3

Solvency Analysis

Solvency ratios vary by industry, however a solvency ratio above 20.0% is considered financially sound. Spars
solvency ratio of 17.95% is therefore on the threshold of what is considered acceptable.
5 year Average Solvency Ratio

=
=
=

3.4.1.4.4

After Tax Net Profit + Depreciation


Total Liabilities
975.11
5431.6
17.95%

Liquidity Analysis

Days of sales outstanding: marginally weakening but nothing alarming


Days inventory on hand: marginally decreasing, again nothing alarming
Days of payables outstanding: payables negatively shorted during 09 and 10 but has steadily increased again.
Cash Conversion Cycle: difficult to summarise due to the number being a little volatile but overall improving

Current ratio: improving but still below acceptable 2:1, it is something to highlight
Cash ratio: improving but below the 0.5:1 acceptable level, therefore it is a flag.
Overall, liquidity and solvency ratios have been on the threshold of acceptable and worthy of keeping an eye on.
Industry charateristics are partly justifiable for lower readings.
5 Yr. Av.

Sep '12

Sep '11

Sep '10

Sep '09

Sep '08

Sep '07

Days of Sales Outstanding

42.46

43.15

44.06

42.87

40.61

41.61

41.12

Days of Inventory on Hand

10.67

11.68

10.82

10.31

10.24

10.32

9.56

Days of Payables Outstanding

40.45

44.67

40.16

37.45

37.01

42.93

48.88

Cash Conversion Cycle (Days)

12.69

10.16

14.71

15.73

13.83

9.00

1.80

Current Ratio

1.08

1.12

1.10

1.08

1.07

1.02

1.01

Quick Ratio

0.88

0.92

0.90

0.89

0.87

0.83

0.85

Cash Ratio

0.04

0.12

0.02

0.02

0.02

0.01

0.12

Source: FactSet Fundamentals

3.4.1.5 Competitor Analysis


5yr Av. Growth

Gross Margin

Operating Margin

Debt/Assets

ROE

ROA

ROIC

EPS Growth

Spar

8.3

3.01

3.82

44.17

12.25

43.72

13.8

Shoprite

17.08

2.85

5.98

37.97

12.43

36.76

23.7

Pick n Pay

9.2

1.72

9.93

58.88

9.79

40.17

-0.2

Woolworths

28.86

5.83

13.69

39.76

14.93

31.69

14.8

Massmart

9.89

3.92

7.05

39.08

8.65

34.89

0.7

Cashbuild

21.76

5.01

0.12

30.22

10.73

30.11

18.6

23 | P a g e

Source: FactSet Fundamentals

Relative to its competitors, Spar scores well on most metrics. Its gross margin is lower compared to peers due to its
franchise model, however operating margin quickly improves. All other metrics are scored on the upper end of
favourable compared to peers.
3.4.1.6 Conclusion
Spars financial position is good. It scores well compared to its peers. One exception to highlight is solvency and
liquidity metrics scoring just below what is considered acceptable. It is important to highlight though that limits
vary from industry to industry.

4 SWOT ANALYSIS
4.1 Strengths

Spar has been able to maintain food market share and grow already-dominant shares in liquor and building
materials.
Groups warehouse capacities are more than strong enough to support future growth.
Due to the companys owner managed format, unions have found it harder to unionise Spars staff.
More customised store offering based on demographics of store location.

4.2 Weaknesses

Spar, along with other food retailers, is subject to food inflation which can be volatile.
Spars wholesale distributor model should struggle to be as cheap on price of its goods as its competitors in
theory.

4.3 Opportunities

Spar holds rights to operate in Mozambique with developments taking place in Mozambique and Spars
Nelspruit warehouse well positioned to distribute into the country, there is an opportunity for growth.
Spar also operates in Namibia, Botswana and Zimbabwe.
Higher food inflation positively impacts revenues and ultimately profits.

4.4 Threats

A marked decline in food inflation negative to profits.


Developed world competitors taking away market share.
A turnaround in Pick n Pay.

24 | P a g e

5 INDUSTRY OUTLOOK
5.1 Industry life-cycle classification

Spar is considered to be in the mature stage of the industry life-cycle. The most obvious second wave of growth will
come from expansion into surrounding African countries.

5.2 Stock classification


Spar can be considered to be a Stalwart business.

