SA's food retail stocks are 'overvalued'

Visser said that the high valuation multiples for companies like Massmart, Shoprite, Pick n Pay and Spar meant that in some cases they were priced for exceptional outcomes and, overall, offered average prospects for investors.

"These are some of the best businesses to be found and can create enormous value when they grow - with high returns on capital and good management teams they deserve to trade on high multiples.

"But, even though companies like Spar and Pick n Pay have come back from their recent highs and now seem to be offering some value, the margin of safety is small compared with certain global opportunities in the same sector," he said.

Visser added that Shoprite was trading at peak operating margins with a price/earnings (P/E) ratio in excess of 20 times, which was not attractive, while Massmart's valuation was stretched at 24 times earnings, assisted by Wal-Mart's 51% acquisition of the company.

Global retailers such as Wal-Mart and Family Mart are operating at historically low operating margins and trading on attractive valuation multiples, Visser noted.

"Wal-Mart has a proven business model with a strong competitive advantage. In contrast to Massmart, it's trading at a very attractive P/E ratio of close to 12 times and this on low earnings. The risk of loss is very low, while the upside potential is more than acceptable," he said.

A further indication that Wal-Mart shares are at attractive levels is the fact that the Walton family, which founded the retailer, has been steadily increasing its stake in the company to 48%.

Family Mart, a Japanese food retailer, also offers an attractive risk return profile for investors - with a P/E ratio of 15, making it cheaply priced relative to its intrinsic value.

Visser said that where the company's clients had allowed, RE:CM had changed the mandates on their funds to be more flexible, and so for the most part, they searched for undervalued ideas in a wider global investment universe.

"The objective is to hold the cheapest combination of good-quality assets, selecting from a wide opportunity set, as opposed to owning potentially overvalued shares simply because it forms part of the local index," he said.

RE:CM does, however, retain a shareholding in Pick n Pay.