Sixty60 And Pingo Delivery Will Optimize Future Last-Mile Logistics

Key Takeaways

• Continuous store expansion and improved logistics signal strong future revenue and sales growth potential.
  
• Investments in operational efficiency and new revenue streams enhance margins and profitability.
  
• Currency volatility, high finance costs, and capital investment needs challenge Shoprite's profitability, cash flow, and financial comparisons amidst store expansion efforts.

Catalysts

An investment holding company, primarily engages in the food retailing business in South Africa and internationally.

• Continuous store expansion, with plans to open 123 new supermarkets and 151 total stores, indicates strong future revenue growth potential. (Revenue)
  
• The recent overhaul of the point-of-sale system and supply chain investments, including new distribution centers, enhances operational efficiency and support a higher trading margin. (Net Margins)
  
• The acquisition of the remaining 50% shareholding in Pingo Delivery aims to optimize delivery services, contributing to both cost management and sales growth through improved last-mile logistics. (Earnings)
  
• Alternative revenue streams such as the Rainmaker platform and increased digital capabilities through Sixty60 and partnerships (e.g., Discovery Vitality) offer higher margin opportunities, potentially boosting overall profitability. (Net Margins)
  
• Strategic focus on core food business and disposal of non-core assets, such as the furniture business, enables streamlined operations and reinvestment into higher-growth potential areas. (Earnings)

Shoprite Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shoprite Holdings's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 2.9% in 3 years time.
• Analysts expect earnings to reach ZAR 9.3 billion (and earnings per share of ZAR 17.72) by about March 2028, up from ZAR 6.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.2x on those 2028 earnings, up from 20.9x today. This future PE is greater than the current PE for the ZA Consumer Retailing industry at 20.7x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.9%, as per the Simply Wall St company report.

Shoprite Holdings Future Earnings Per Share Growth

Risks

• Currency volatility and hyperinflation in regions like Ghana and Malawi present financial challenges for Shoprite's non-RSA operations, potentially impacting earnings due to decreased profitability and currency devaluation.
  
• Elevated finance costs, driven by increased lease liabilities and high interest rates, pose a risk to net margins and could affect future earnings if not mitigated.
  
• Increased inventory levels resulting from an aggressive store expansion program and supply chain investments may strain working capital, potentially impacting cash flow and profitability.
  
• The ongoing need for substantial capital investment, both in new stores and technology, could pressure free cash flow and may affect the company's ability to maintain dividend growth.
  
• The sale of the furniture business, while expected to unlock capital, could lead to short-term earnings impacts and complicates financial comparisons due to changes in reporting and adjustments in key financial ratios.

Valuation

• The analysts have a consensus price target of ZAR309.143 for Shoprite Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR318.9 billion, earnings will come to ZAR9.3 billion, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 16.9%.
• Given the current share price of ZAR266.79, the analyst price target of ZAR309.14 is 13.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.