analysis
Stock pick
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Woolworths Holding Ltd
oolworths is involved in the retailing sector in South
Africa. It offers quality clothing, food, home-ware,
beauty and financial services under its own brand
name. It also operates in Australia via its investment in Country
Road and more recently Witchery (ASX: WOW).
Woolworths targets the higher income market by providing
customers with the top-quality products. It is also now
targeting the upper echelons of society through its comparative
advantage in the retailing sector.
Despite the recent turmoil in the credit markets, Woolworths
has come out fairly unscathed. With rising petrol and electricity
prices and inflation growing faster than wage prices, people’s
disposable income has shrunk. This has resulted in the increase
in bad debt and the tightening of credit. With the tightening of
credit comes a decrease in consumption expenditure. Now,
while this credit tightening has severely affected stores such as
Shoprite that target lower-income households, the credit turmoil
hasn’t affected Woolworths’ sales. Recently they announced
an increase in sales of 20% while analysts were predicting an
increase within the range of 12%.
With the ever-growing middle and upper classes in South
Africa there is an ever-growing customer base to be served
and Woolworths face little competition in their niche of targeting
higher income households.
Woolworths also demonstrates a serious commitment to
sustainability.* This often undervalued trait gives companies a big
comparative advantage against those who don’t. Woolworths
was recently included in the Dow Jones Sustainability Index and
is the only South African company to be recognised by the World
Economic Forum’s “New Sustainability Champions”.
Woolworths has recently been sold off and value can be
found in this share at current prices. A few quick stats that
depict this value can be found in the price to earnings which
has dropped from 26 times to 22 times; the debt to equity is
only 0.3; and the return on capital has averaged around 30%
over the last six years. The only downside in this stock is its
NAV to Price which is over 11 times, and with this comes a
degree of risk.
The chart depicting the share’s recent performance shows
how well it has done. But the question is whether it can continue
its splendid run. With its solid and sustainable performance thus
far, as well as its relatively low price to earnings (compared to
Pick n Pay at 42 times, and Shoprite at 26 times), there still may
be great things to come from “Woolies” in the next few years.
[JSE ticker: WHL]
Woolworths 3 years (6,900c +174.90%)
8741
6952
5163
3374
1585
2011
2012
2013
*If you are interested in learning more about the importance of sustainability, we