Sasfin : AutoZone in the Red Despite Solid Q1 Results

MARKET COMMENTARY

SOUTH AFRICAN MARKET COMMENTARY

Shares on the JSE ended mostly lower yesterday, with both the All-Share and Top-40 index ending the session 0.18% lower. Meanwhile, Gross domestic product expanded 1.6% in the three months through September, compared with a contraction of 0.7% in the previous quarter. Looking at sectors, Closed End Investments saw the biggest gains, rising 2.32% and Finance and Credit Services was up 1.98% by the close of the session. In company news, Nedbank was up 2.77% to lead gains, while Mondi PLC was the biggest loser, dropping 5.45%.

EUROPEAN MARKET COMMENTARY

European markets closed lower yesterday, with global sentiment subdued this week as investors weigh future policy from global central banks. The pan-European Stoxx 600 closed down 0.6%, with most sectors and major bourses finishing in the red. Tech stocks led losses, shedding 1.5%, followed by Financial Services, which was down 1.4% and Health Care, which dipped by 1.1%. Looking at companies, Aeroports de Paris (ADP) shares plunged more than 12% by mid-afternoon, after Royal Schiphol sold off its remaining 3.91% stake in the company at a discount price. Anglo-American cybersecurity firm Darktrace fell more than 6%.

US MARKET COMMENTARY

US stocks tumbled yesterday, building on the previous session's losses, as fears of a recession gripped Wall Street. Stocks added to Monday's declines, with the S&P falling for a fourth straight day and its seventh negative session in eight. Media and Bank stocks, which tend to suffer during recessions, led the losses. Paramount Global's CEO warned of lower fourth quarter advertising revenue, sending shares down nearly 7%. Morgan Stanley's stock slumped amid news it's planning to cut 2% of its workforce, continuing the recent layoff trend in the sector. Growth-focused technology names like Nvidia, Amazon and Meta Platforms also weighed on the market.

ASIAN MARKET COMMENTARY

Shares in the Asia-Pacific traded mixed today after major U.S. indices fell more than 1% each overnight as recession concerns weigh on markets. Elsewhere in Asia, economists expect the Reserve Bank of India to announce a 35-basis point rate hike. That would bring interest rates in the country to 6.25%. Meanwhile, China's November trade data is predicted to show a sharp drop in exports and imports. The trade balance in U.S. dollars is predicted to narrow to $78.1 billion, smaller than the previous month's $85.15 billion.

CURRENCY MARKET COMMENTARY

The rand strengthened yesterday, as clarity on the handling of "farmgate" scandal involving President Cyril Ramaphosa and better-than forecast third quarter growth figures brought back some risk appetite among investors. At the close, the rand traded at R17.38 against the dollar, 0.27% firmer. Meanwhile, the dollar crept higher today as top executives from the biggest U.S. banks warned of an impending recession, which dampened risk appetite and kept the greenback supported. The sterling, euro and Japanese yen all dropped against the dollar in early Asian trade this morning.

COMMODITIES MARKET COMMENTARY

Gold prices struggled for momentum today as investors looked to next week's U.S. Federal Reserve policy meeting for clues on the pace of rate hikes. Meanwhile, oil prices were mixed this morning after falling to their lowest settlement levels this year as economic uncertainty and the prospect of higher interest rates pressured prices. Oil prices have dropped by more than 1% for three straight sessions, giving up most of their gains for the year. Service-sector activity in China has hit a six-month low, and European economies have slowed due to the high cost of energy and rising interest rates.

LOCAL COMPANIES

Schroder European Real Estate Investment Trust Plc (SCZ) -4.8%

For the year ended 30 September 2022, the company reported Net Asset Value ("NAV") total return of 7.3% based on an IFRS profit of €13.9 million (30 September 2021: 3.2% /€6.2 million), driven primarily by valuation uplifts in the industrial and DIY portfolio, together with the German office portfolio. NAV totalled €188.2 million or 140.8 cps (30 September 2021: €199.5 million or 149.2 cps), reflecting the payment of the special dividends (excluding which the NAV would have been €201.0 million). Underlying EPRA earnings of €6.1 million (30 September 2021: €6.6 million) were reported, which will increase with the redeployment of Paris B-B sale proceeds and rental indexation. The company showed signs of a strong balance sheet with considerable cash reserves and investable firepower of circa €50 million including additional debt. They maintained a prudent gearing approach with a loan to value ("LTV") of 29% and 20% net of cash (30 September 2021: 16% net of cash / 28% gross of cash), considerably below target of 35%. The average cost of drawn debt (interest-only) is 1.9% while approximately 33% of the Company's debt expires in 2023 and they have had positive discussions with lenders regarding these loans with the Company expecting increased financing costs to be offset by rental indexation. Total direct portfolio valuation of €218.7 million, reflecting a like-for-like increase of 3%, or €7.6 million (€7.2 million net of capital expenditure and incentives). The company concluded 14 new leases and regears across the portfolio totalling 19,065 sqm at a weighted unexpired lease term of 6.1 years. 100% rent collection, excluding the Seville JV interest which has been written to nil.