5.3 Stock market cycle analysis


Two major inputs affecting Spar are positive food inflation and the interest rate cycle affecting disposable income
trends. Spar therefore performs well during the later stages of a recession into an early bullmarket.

BUSINESS DRIVERS
Positive food inflation
Disposable income trends
African expansion

6 OVERALL QUALITY CONCLUSION


The overall assesment of Spar is in support of an above average quality business. Spar scores well on market
positioning, good on business model, satisfactory on management and good on financial strength.

25 | P a g e

3.1. Market Position - Sector Specific

3.1.2.1. Economic Moat

3.1.2.2. Market Share Analysis

3.1.2.3. Financial Comparison

Score

Bargaining power with Suppliers

poor

below average

average

above average

excellent

Bargaining power of Buyers

poor

below average

average

above average

excellent

Degree of Competion

high

fairly high

moderate

fairly low

low

Threat of new entrants

high

fairly high

moderate

fairly low

low

Threat of Substitutes

high

fairly high

moderate

fairly low

low

Decreased

Marginally Decreased

Flat

Marginally Increased

Increased

Market Concentration

low

fairly low

average

fairly high

high

5 Year Margin Analysis


5 Year Avg ROE
5 Year Avg ROA
5 Yr Avg EPS growth

poor
poor
poor
poor

below average
below average
below average
below average

average
average
average
average

above average
above average
above average
above average

excellent
excellent
excellent
excellent

3
4
4
3

poor

below average

average

above average

excellent

1
complex
weak
high
poor

2
fairly complex
fairly weak
fairly high
below average

3
average
average
average
average

4
fairly simple
fairly strong
fairly low
above average

5
simple
strong
low
excellent

Score
5
4
3
3

poor

below average

average

above average

excellent

1
poor
poor
poor
poor
poor

2
below average
below average
below average
below average
below average

3
average
average
average
average
average

4
above average
above average
above average
above average
above average

5
excellent
excellent
excellent
excellent
excellent

Score
4
4
4
4
3

poor

below average

average

above average

excellent

1
strongly disagree
strongly disagree
strongly disagree
strongly disagree
strongly disagree
strongly disagree
strongly disagree

2
disagree
disagree
disagree
disagree
disagree
disagree
disagree

3
neutral
neutral
neutral
neutral
neutral
neutral
neutral

4
agree
agree
agree
agree
agree
agree
agree

5
strongly agree
strongly agree
strongly agree
strongly agree
strongly agree
strongly agree
strongly agree

Score
4
4
3
4
4
2
2

poor

below average

average

above average

excellent

poor

below average

average

above average

excellent

5 year change in Market Share

3.2. Business Model


3.2.2. Qualitative

3.2. Business Model

Ease of Understanding
Forward looking strategy
Execution risk associated with strategy
Vertical intergration of the value chain

3.3. Management
3.2.2. Qualitative
3.3.2.1. Corporate Governance
3.3.2.2. Ownership Structure
3.3.2.3. Track Record

Corporate Governance
Management's ownshership in the company is acceptable
Mangement has created shareholder wealth
Management has delivered on expectations
Management are highly experienced in their field of expertise

3.4. Financial Strength


3.4.2. Qualitative
3.4.2.1.1. Revenue growth
3.4.2.1.2. Margin analysis
3.4.2.1.3. Financial Leverage
3.4.2.1.4. Ratio Analysis

Revenue growth has been satisfactory over the past 5 years


Margins have been sustained over the past 5 years
Financial Leverage is healthy
ROE (via Du Pont Analysis) is attractive
Profitability ratios are satisfactory
Solvency ratios are satisfactory
Liquidity ratios are satisfactory

Overall

Source: Efficient Select

7. Overall Quality Conclusion


Idea Generation

Screening Tools

Theme

Other

Weak

Average

Strong

Houseview
Call
Equity
Sector
Economic Cycle View

Negative
Negative
Negative
Early Recovery

Stable Negative
Stable Negative
Stable Negative
Mid Recovery

Stable
Stable
Stable
Late Recovery

Stable Positive
Stable Positive
Stable Positive
Recession

Positive
Positive
Positive

Industry Outlook
Stock Classifaction
Industry life-cycle Classification
Stock Market Cycle Analysis: When does the stock perform best

