BizNews Investment Voice: Pepkor - The pressure cooker waiting to pop

Key topics:.Pepkor fintech revenues surge, driving higher margins Pepkor Credit, insurance and banking deepen customer lock-in Economic tailwinds could trigger a rerating beyond retail.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..BizNews Reporter.Its retail + credit + fintech ecosystem with economic tailwinds deepens customer lock-in and generates higher-margin, recurring income beyond retail.The Pressure: GrowthThe Heat: FinTech and credit increasing pressure at rapid paceThe Pot: Retail holding the mass-marketThe Lid: Economic tailwinds that creates the “airtight environment”.1) THE HEAT JUST GOT HOTTER - FinTechOver R30Bn in revenue from Fintech alone by the end of 2030, implying an increase of >100% from today’s revenue - Is it possible?In the most recent results, Fintech revenue surged +31%, now contributing 17% of total revenue. But the real story is in the margins. Operating margin expanded by +180 basis points to 13%, proving that this growth is profitable.Look beneath the pot, and you find segments growing aggresively:• Foneyam (Phone Rentals): Revenue rocketed 375%, from R400m to R1.9bn in a single year.• Abacus (Insurance): Grew 78.4%. Crucially these are high-margin revenues, with operating margins hitting 26% and 22% respectively..Owning the rails – CloudbadgerAcquiring Cloudbadger and securing banking approval enables Pepkor to leverage its vast retail footprint into banking.The market is seeing this as “just another retailer trying to become a bank” but I disagree – I see it as turning up the gas on a FinTech business that is already growing rapidly:• Zero CAC: Traditional banks spend billions on marketing. Pepkor has millions of customers walking through their doors. Their Customer Acquisition Cost is effectively zero – the risk is in bad debts. • Cross Selling: Once they have a customer embedded in their banking service, it is easy and cheap to convert them into additional revenue through cross-selling• Revenue Unlock: They have 32.5M identifiable customers in their fintech business. For example, if they convert 5% to a primary banking account generating R50/month in fees/data/lending etc it will add R1bn in extra revenue..The "Optical Illusion": Margin Expansion My final point is that the FinTech’s operating profit margin seems ‘artificially low’. A 13.0% margin for a FinTech business, when selling t-shirts (CGM) earns 12.3%.Here’s why: Pepkor’s Fintech division is two businesses in one, and understanding the split is the key to unlocking the value:1. Flash: This is a high-volume, low-margin business (9% operating margin). It currently makes up 55% of the revenue, which drags the average margin down.2. Financial Services: This includes Foneyam, Abacus, lending etc. These are high-margin products (20-30%) that drop pure profit to the bottom line..Here is the signal the market is missing: The highmargin financial services are outpacing Flash. While Flash grew revenue at a respectable +13.7%, financial services exploded by +61.4%.This is a mathematical inevitability: As the high-margin financial services segment becomes a larger slice of the pie (it already contributes 62% of the operating profit despite being less than half the revenue), the overall FinTech margin must expand.My point is that we are watching a shift in real-time. Management is aggressively feeding the high-margin segments (Cloudbadger, Foneyam, Abacus). As we move towards financial services, that 13% margin will drift toward 15%-20%.When that happens, the market can no longer price Pepkor as a retailer selling cheap clothes. .2) THE POT JUST GOT BIGGER & BETTER – Acquisition of Shoprite’s Furniture BusinessPepkor’s acquisition of Shoprite’s OK Furniture and House & Home for R3.2B is expected to add R7.5B in revenue (+7.9%) and R536M in operating profit (+5%) … but this is not the true opportunity.The synergy buffer:- Merging Supply Chains: Pepkor already owns Russells, Bradlows, Sleepmasters, and Incredible Connection. Adding 400 ‘OK Furniture’ stores to this network creates operating leverage.- Credit Book: Deploying Pepkors ‘Tenacity’ model can lift Shoprite’s 15% credit mix to Pepkor’s 20-25% standard.- Margins expand from Shoprite’s current low base (5.9% trading margin) closer to Pepkor's lifestyle division standards..Competitors know this. Lewis Group’s aggressive litigation to block the deal confirms the competitive advantage Pepkor gains here and the strategic threat is real.Risk: The Constitutional Court ruled Lewis Group can intervene in the deal - risking a costly, prolonged legal battle that distracts management..Pepkor’s List of Value Creation.3) IS THE LID GETTING TIGHTER OR LOOSER?Is there an economic tailwind that will tighten our lid, or a headwind that will loosen it? I believe 2026 will bring us a tailwind:• Stronger Rand• Lower Fuel Prices• Lower Inflation Target• Interest Rate Cuts• GNU Dividend: Government stabilityAt a macro level, these factors lower bond yields and improve South Africa’s risk premium. We are already seeing foreign inflows into bonds, but not yet equities. Pepkor is well positioned to benefit when equity flows follow - particularly as peers like Mr Price, Truworths and TFG continue to struggle.At a micro level, these same dynamics directly support Pepkor’s customer base. The increase in disposable income, while cheaper credit improves affordability and supports growth in the loan book. This creates a favourable backdrop for both retail volumes and FinTech growth.Going forwardThere are execution risks and challenges that Pepkor will face, and I don’t expect the stock to rerate higher tomorrow – things take time. I am looking into the future and see multiple growth drivers for Pepkor (I never even got to their Brazilian ‘Avenidas’) building that the market is not piecing together.

BizNews Investment Voice: Pepkor - The pressure cooker waiting to pop

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