Thinking of investing in Pick ‘n Pay? Or unloading it from your share portfolio? Cor van Deventer of Seed Investments has put together this general primer for stock market investors who have their eye on this household name. Cor reckons that, with a new CEO at the helm, things should be looking up for the supermarket chain.
However, not everyone is impressed with the retailer. As revealed on Biznewz.com earlier this week, Pick ‘n Pay has done some interesting tinkering to its financial reporting parameters. So, after you have read Cor’s piece, do take a look what the investment professionals at Cadence Capital make of the retailer’s way of doing things. Here’s the piece: Cadence v Pick ‘n Pay debate: Retailer ignored matching principle to artifically boost profit number. – JC
By Cor van Deventer
Pick ‘n Pay Stores Limited has been a household name in South Africa for over 40 years, and the family supermarket chain is synonymous with the Ackerman family and value for money. Although the share price has lagged competitors of late, Pick ‘n Pay remains one of the leading retailers in South Africa and remains positioned for growth under new CEO Richard Brasher of Tesco fame.
History
The Pick ‘n Pay empire was born in 1967, when Raymond Ackerman purchased four small stores in Cape Town. The company was listed in 1968, and the share price rocketed from R1.00 to R6.50 and turnover increased to R5m in the first year of trading. In 1970 Pick ‘n Pay entered the Financial Mail Top 100 companies, and opened SA’s first hypermarket in 1975. The company’s No Name brand was launched in 1976 and R1 billion annual turnover was reached in 1983.
In 2001 the chain entered the digital age with the introduction of online shopping, a division that has grown
into one of SA’s top online businesses and the first to offer 1 hour delivery slots for groceries.
Recent Results
The results for the 2013 financial year were disappointing, and management described it as one of the toughest operating years yet and admitted that a turnaround strategy was in order. Turnover increased by only 6.3% due to depressed economic growth and high levels of household cost inflation, and the trading margin decreased to a thin 1.4%. Management pointed out that investments made in distribution centres and services improvements have not yet started to pay off.
The market held its breath when Pick ‘n Pay released its results for 26 weeks ended 1 September this week, and was clearly surprised on the upside judging by the share price jumping up 7.8% on the day.
| 26 weeks ended 1 Sept 2013 | 26 weeks ended 2 Sept 2012 | Comparable 26 weeks period % change | % change on prior year as published | |
|---|---|---|---|---|
| Till sales | R35.0bn | R32.3bn | 8.1 | 6.9 |
| Turnover | R30.1bn | R28.0bn | 7.5 | 6.2 |
| Gross margin | 18.1% | 17.7% | ||
| Trading profit | R318m | R236m | 34.8 | 15.2 |
| Trading margin | 1.1% | 0.9% | ||
| EBITDA | R811m | R697m | 16.2 | 9.9 |
| HEPS | 40.81 cents | 30.06 cents | 35.8 | 13.6 |
| DPS | 14.80 cents | 14.75 cents | 0.3 |
Group till sales, including owned and franchised stores, was up 8.1% in a very competitive market, and turnover increased by 7.5% to R30.5bn. This enabled the group to grow headline earnings per share by 35.8%. Internal food inflation was kept to 4.2%, compared to CPI food inflation of 6.4%.
The gross profit margin improved slightly to 18.1%, and the trading margin of 1.1% was a 0.2% improvement over the comparable period last year. Trading expenses increased by 9.4% due to labour costs, increased occupancy costs and customers paying via debit and credit cards instead of cash.
Customer growth stood at 3.3%, a welcome sign that P n P is at least not losing any more customers to competitors.
The graph illustrates that P n P is stemming market share losses, with the gap in year-on-year growth closing down significantly over the last year.
The group opened 38 new stores in SA during the reporting period, as well as 6 stores across Zambia, Mozambique, Namibia, and Zimbabwe. More than 1,000 stores, of which 60% are owned outright and 40% franchised, are now operated in 8 countries.
The operations in Africa showed an increase in revenue of 32.8% to R1.6bn for the 100 stores operated. A trading margin of 4.1% was achieved, demonstrating the immense growth potential from Pick ‘n Pay’s potential expansion in these regions.
Current valuation and future prospects
The company currently trades at a high PE of 38 and a dividend yield of about 2%, similar metrics to competitors in the retail sector – albeit off a depressed earnings base. Management has already made significant progress in a short time in improving efficiencies and management performance and accountability. Management aims to strengthen the core SA business first, before establishing the rest of Africa as a second growth engine, and only time will tell if the likes of Shoprite can be beaten in Africa.
Note: Pick ