Bottom Line: Shoprite at a price

WHY WOULD a company on a prospective multiple of 29.5 and a yield of 1.7 per cent issue preference shares on a gross yield of 9.84 per cent? Deryck Nicholson, chairman of Shoprite, and his brother Ian, deputy managing director, believe that is a price worth paying for keeping their stake in the company above 50 per cent.

That is bad news for other investors because Shoprite's shares are well worth having. In the three years since it expanded into Scotland from its native Isle of Man, the shares have risen sevenfold against the market, and more than 10 times faster than other food retailers.

Pre-tax profits have soared from pounds 1.1m to a forecast pounds 9.2m this year. If the aim of trebling the number of stores to 200 over the next two years succeeds, there should be plenty more growth to come.

Shoprite's formula is simple: it aims to offer shoppers the lowest prices in Britain. That means a low gross margin - analysts estimate that it is less than half the 25 per cent achieved by more upmarket rivals - but it keeps the customers rolling in.

A limited range and a no-frills approach to store decor and display allow it to make a respectable return. The 4.8 per cent operating margin earned last year may be just two-thirds that of Tesco and Sainsbury, but it was ahead of the 4.1 per cent achieved by Asda.

There are risks. Fast-expanding companies can veer out of control, while other discounters, like Kwik Save and Aldi, are starting to expand in Scotland.

But Shoprite has managed its rapid growth well so far. The Nicholsons clearly believe there is much more growth to come. Other investors have to hope that they will eventually enjoy a share of it.

(Graph omitted)