SAP Rollout And Uber Eats Integration Will Drive Urban Growth

Key Takeaways

• Accelerated operational improvements and strategic digital initiatives are improving margins, setting SPAR up for outperforming market revenue and profitability expectations.
  
• Divestment from weak markets and targeted expansion in high-growth regions are boosting earnings resilience and securing SPAR's leadership in omni-channel retail.
  
• SPAR Group faces ongoing revenue, margin, and competitiveness challenges due to weak sales growth, high costs, digital lag, regulatory pressures, and underperforming international assets.

Catalysts

Engages in the wholesale and distribution of goods and services to grocery stores and other group retail outlets in South Africa and internationally.

• While analyst consensus expects SPAR Group's operating margin in South Africa to reach 3% by 2026 through operational efficiencies, the current pace of gross margin expansion, cost discipline, and earlier-than-expected SAP stabilization in key distribution centers suggest the margin target could be exceeded or realized ahead of schedule, delivering meaningfully higher net margins.
  
• Analysts broadly agree that SPAR2U's rollout and on-demand fulfillment will boost revenue, but the rapid year-on-year volume growth of 174% and integration with Uber Eats across 130 stores indicate SPAR Group could establish itself as the leading omni-channel retailer in Southern Africa, capturing a disproportionate share of the fast-growing e-commerce and convenience segment, thus driving multi-year revenue growth above market expectations.
  
• SPAR Group's disciplined divestment from underperforming European assets and strategic refocus on core fast-growing and high-return regions like Southern Africa, Ireland, and Sri Lanka will enable a swift redeployment of capital into markets benefiting from urbanization and middle-class growth, accelerating top-line expansion and enhancing group earnings resilience.
  
• Leveraging data-driven loyalty programs-now with over 10 million active rewards members-SPAR Group is positioned to further boost customer basket size, retention and private label penetration, supporting ongoing gross margin improvement and structurally higher profitability.
  
• The enhanced focus on supply chain automation, digital infrastructure (notably accelerated SAP rollout), and embedded sustainability initiatives will not only lower operating costs but also position SPAR as a retail leader among increasingly ESG-conscious consumers, structurally bolstering long-term revenue streams and premium brand positioning.

SPAR Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on SPAR Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming SPAR Group's revenue will grow by 4.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.0% today to 1.3% in 3 years time.
• The bullish analysts expect earnings to reach ZAR 2.3 billion (and earnings per share of ZAR 16.36) by about August 2028, up from ZAR 1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the ZA Consumer Retailing industry at 20.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.63%, as per the Simply Wall St company report.

SPAR Group Future Earnings Per Share Growth

Risks

• Persistent weakness in sales growth, particularly in Southern Africa and Ireland, coupled with negative revenue trends in certain business units, suggests that SPAR Group may continue facing top line pressures due to challenged consumer environments and competition from price-aggressive discounters, which could weigh on long-term revenue growth.
  
• The company's high cost base and historic underinvestment in digital transformation raise concerns about its ability to compete effectively with more technologically advanced and agile retailers, potentially resulting in continued margin compression and constrained net earnings.
  
• Recent asset write-downs and significant impairments, such as the ZAR 4.2 billion writedown for Switzerland and the U.K., highlight ongoing struggles with international execution and overexposure to underperforming or mature markets, directly reducing group earnings and equity value.
  
• Despite selective digital initiatives like SPAR2U, accelerating e-commerce trends present a structural threat to SPAR's traditional large-format and brick-and-mortar retail model, risking ongoing market share loss and lower foot traffic, which may negatively impact both revenue and operating margins over time.
  
• Rising regulatory demands, supply chain disruptions, and increasing consumer focus on sustainability and ethical sourcing could drive up compliance and operational costs for SPAR Group, further pressuring net margins and future profitability if investments are not matched by productivity gains or revenue uplift.

Valuation

• The assumed bullish price target for SPAR Group is ZAR171.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SPAR Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR171.0, and the most bearish reporting a price target of just ZAR111.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ZAR174.1 billion, earnings will come to ZAR2.3 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 18.6%.
  
• Given the current share price of ZAR106.59, the bullish analyst price target of ZAR171.0 is 37.7% 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.