Massmart may have wrong-footed some naysayers this week, but a return to dividends will be a long way off given how much the retailer owes parent Walmart.
Massmart’s shares spiked a cool 20% on Monday to close at R54.10, and rallied again on Tuesday despite posting a R1.8bn loss for the year ended December 27.
But Massmart’s progress on a turnaround under Walmart veteran Mitchell Slape is evidently gaining pace — and much of its 2020 loss was due to one-off costs such as almost R800m in impairments, R132m in retrenchment fees and losses of R365.3m at its Cambridge and Rhino food divisions, which are now being sold.
Overall, despite SA’s crippling Covid-19 lockdowns, Massmart’s sales of R86.5bn were only 7.7% down for the year.
Still, retail analyst Syd Vianello believes the company’s debt is a lot more burdensome than it appeared in its presentation, in which stripped-out lease liabilities and added-in cash likely owed to suppliers leave Massmart — which owns Game, Makro and Builders Warehouse — with borrowings of just R2.5bn, and a gearing ratio of 0.87.
Vianello, however, argues that Massmart’s short-and medium-term debt comes to almost R6bn, including a R4bn rolling Walmart loan, against equity of R2.9bn (excluding the free cash that will be paid over to suppliers).
That would give Massmart a debt to equity ratio of almost two times — higher than any other retailer in SA, says Vianello.
He argues Massmart would have had little joy from local banks were it not for the backing of its parent and is worried that this rolling loan could become more expensive, given a potential rise in US interest rates.
Slape, says Vianello, has been sent to fix the business, make it profitable and repay Walmart, which stumped up $2.5bn to buy its 51% stake in 2010, at R148 a share.
It has been a disastrous acquisition for the Americans, though under Slape Massmart’s shares have recovered 33% over the past year.
The problem is that minority shareholders will be last in line for dividends, argues Vianello.
Cynics aside, Slape is evidently moving ahead with the retailer’s 2020 turnaround strategy. So far the group has completed more than 30 turnaround projects.
"We have overcome what for me, arguably, is the biggest risk in any turnaround initiative, and that’s the ability to deliver against commitments," says Slape.
Massmart has split the business from four separate divisions into two, outsourced its IT support to a Walmart centre in India, reduced head office space, closed the DionWired tech business and sold eight nonperforming Masscash stores.
Masscash, which holds the Jumbo Cash & Carry and Shield wholesalers, turned its first profit in five years.
And Builders Warehouse had its best performance ever — earning more than R1bn in profit after increasing profit margins by two percentage points to 35.9%.
Massmart is also, at long last, improving and investing in its online business which made R1bn in sales over the period, having played second fiddle to rival Takealot for years.
Sylvester John, Walmart’s second managerial export to SA, is leading the company’s e-commerce team and has driven the idea to include Makro and Builders Warehouse as well as Game as anchor tenants on the Vodacom super app.
This super app is an overarching app all Vodacom subscribers will be able to use, which includes other company apps and has simple payment systems. It’s based on super apps in China and will launch midyear.
The retailer also announced a review of its African businesses in Nigeria, Ghana, Kenya and Uganda. It’s probably not what the world’s largest retailer had in mind when it bought into Massmart as a means to expand on the continent. But Slape is adamant Walmart is still "long on Africa", and still committed to African businesses in Botswana and Mozambique.
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