Phantom Shares: The Rich Keep Getting Richemont

• South Africa
• Distell, Richemont, Shoprite, Spar, Woolworths
• November 22, 2021

Phantom Shares is my weekly summary of the more interesting stories and themes from the prior week on the JSE. It is first published in the Daily Maverick 168 newspaper on a Saturday and then in Business Maverick each Monday. It is reproduced here with the permission of Daily Maverick.

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The rich keep getting Richemont

Every now and then, a company releases a result that makes the entire market sit up and take notice. Richemont achieved that with its interims for the six months to September. Over the course of the week, the share price gained around 12%. For a company with a market cap of over R1tn to be registering those types of gains in just a few days, you know there must have been something special.

Revenue wasn’t just up vs. the prior year; it was up 20% vs. the pre-pandemic period. The Jewellery Maisons stole the show, with revenue growth of 36% vs. 2019. The group’s gross margin was 100bps higher than 2019 and operating margin was 21.9% vs. 15.7% in 2019.

To add to this sparkling performance, Richemont is also working on an industry-wide platform to grow direct-to-consumer sales of luxury goods. This would help Richemont capture more margin in the value chain.

The share price is up nearly 75% year-to-date and trading at all-time-highs. If ever you needed proof that the pandemic bounced off the wealthiest families in the world without even leaving an economic bruise, Richemont is where you’ll find it.

Distell’s deal moves forward

Heineken has finally played its hand in the Distell deal. Many punters were left disappointed by an offer price of R180 per share, especially as Distell traded slightly above that level for some time. As these deals can take as long as 12 months to be finalised, the share inevitably trades at a discount of 7% – 10% to the offer price in recognition of the time value of money and some deal risk.

The deal structure is interesting. Heineken will combine its Southern African business (including the interest in Namibia Breweries Limited) with most of Distell’s business in a new private company creatively referred to as Newco. Remgro will roll into that structure and Distell shareholders can elect to do the same, provided they don’t mind holding unlisted shares.

The other element to this story is Capevin, which will be unbundled to Distell shareholders before the transaction is concluded. The whisky businesses will sit in Capevin. Distell shareholders can elect to retain an unlisted stake in Capevin or sell to Heineken for cash.

Shareholders will need to wait until next year before they find out the full details of the underlying businesses. Distell needs to issue a scheme circular and prospectus before 12 January 2022. The company’s advisors probably aren’t going to have a great Christmas holiday.

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Shoprite is the market darling of grocery

Three of the four major grocery groups released results or updates last week. It’s now quite clear that Shoprite is the market’s favourite grocery store, with the share price climbing 7.5% after the latest announcement.

In the quarter ended September 2021, Shoprite achieved group sales growth of 9.3% and Supermarkets RSA sales growth of 11.6%. This was achieved despite alcohol restrictions and the civil unrest.

The Checkers FreshX format has been a successful growth story, targeting the high-LSM customers that have historically been Woolworths’ bread and butter (or organic jam). Shoprite isn’t ignoring lower-LSM growth opportunities either, as the group hopes to finalise the acquisition of 111 Massmart Cash & Carry and Cambridge Foods stores by the end of the 2022 financial year. These will be rebranded accordingly, presumably into a mix of Shoprite and Usave outlets.

It’s worth highlighting that Sixty60 achieved a record quarter. If you ever wondered whether on-demand grocery has a place in a post-lockdown world, Shoprite has answered the question for you.

Spar has answered that question as well, with the group announcing that it will pursue a centralised online offer. It’s probably too late in the South African market, although Spar does have the benefit of learning from the existing players before launching an offering.

Spar’s biggest headache is in Poland, where the recent acquisition is proving to be a significant challenge to implement. A loss of nearly R530 million in Poland is a severe drag on a group result of around R3 billion. The rest of the group didn’t have anything spectacular to report, so the market punished Spar and sent the share price 9% lower.

Woolworths received a 6% beating from the market after releasing a trading update. The lockdowns in Australia are causing immense pain for David Jones and Country Road. While these are exogenous factors that Woolworths can’t control, there was an interesting data point in the previously unassailable Woolworths Food business that investors would’ve noticed.

Price movement was just 2.6% while underlying product inflation was 3.8%. This means that Woolworths Food has less pricing power than before, which can only be a result of Checkers competing successfully for the same customers as Woolworths.

The gloves are off in grocery retail. Ultimately, consumers will be the winners.

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