Institutions take to cash retailers

Posted On Friday, 05 October 2001 03:01 Published by
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Credit expensive to administer and AIDS' effect on payments causes concern

Institutions take to cash retailers. BD 5 Oct 2001

Credit expensive to administer and AIDS' effect on payments causes concern

RETAILERS that generate strong cash flows have begun to attract institutional interest, even though many are small-cap companies.

Big cash retailers like Massmart and Pick 'n Pay have always been favoured more than those that sell on credit.

Now smaller companies ranging from luxury lifestyle chain Wetherlys to ceramic tile store, TileAfrika say that institutions have started to look more closely look at them.

With credit sales expensive to administer and credit retail business models hard to assess investors have traditionally tended to prefer cash retailers.

Wetherlys finance director David Jacobson said a renewed interest in small-cap companies was reason why investors were looking at cash retailers. Wetherlys thought retailing bottomed late last year, and expected good growth in a few years.

Standard Equities retail analyst Evan Walker said concern about how AIDS deaths would affect payments to credit retailers tended to benefit perceptions of cash retailers. Walker said he believed there was a lot more cash in the lower end of the retail market than most thought.

Cash being generated in the informal sector in combination with the R17bn paid out by micolenders was driving cash sales.

Consumers were averse to buying on credit, as they remembered how steep interest rate hikes a few years ago hit them.

Tighter credit scouring techniques by credit retailers in the face of higher bad debts also had a negative effect on credit sales.

Walker said interest-rate rises helped cash-only clothing retailers like Mr Price. Customers who previously did not shop there started to buy cheaper goods for cash at Mr Price stores.

Cash sales remained high at 76,2% of total sales for July.

It was easy to see why cash retailers attracted investors. Strong cash inflows mean balance sheets are healthy as gearing is reduced.

Strong cash reserves mean firms can expand rapidly without increasing their borrowings.

Pick 'n Pay could afford to pay R500m for Australian subsidiary Franklins from its R1bn in cash. CEO Sean summers likes to make the point that his group earns a lot of bank interest on its cash.

TileAfrika did not expect the 30 stores it planned to open in the next three years to have any longterm affect on gearing.

Smaller cash retailers were pleased by institutional interest shown, but many are tightly held, making trading in them difficult.

TileAfrika MD Sam Rego said he could make the shares in his company more liquid by selling some of those he held, but share liquidity was not a priority now.

Publisher: Business Day
Source: Business Day

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