Spar CEO Reeza Isaacs is understandably miffed. Hardly a week goes by that he doesn’t have to bat off some or other seemingly existential query from the media. For the most part he does it with good grace although it’s obviously a distraction from getting on with the urgent task of putting the group back on an even keel.
Unfortunately for Isaacs who’s been in the top job a mere four months, it comes with the territory. And it’s pretty grim territory, pockmarked with treacherous pitfalls. It’s not just a matter of the grimness; it’s the fact investors are looking so closely – as you might with someone in ICU – fearful that even the slightest mishap could be fatal.
This time round, investors appear to be more than a little nervy about Spar’s cash position and relationship with its bankers; the fears may explain a week-long, 11% dive in the group’s share price, which closed on Friday at a 15-year low of R45.78.
Yet Isaacs assures Currency there are no funding concerns and that the group’s banks are, in fact, firmly behind them. “We have a good, open and transparent relationship with our banks,” he said this weekend. He acknowledged that the banks are looking closely at the retailer’s interest cover but said that its covenant had been met in March. However, “come September, we might have to look at it.”
Non-committal
As for what might have caused the latest share price plunge, Isaacs was non-committal, saying he didn’t follow the share price. Which is quite a statement given that Spar has lost 75% of its value over just five years, while a share price of R45.78 gives it a market cap of only R8.8bn.
Protea Capital Management’s Jean Pierre Verster believes that while there may be no solvency issues at Spar, there could be month-end liquidity strains. “The problem for retailers is that their cash flow is very cyclical and in Spar’s case the working capital cycle is very short but very deep,” he tells Currency.
It means that in the days between paying suppliers and receiving payment from its independent retailers, Spar could be heavily overdrawn. “But the situation gets reversed very soon,” says Verster.
Unless, as happened with Pick n Pay, its deep working capital cycle combines with operating losses, which would almost certainly force it into a rights issue. This, clearly, has the market freshly spooked.
Spar has essentially been hospitalized for over three years and, while it’s endured several extensive life-saving procedures, there’s still no certainty about its long-term survival. As far as investors are concerned the company will probably need at least 18 months of consecutive good – not necessarily joyous – results uncluttered by any signs of frailty.
Deteriorating cashflow
Surprisingly, Spar’s shares seemed to stabilize after the release of its interim results on June 10, notwithstanding the distinct lack of good news in the figures. Not only was Spar battling continued mismanagement at its KwaZulu-Natal distribution centre and a bungled Black Friday promotional campaign, but its cashflows were clearly deteriorating, too.
Cash and cash-equivalents at the end of March had dropped to R1bn from R2.3bn a year before, and although long-term borrowings were down marginally (to R6.4bn from R6.5bn) the bank overdraft had more than doubled to R1.4bn from R680m the previous March. The tight end-March situation was certainly aggravated by the almost doubling in credit-loss provisions for its independent retailers in South Africa.
Investors initially seemed to take it in their stride; a week later they appeared to be having second thoughts.
One analyst note pointed to the problem: “the company’s interest payments are not well covered by earnings”. Net interest cover is just 3 times which, the note said, was considered a major risk. “If the company is unable to fund interest repayments on its debt through profits, it may be forced into reducing its debt burden through selling assets, undertaking a potentially costly capital raising…”
Yet in its results presentation, the message from management was that adequate funding headroom exists and “organic” levers (presumably asset sales) had not yet been deployed. Recovery would generate the cash internally, assured Spar, noting that a rights issue at the current share price would destroy value and was not required.
Still, there is an additional problem lurking on the horizon.
The Giannacopoulos Family is set to file an amended damages claim against Spar relating to its attempt to grab ownership of some of the Family’s 45 Spar outlets back in 2019. The amendment is expected to involve a hefty increase in the original R2.1bn in damages the Giannacopoulos Family is seeking. As it is, Spar has made no provision for the R2.1bn claim, but says in a contingent liability note in its financial statements that it does not recognize any liability for damages, based on legal opinion.
All-in-all fraught territory for Isaacs.
Top image collage: Rawpixel; emojipedia.org; Currency.
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