Rights Issue on the Horizon? It's time to Short TFG!
If you have ventured to your local shopping mall you will see one of the most important elements missing… Shoppers. Shopping malls resemble ghost towns more than anything else. And that isn't going to change anytime soon as consumers are still under financial pressure, don't want to be in busy places and are trying to move to more online shopping.
The shift to online shopping is something most retailers have had on the back burner, so their systems, infrastructure and marketing are not up to scratch. And so, sales through online channels is a small portion of most retailer's revenue, especially clothing retailers.
One of the clothing retailers that will remain under pressure is TFG (The Foschini Group), its results to March 2020 were okay, but they haven't provided much information on trading during lockdown and how it will impact the business going forward.
What we do know is…
Rightsizing TFG will impact the profitability further
Management have indicated the following:
1. They have suspended the final dividend,
2. indicated a rights issue is on the cards. The rights issue will be a little less than 25% of their current market capitalization,
3. implemented cost saving initiatives like extending payment terms, delaying or cancelling orders, and squeezing landlords on rentals.
4. Only 8.4% of turnover was online shopping pre-lock down.
Better Retail investment opportunities out there
The above reduce the attractiveness of TFG as an investment and part of a portfolio, We expect some investors to sell out of TFG and buy into other retailers that have lower debt, bigger footprint and appeal more to the younger more tech-savvy consumer.
That’s why we believe now is the time to short TFG. Its price action is building a longer-term sideways channel between R80 and R63, we expect it to test the support at R63 in the weeks ahead as the rights issue is announced.
Short TFG above R75.00 for a move to R63.50.
Ensure you don’t trade too big, rather take half a position now and add to it if it moves towards the upper trading level of R80. With a stop loss at R80.50.
See you next week.
Contributing Editor, Money Morning