Turn Around
Introduction
Early Recovery

Slow Grower
Growth
Mid Recovery

Stalwart
Mature
Late Recovery

Cyclical
Decline
Recession

Fast Grower

Quality Assessment Report: Conclusion

Business Drivers
1)
2)
3)
4)
Final Comments

Positive food inflation


Disposable Income Levels
African expansion
-

Source: Efficient Select

26 | P a g e

7 VALUATION
Please find below a summary of the Spar Valuation. For a more detailed breakdown, please refer to valuation
template.
Weighted Valuation
Historical Valuation
Relative Valuation

Weight
60%
40%

Buy Price
126.07
128.78

Target Price
198.68
149.54

Sell Price
181.32
136.48

Weighted Valuation

100%

127.16

179.02

163.38

Source: Efficient Select

8 SOURCES
Nedbank
UBS
Factset
Spar company website

27 | P a g e

9 APPENDIX
9.1 FINANCIAL STATEMENTS
9.1.1 Income Statement
Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Final

Final

Final

Final

Final

Final

Sales/Revenue

43557.40

38814.00

34844.20

31962.10

26742.20

21704.00

Cost of Goods Sold (COGS) incl. D&A

39846.70

35336.60

32083.70

29393.00

24582.50

19926.90

Gross Income

3710.70

3477.40

2760.50

2569.10

2159.70

1777.10

SG&A Expense

2188.70

2065.70

1759.60

1648.10

1437.70

1201.40

Other Operating Expense

13.00

12.90

13.00

136.20

0.00

0.00

EBIT (Operating Income)

1509.00

1398.80

987.90

784.80

722.00

575.70

Non-operating Income (Expense) - Net

32.30

34.20

340.00

390.40

297.30

229.80

Interest Expense

26.00

24.70

20.90

29.50

19.30

10.30

Unusual Expense (Income) - Net

0.10

3.70

#N/A

-1.00

1.50

0.50

Pre-tax Income

1515.20

1404.60

1307.00

1146.70

998.50

794.70

Income Taxes

459.80

452.00

391.60

401.50

316.90

271.70

Equity in Earnings of Affiliates

3.50

0.00

0.40

0.00

0.00

#N/A

Consolidated Net Income

1058.90

952.60

915.80

745.20

681.60

523.00

Minority Interest Expense

0.00

0.00

0.00

0.00

0.00

0.00

Net Income

1058.90

952.60

915.80

745.20

681.60

523.00

Net Income available to Common

1058.90

952.60

915.80

745.20

681.60

523.00

EPS (recurring)

5.71

5.23

5.06

4.26

#N/A

2.99

EPS (basic)

6.16

5.56

5.36

4.39

4.07

3.13

EPS (diluted)

