Cadence Capital is concerned that Pick n Pay is trying to paint too optimistic a picture with its claim of a 35% pro-forma profit improvement in financials released today. The firm maintains a two day difference in the trading period has been manipulated to produce an artificial boost – and wonders whether this was by accident or design. The note, with detailed calculations, is republished below. As does a response from Pick n Pay’s financial director Bakar Jakoet who says Cadence is welcome to call him to talk it over. That is sure to be an interesting conversation. We look forward to the follow up. For now, though, you be the judge of whether Cadence or Pick n Pay has it right. – AH
This note was issued today by Cadence Capital:
There is a fundamental flaw in Pick n Pay’s interim financial results reported today. Is this is by design or by default??
Management have used a 182 day current year reporting period vs. a 184 day prior year reporting period to conceal a very poor trading performance.
Comprehensive income for their latest interim financial period ending September 1st 2013 is R192.6 million vs R182.0 million in 2012. This is a 5.8% increase in their bottom line which is used for calculating HEPS. However by adjusting and reducing the prior period by 2 days from 184 days to 182 days they have incorrectly arrived at a 35% increase in their bottom line.
How have they done this?
When adjusting the prior period by two days they have incorrectly reduced Gross Profit and not Net Profit. They have reduced Gross Profit of R4,995.2 million by 2/184 days = R54.2 million. To this figure they have applied a 28% tax rate to arrive at R39 million.
They have then deducted these two days of Gross Profit from their bottom line to arrive at an adjusted R143 million bottom line for 2012. They now compare R143 million to their 2013 bottom line of R192.6 million and incorrectly announce that pro-forma like for like comprehensive income has increased by 35%.
What Pick n Pay should have done was adjust the Net Profit by two days (i.e. R182m x 2/184 days which is R2 million). By deducting R2 million from R182 million this will result in R180 million when compared to 2013 bottom line of R192.6 million. An improvement of only 7%.
The true reality is that Pick n Pay has increased profits marginally by 7% on a like for like period, but whether by design or by default is misleading investors with the announcement of a 35% increase in pro-forma bottom line and HEPS.
In fact the South African share of profits as reported in their latest interim financial period was R206.7 million vs. R212.1 million in 2012. Even adjusting the South African operations by two days will not conceal the fact that South African segment profits are down for the year.
Pick n Pay’s financial director Bakar Jakoet responds:
In order to ensure comparability when reviewing the PnP Group interim result for the 26 weeks ended 1 September 2013 the following needs to be taken into account:
1. The current reporting period, H1 of FY2013/14, consists of 182 days of trading result (gross profit) and 6 months’ worth of trading expenses
2. The published result for H1 FY2012/13 consisted of 184 days of trading result (gross profit) and 6 months’ worth of trading expenses
The following adjustments were therefor made to assist with like for like comparison
1. Gross profit of R4.96 bn (17.7% of turnover) was presented as a comparable number against the achieved gross profit of R5.47 bn (18.1% of turnover)
2. The adjustment of R40m to the comparable gross profit (R5.0 bn as published last year vs the R4.96 bn presented as pro forma comparison this year) relates to the trading result for the 2 additional trading days as well as directly attributable expenses in gross profit
3. No adjustment was needed on trading expenses as these items have not been affected by reporting calendar change
In summary, in both periods we have accounted for a full six months’ worth of expenditure, but in the current reporting period we are 2 days short on gross profit. In order to ensure comparability we have reduced the comparable gross profit with the R40 m gross profit relating to the two additional trading days.
