Pairs trade: Buy shoprite and sell Massmart - Investec trade flash: (26 Jan 2011 14:05) - Buy Shoprite (9292c) and sell Massmart (14655c): Better recovery potential Recent sharp relative price movements in Shoprite have given rise to what we believe is a trading opportunity in Massmart and Shoprite. Massmart shareholders have recently approved the acquisition by Walmart of a 51% stake in Massmart for R148/share; this clearly provides a floor for the Massmart share price and has seen its stock hold up very well in the recent retail sell-off. At the same time, Shoprite - widely regarded as the other contender for a Walmart deal - has fallen by 15% from its peak levels. Prior to the announcement of the Massmart/Walmart deal, these two companies' shares traded in virtual lockstep for some time. We believe it is a fairly low risk trade to purchase Shoprite at current levels and short (or sell) Massmart as a pair trade. From a rating perspective, we believe Massmart is fully discounting its potential earnings recovery (which we believe will be material at about 30% for two years) at a 12-month rolling PE of 17x. By comparison, while Shoprite's 12-month forward PE of 16x is not materially lower, it does incorporate much lower projected earnings growth. In addition, should food inflation surprise materially on the upside (there is a good chance of this), Shoprite operationally would benefit far more than Massmart, given its core food focus. The risk to this trade is that Shoprite's share price falls a few more percent on "negative momentum" while Massmart continues to benefit from the deal underpin, but this would make the relative trade more compelling. To read the full story please log on to -
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