Shoprite CEO Pieter Engelbrecht
  • Using his own money, Shoprite's CEO Pieter Engelbrecht bought a large number of contracts for difference worth R20 million.
  • Engelbrecht will coin it if the retailer's share price moves higher. 
  • But in the initial stage of this position, Engelbrecht has lost a lot of money. 
  • For more stories, go to Business Insider South Africa.

This week, Shoprite’s CEO took a massive bet that the company’s share price will move higher – but so far he has lost money. 

Pieter Engelbrecht bought 11,000 Exchange-Traded Contracts for Difference (eCFDs) on Wednesday and another 104,000 on Thursday. Together, the transactions represent R20.2 million in Shoprite shares.

What is a contract for difference?

A CFD exactly tracks the price of a share and allows you to take a bet on its direction. 

If you buy a CFD at R10 and sell at R15 then you will receive the R5 difference. But if you buy at R10 and sell at R5 then you pay the R5 difference.

Take this example: Say a share is trading at R10, and you think it will increase. You buy 1,000 CFDs which are equal to 1,000 shares. The total value is R10,000 - but you only have to put down a 10% deposit for the CFDs: R1,000.

In a month's time, the share is trading at R15. If you sell your CFDs now, you are entitled to the difference between the price at which you bought (R10) and the price at which it is trading now (R15).

You have made R5,000 - with only a R1,000 investment.

But there is great danger if the share price moves against you. Many people have been wiped out.

If the share halves from R10 to R5, you need to pay the difference: R5,000. And you can’t wait for the share price to recover. Usually there is a daily margin call - an urgent call from your broker to pay the difference if you are on the losing side.

A CFD is usually a contract between two parties. An eCFD is a CFD that is listed on the JSE – you can buy it and sell like normal shares.

Engelbrecht used his own money for these transactions, which burnt him within hours.

On Wednesday, Shoprite’s share price tanked by 6% after HSBC downgraded its view on the retailer from “hold” to “reduce”. This means the investment bank believes investors should be selling the share.

Shoprite has been losing market share in South Africa in recent months amid distribution problems, which may have encouraged some shoppers (specifically at Checkers) to go to Pick n Pay instead.

See also: Pick n Pay’s price cuts are paying off: it is stealing customers from Shoprite and Checkers

Shoprite only managed half-year sales growth in South Africa of 2.5%, while Pick n Pay grew sales by more than 7% over the past year.

Margin call

On average, Engelbrecht paid R175.88 per share for Tuesday’s transaction, and R177.83 on Wednesday.

On Wednesday, the share closed around R167.

That meant Engelbrecht probably had to pay almost R1 million in a single day as a margin call, estimates JC Louw, CEO of the investment information and trading platform Sharenet.

“It had to hurt. Why directors dabble in short-term investments like CFDs is beyond me,” Louw said.

See also: More Checkers stores are being radically transformed – to include coffee stations and ‘wine cellars’

In theory, Engelbrecht’s bet on Shoprite should inspire confidence in other investors. It’s the ultimate informed insider view, right?

But Louw says that this is not always the case. “A director has to get approval from the board and other parties before he’s allowed to trade – that process could take a long time. This week’s transaction may not be his current view.”

Engelbrecht can sell the contracts at any time, and Louw believes that the official expiry date for the contracts is in March next year.

Fortunately for Engelbrecht, Shoprite’s share price did bounce higher on Thursday, and closed at R174.27 – which is still below the price he paid for the CFDs.

The Wiese Way

Shoprite chair Christo Wiese also liked to buy geared instruments, and aggressively acquired similar contracts for many years. In a single day in 2015, for example, Wiese bought contracts for almost R1 billion in Shoprite shares.

He also bought millions of Steinhoff contracts right up until November 2017 – this came back to bite him, and contributed to the R50 billion Wiese lost when the company imploded weeks later.

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