Shoprite Holdings (SHP) +2.2%

The Shoprite Holdings will enter the clothing category in March in its latest incursion on adjacent categories to its core supermarket business. This move will put it squarely up against Pick n Pay, whose clothing business is one of its growth engines. Clothing will integrate into its existing supply chain, with the group leveraging its extensive buying capability. It used to stock clothing in its Checkers Hyper stores but removed this some time ago, barring some basics. The company feels clothing has been 'premiumised' and shoppers don't want to put a shirt they're buying "on top of their chicken" in a trolley. The group has not said whether its clothing unit will target the middle- to upper-income Checkers customer or the mass market Shoprite shopper. The margins are undoubtedly better in the 'Checkers segment' so this is more likely - and this is squarely the Pick n Pay Clothing target market. Plus, Shoprite probably doesn't want to get into a battle with Pep at the lower end. Clothing aside, the Shoprite group has already entered five adjacent categories in its Checkers business. LiquorShop, which spans both the Checkers and Shoprite brands, is the most successful and represents 7.2% of the group's SA supermarket business's sales. There are 570 LiquorShop stores across the country. There is clear long-term potential with Petshop Science - the group has already opened more than two dozen of these standalone pet stores, which offer premium pet food and accessories, and should have "about 50" by June. This diversification comes as the group has exited African markets which did not provide an adequate return, or where it had a sub-scale operation. It sold its business in Nigeria after being present in that market for 15 years, and shut units in Kenya, Uganda and Madagascar. Importantly, most of these adjacent categories offer far better margins than core grocery retail - particularly of commodity items and staples.

Eskom

Eskom's generation performance has been continually deteriorating for the last several years, which affects revenue and cashflow, while a resolution of its debt burden has still not been concluded. Until Eskom is on a sound financial footing, it lacks the funds to invest in maintenance and the expansion of generation and transmission capacity, at a time when the economy is being crippled by daily load shedding. The utility is currently surviving on regular government bailouts, which diverts public money needed for other urgent socioeconomic interventions. While Eskom's sales volumes have decreased in recent years, the utility's sales revenue continues to increase (2019/20: R199.5 billion; 2020/21: R204.3 billion), due to continued, above-inflation electricity tariff increases. Revenue in 2021/22 is expected to be higher still, as Eskom increased its average tariffs by 15.6% on 1 April 2021, while the economy continued to recover from Covid-19. Selected commodity prices also remained strong, benefiting Eskom's mining customers. However, in the longer term, Eskom's sales volumes and revenues are under threat, as more customers, including some of its largest energy intensive users, are supplementing their energy needs with renewables and other self-generation options, to ensure security of supply, contain costs and decarbonise their operations.

INTERNATIONAL COMPANIES

Paramount Global (PARA) -7.0%

Shares of Paramount Global fell about 7% on Tuesday after CEO Robert Bakish lowered expectations for the company's advertising sales during the fourth quarter. On Tuesday, he revised the company's previous forecast to down "a bit below" the third quarter, rather than in-line with prior results. The company sees fourth-quarter advertising revenue declining by a larger percentage than it did in the third quarter. Paramount's ad revenue fell 2% in the third quarter. In addition to its broadcast network and portfolio of cable-TV channels, Paramount's streaming service Paramount+ has an ad-supported tier. The company also owns the free, ad-supported streamer Pluto, which Bakish said was also feeling the pain of the tough ad market.

AutoZone (AZO) -2.8%

AutoZone yesterday reported net sales of $4.0 billion for its first quarter (12 weeks) ended November 19, 2022, an increase of 8.6% from the first quarter of fiscal 2022 (12 weeks). Domestic same store sales, or sales for stores open at least one year, increased 5.6% for the quarter. For the quarter, gross profit, as a percentage of sales, was 50.1%, a decrease of 242 basis points versus the prior year. The decrease in gross margin was driven by a 203-basis point ($81 million) non-cash LIFO charge driven primarily by rising freight costs, with the remaining deleverage primarily from accelerated growth in our Commercial business. Operating expenses, as a percentage of sales, were flat to last year at 31.9%. Operating profit decreased 4.2% to $723.0 million. Net income for the quarter decreased 2.9% over the same period last year to $539.3 million, while diluted earnings per share increased 6.9% to $27.45 from $25.69 in the year-ago quarter. The Company's inventory increased 17.6% over the same period last year, driven by inflation and our growth initiatives. Net inventory, defined as merchandise inventories less accounts payable, on a per store basis, was negative $249 thousand versus negative $207 thousand last year and negative $240 thousand last quarter. During the quarter ended November 19, 2022. Shares of AutoZone were down in morning trading yesterday.

Dave & Buster's Entertainment (PLAY) -2.8%

The Company is on pace to realize its previously disclosed annual synergy target of $25 million and has already implemented $17 million of annualized cost savings to date. Record third quarter revenue of $481.2 million increased 51.3% from the third quarter of 2021 and increased 60.7% from the third quarter of 2019. Including the pro forma contribution of Main Event in the third quarter of 2021 and 2019, this quarter's revenue grew 20.6% and 32.5%, respectively. Pro forma combined comparable store sales (including Main Event branded stores) increased 13.3% compared with the same period in 2021 and 17.5% compared with the same period in 2019. Net income totalled $1.9 million, or 4 cents per diluted share, compared with net income of $10.6 million, or 21 cents per diluted share in the third quarter of 2021 and net income of $0.5 million, or 2 cents per diluted share in the third quarter of 2019. Record third quarter Adjusted EBITDA of $90.0 million increased 31.9% from the third quarter of 2021 and increased 94.4% from the third quarter of 2019. Including the pro forma contribution of Main Event in the third quarter of 2021 and 2019, this quarter's Adjusted EBITDA grew 15.0% and 88.4%, respectively.

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