5.71

5.21

5.06

4.26

3.91

2.99

EBITDA

1634.40

1521.30

1096.20

877.20

795.00

629.10

28 | P a g e

9.1.2 Balance Sheet


Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Final

Final

Final

Final

Final

Final

Cash & ST Investments

841.60

96.40

85.20

68.50

57.90

453.50

Total Accounts Receivable

5379.80

4919.80

4449.90

3735.60

3376.20

2721.50

Inventories

1415.60

1135.00

959.20

853.10

795.70

594.50

Other Current Assets

35.80

26.60

28.60

26.40

24.20

45.50

Total Current Assets

7672.80

6177.80

5522.90

4683.60

4254.00

3815.00

Net Property, Plant & Equipment

1588.00

1550.40

1521.00

1425.80

1083.30

736.20

Total Investments and Advances

60.90

23.60

41.50

17.30

56.10

117.50

Long-Term Note Receivable

171.70

154.10

139.10

143.30

145.60

124.60

Intangible Assets

391.00

381.90

299.70

245.60

245.60

245.60

Deferred Tax Assets

10.90

13.20

3.20

22.00

15.70

14.50

Other Assets

0.00

0.60

1.50

2.20

33.60

4.10

Total Assets

9895.30

8301.60

7528.90

6539.80

5833.90

5057.50

ST Debt & Curr. Portion LT Debt

0.00

114.90

531.10

351.00

310.00

11.30

Accounts Payable

5513.90

4308.90

3506.60

3099.60

2873.50

2956.60

Income Tax Payable

6.70

40.60

0.40

2.30

121.30

71.30

Other Current Liabilities

1300.80

1131.20

1094.10

937.20

856.60

738.80

Total Current Liabilities

6821.40

5595.60

5132.20

4390.10

4161.40

3778.00

Long-Term Debt

0.00

0.00

0.00

0.00

0.00

115.00

Provision for Risks & Charges

103.40

85.50

75.10

67.90

60.80

54.80

Deferred Tax Liabilities

3.90

0.60

#N/A

#N/A

#N/A

#N/A

Other Liabilities

129.00

130.40

134.40

141.50

123.90

0.00

Total Liabilities

7057.70

5812.10

5341.70

4599.50

4346.10

3947.80

Common Equity

2837.60

2489.50

2187.20

1940.30

1487.80

1109.70

Total Shareholders' Equity

2837.60

2489.50

2187.20

1940.30

1487.80

1109.70

Accumulated Minority Interest

0.00

0.00

0.00

0.00

0.00

0.00

Total Equity

2837.60

2489.50

2187.20

1940.30

1487.80

1109.70

Liabilities & Shareholders' Equity

9895.30

8301.60

7528.90

6539.80

5833.90

5057.50

Assets

Liabilities & Shareholders' Equity

29 | P a g e

9.1.3 Cash Flow Statement


Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Final

Final

Final

Final

Final

Final

Net Income / Starting Line

1510.20

1404.40

1303.30

1141.30

971.90

774.70

Depreciation, Depletion & Amortization

125.40

122.50

108.30

92.40

73.00

53.40

Other Funds

0.00

0.00

0.00

0.00

0.00

0.00

Funds from Operations

1201.60

1158.00

1074.90

846.70

845.80

649.10

Changes in Working Capital

622.40

204.30

-257.50

-163.60

-870.10

521.90

Net Operating Cash Flow

1824.00

1362.30

817.40

683.10

-24.30

1171.00

Capital Expenditures

-74.10

-41.50

-36.30

-51.10

-60.80

-38.70

Net Assets from Acquisitions

-9.10

-82.20

-54.10

0.00

0.00

0.00

Sale of Fixed Assets & Businesses

2.30

4.90

2.00

100.60

5.20

18.00

Purchase/Sale of Investments

-141.10

-135.40

-183.90

-390.40

-365.30

-275.90

Other Funds

0.00

0.00

-8.70

72.40

64.60

-97.20

-268.50

-356.30

-393.80

Operating Activities

Investing Activities

Net Investing Cash Flow

-222.00

-254.20

-281.00

Financing Activities
Cash Dividends Paid

-670.50

-624.60

-578.50

-467.70

-355.40

-246.30

Change in Capital Stock

-71.40

-56.10

-121.30

22.60

29.60

-80.50

Issuance/Reduction of Debt, Net

0.00

0.00

0.00

41.00

-0.40

-37.60

Other Funds

0.00

0.00

0.00

0.00

0.00

0.00

-680.70

-699.80

-404.10

-326.20

-364.40

Net Financing Cash Flow

-741.90

Exchange Rate Effect

0.00

0.00

0.00

0.10

1.20

-0.80

Net Change in Cash

860.10

427.40

-163.40

10.60

-705.60

412.00

Free Cash Flow

1749.90

1320.80

781.10

632.00

-85.10

1132.30

9.1.4 Ratios
Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Price/Earnings (x)

20.79

17.33

17.33

14.72

12.42

17.61

Price/Sales (x)

0.51

0.43

0.46

0.34

0.32

0.42

Price/Book Value (x)

7.78

6.65

7.27

5.69

5.77

8.44

Valuation

30 | P a g e

Price/Cash Flow (x)

13.02

12.91

20.56

16.57

-363.40

8.23

Enterprise Value/EBIT (x)

14.06

11.85

16.55

14.42

12.24

15.70

Enterprise Value/EBITDA (x)

12.99

10.89

10.89

14.91

11.11

14.37

Enterprise Value/Sales (x)

0.49

0.43

0.47

0.35

0.33

0.42

Total Debt/Enterprise Value (x)


EPS (recurring)

0.00
5.71

0.01
5.23

0.03
5.06

0.03
4.26

0.04
#N/A

0.01
2.99

EPS (basic)

6.16

5.56

5.36

4.39

4.07

3.13

EPS (diluted)

5.71

5.21

5.06

4.26

3.91

2.99

DPS

4.30

3.77

3.62

3.22

3.22

1.85

Dividend Yield (%)

