We now call the bottom in SA General Retail

Research evidence excerpt

We now call the bottom in SA General Retail

n than fresh elena.jouronova@jpmorgan.com

earnings downgrades. Against this backdrop, we believe the debate around a J.P. Morgan Securities plc

bottom is now credible and risk/reward is skewing more favourably. While we

acknowledge downside risks persist and near-term catalysts remain limited, we see

scope for a 10-15% retracement as the sector trades at ~10.0x versus historical

bottom levels of 11x and peak levels of 16.2x. Fundamentally, we expect questions

to remain for some time, but our tactical upgrade is driven by positioning, a

potential ‘re-opening’ tailwind as the Strait of Hormuz risk recedes (see our note),

and the optionality from our consolidation scenario analysis –where we view

consolidation as the most credible route to restoring industry economics and

improving the sector’s ability to defend share of wallet (see our note). Our South

Africa Strategy Top Picks include: BID, ANG, DSY, IMP, SHP, CPI, FSR and

NPN.

Views from SA Strategy – we are calling the bottom in SA General Retail and

upgrade to N (from UW)

• The valuation argument is convincing – At 10x fwd PE, the valuation

argument for SA General Retail is the most compelling argument for

investors to begin positioning for a tactical trade. The stocks are now >1sd

cheap relative to their history, the second-cheapest sector on the JSE, just ahead

of SA Tech within the non-Mining cohort of the exchange. We often find it

illuminating to break down an index into four quadrants going back 15

years to adequately lay out the stakes. The top quartile, which we refer to as

peak of the cycle (often when these names are most conducive for correction),

sits at 16.2x fwd PE – if the retail market were to consolidate & experience