Picking up a bargain in the cut-price shops

I had intended to recommend a further share for your China pot, but that will have to wait until next week. On 23 June, Shoprite will be announcing its interim results, which I hope will be excellent. I want to tell you about the company beforehand.

Supermarkets such as Argyll's Safeway, Tesco and Asda try in their various ways to emulate the market leader, Sainsbury. They offer a high quality shopping experience, attractive premises in prime locations, a great variety of well displayed products and helpful staff.

At the lower end of the scale are the discounters such as Shoprite, which offer a limited line of products, sometimes left in cardboard boxes, in smaller and not such attractive or well located premises serviced by comparatively limited staff. As Shoprite says, 'We cut the frills to pay your bills.'

My elder son lives in Edinburgh, where Sainsbury is about to open a big new store, Safeway and Asda have been expanding and Shoprite has been operating for some time. On 5 June, my son checked a representative spectrum of product prices, to find that Shoprite was more than 7.5 per cent cheaper than Safeway, Asda and Sainsbury's Savacentre. The most striking examples were: two litres of Coca-Cola for 85p, instead of 99p at Asda; and Kellogg's Variety Pack for 117p, against Safeway's and Savacentre's 149p.

All the supermarkets and discounters are spending vast sums of money opening new branches throughout the UK and all of them are hoping for increased profits as a result.

It is interesting, therefore, to have a closer look at The Estimate Directory for May, which used 1 May share prices, to ascertain the prospective p/e ratios of all the supermarkets based on brokers' consensus forecasts.

In addition, I have shown the consensus growth rate forecasts and calculated the PEG factors (p/e ratios divided by growth rates) to determine how much the investor has to pay for the future growth of each company (see table).

Sainsbury is, deservedly, the highest rated with the most expensive PEG factor of 1.2. Tesco and Argyll are not far behind. However, the company that stands out is Shoprite with a PEG of only 0.3.

I like bargain shopping too, so I much prefer to buy Shoprite's future growth of more than 50 per cent per annum on a future multiple of 16, instead of Sainsbury's growth of only 12 per cent on a multiple of 14.3.

Shoprite has experienced management in the form of the Nicholson family, who own more than 53 per cent of the company. The father of Deryck Nicholson, the chairman and managing director, was the co-founder of Kwik Save.

Shoprite has an established reputation in Scotland and an attractive formula to clone. It often shares premises with Iceland Frozen Foods and lets consessions to greengrocers and butchers and other complementary retailers. It has aggressive plans for opening many more stores in Scotland, which will increase its buying power, enabling it to continue to undercut the opposition and further boost both turnover and profits.

In the year to October 1993, the brokers' consensus forecast is for Shoprite's earnings per share to grow by 53 per cent and in 1994 for growth of a further 52 per cent. At the present price of 140p, the company's market capitalisation is about pounds 104m and the prospective p/e ratio for 1993/4 is around 16.

Some investors might worry about the damage that the expansion of Sainsbury and other supermarket chains in Scotland could do to Shoprite's business.

However, many shoppers in Scotland are governed by tight budgets and cannot afford to add 7.5 per cent or more to their weekly food bills for necessities, just for the pleasure of shopping in a well-lit store with a vast array of well-displayed products. In my view, the main national supermarkets have far more to fear if Shoprite decides to head south.

Shoprite shares are not for the faint of heart, but in my view, the risks are in the price, which seems to me to be an outstanding shopping bargain.

Next week, another Hong Kong share for your China pot.

----------------------------------------------------------------- SUPERMARKET CHECKOUT ----------------------------------------------------------------- Company Year ending Prospective Future PEG p/e ratio growth rate Asda 4/94 15.3 16 0.9 Argyll 3/94 11.0 11 1.0 Budgens 4/94 12.7 16 0.8 Kwik Save 8/94 12.6 12 1.0 Wm Low 8/94 7.7 8 1.0 Wm Morrison 1/95 14.9 19 0.8 Sainsbury 3/94 14.3 12 1.2 Shoprite 10/94 16.1 52 0.3 Tesco 2/95 9.0 8 1.1 -----------------------------------------------------------------

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.

(Graph omitted)