3.36

3.92

3.90

4.98

5.05

3.36

Dividend Payout Ratio (%)

69.84

67.85

67.54

73.28

62.73

59.11

Gross Margin (%)

8.52

8.96

7.92

8.04

8.08

8.19

SG&A to Sales (%)

5.02

5.32

5.05

5.16

5.38

5.54

Operating Margin (%)

3.46

3.60

2.84

2.46

2.70

2.65

Pre-tax Margin (%)

3.48

3.62

3.75

3.59

3.73

3.66

Net Margin (%)

2.43

2.45

2.63

2.33

2.55

2.41

Return on Assets (%)

11.64

12.03

13.02

12.04

12.52

12.17

Return on Equity (%)

39.76

40.74

44.38

43.48

52.48

52.25

Return on Total Capital (%)

38.92

35.79

36.56

36.45

44.93

47.21

Return on Invested Capital (%)

39.76

40.74

44.38

43.48

50.26

49.03

Basic DuPont ROE (%) (3 Step)

39.76

40.74

44.38

43.48

52.48

52.25

Revenue/Employee

11.16

10.17

12.91

12.11

10.41

9.07

Net Income/Employee

0.27

0.25

0.34

0.28

0.27

0.22

Receivables Turnover (x)

8.46

8.29

8.51

8.99

8.77

8.88

Days of Sales Outstanding

43.15

44.06

42.87

40.61

41.61

41.12

Inventory Turnover (x)

31.24

33.75

35.41

35.65

35.37

38.18

Days of Inventory on Hand

11.68

10.82

10.31

10.24

10.32

9.56

Payables Turnover (x)

8.17

9.09

9.75

9.86

8.50

7.47

Days of Payables Outstanding

44.67

40.16

37.45

37.01

42.93

48.88

Cash Conversion Cycle (Days)

10.16

14.71

15.73

13.83

9.00

1.80

Total Asset Turnover (x)

4.40

4.68

4.63

4.89

4.58

4.29

Working Capital Turnover (x)

51.16

66.67

89.18

108.90

288.79

586.59

Current Ratio

1.12

1.10

1.08

1.07

1.02

1.01

Quick Ratio

0.92

0.90

0.89

0.87

0.83

0.85

Cash Ratio

0.12

0.02

0.02

0.02

0.01

0.12

Profitability

Efficiency

Liquidity

31 | P a g e

Credit Analysis
Net Debt/EBITDA (x)

-0.51

0.01

0.41

0.32

0.32

-0.52

Net Debt/(EBITDA-Capex) (x)

-0.54

0.01

0.42

0.27

0.34

-0.55

Total Debt/EBITDA (x)

0.00

0.08

0.48

0.40

0.39

0.20

EBITDA/Interest Expense (x)

62.86

61.59

52.45

29.74

41.19

61.08

EBIT/Interest Expense (x) (Int. Coverage)

58.04

56.63

47.27

26.60

37.41

55.89

Fixed-charge Coverage Ratio (x)

58.04

56.63

47.27

26.60

37.41

55.89

CFO/Interest Expense (x)

70.15

55.15

39.11

23.16

-1.26

113.69

LT Debt/EBITDA (x)

0.00

0.00

0.00

0.00

0.00

0.18

LT Debt/Equity (%)

0.00

0.00

0.00

0.00

0.00

10.36

LT Debt/Total Capital (%)

0.00

0.00

0.00

0.00

0.00

9.30

LT Debt/Total Assets (%)

0.00

0.00

0.00

0.00

0.00

2.27

Total Debt/Total Equity (%)

0.00

4.62

24.28

18.09

20.84

11.38

Total Debt/Total Assets (%)

0.00

1.38

7.05

5.37

5.31

2.50

Net Debt/Total Capital (%)

-29.66

0.71

16.40

12.33

14.02

-26.47

Total Debt/Total Capital (%)

0.00

4.41

19.54

15.32

17.24

10.22

Net Debt/FFO (x)

-0.70

0.02

0.41

0.33

0.30

-0.50

LT Debt/FFO (x)

0.00

0.00

0.00

0.00

0.00

0.18

FCF/Total Debt (x)

#N/A

11.50

1.47

1.80

-0.27

8.97

CFO/Total Debt (x)

#N/A

11.86

1.54

1.95

-0.08

9.27

Source: FactSet Fundamentals

32 | P a g e

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