Massmart trading update, building for the future

Yesterday Massmart released an informative trading update which told us what to expect in terms of earnings for the 26 week period ending 23 December 2012. Before we delve into the numbers they explain the once off effects. Last year's earnings included transaction costs, mostly integration costs following the Wal-Mart deal. That pushed the base down. This year the company is still facing integration costs as well as a R140m increase to the Supplier development fund. That total of that fund is R240m. That is a lot of money for a company who made R865 million in the comparable 6 month period last year.


When you consider these added costs, the R140 million charge probably having the biggest impact, headline earnings per share are expected to be down between 18% and 25%. That equates to between 312c and 341c a share. This is not good for a company that is priced for strong growth. Had it not been for these extra charges the company looks to make between 410c and 438c. That sees growth of between 2%-9%.


Again that is not good enough for this company. Annualise the top of the range 438c and we get 876c. Trading at R185 and 21 times forward earnings you can see why I say these results are not good enough. But as an investor we are not at all unhappy. I go back to something I have spoken about a lot of late. We are not worried about short term earnings. Of course it is important but it is only one element to consider when deciding on the long term bigger picture.


We have full faith in the Massmart management team who are investing heavily now, for the future. Africa is hungry not only for food but for appliances, sports equipment, entertainment devices and everything else that makes our lives as comfortable as they are. It is not going to be easy getting it there and this will be an expensive exercise. But once it is there they could experience growth that is unattainable anywhere else in the world. We will continue to add to this stock and will remain patient.


As for the share price, it was actually up 1.8% on the news yesterday. Obviously these numbers were slightly better than expected. However it lost that all today and more as Shoprite released disappointing numbers. Sasha has covered those in intricate detail, as always.