In June the retail group announced that it was looking to reduce its 55 per cent stake in RCS through a sale of a separate listing.
“I don’t think this is a trend that’s all that new, if one looks at Edcon and Woolworths. We’ve seen the impact on Woolworths, it just makes the balance sheet a lot cleaner and they don’t have to be as geared,” Gryphon AM portfolio Manager Reuben Beelders told CNBC Africa.
“Investors are effectively looking at two different balance sheets, the one related to the retail business, the other related to recollection of the debt associated with that retail business, but I certainly think that in the case of Woolworths, it led to a re-rating. Investors like clarity that it provided and one could get an indication of the actual ROE that the retail business in isolation generated.”
Beelders however explains that selling in the current economic climate might not be beneficial, especially as concerns heighten over the local unsecured lending space. It has nonetheless been declared a positive strategic move.
“It’s obviously going to depend on the price that they realise, I think it was fairly common knowledge last year that they were trying to list this company, it didn’t succeed in getting that right so if they get a good price, I think it’ll be positive,” Beelders explained.
Capital requirements for companies with consumer financial units become quite high as the unit gains more debtors. Beelders expects that the cost of interest is set to increase over time, making it prohibitively more expensive to hold all the debts.
“We’ve been cautious on the retailers, we thought towards the end of last year that they were very overbought. They have come back quite dramatically and we probably see some value there now but I would buy only on a short term bound, so I don’t think long term that retailers are going to be in a good space for the next year or two,” he said.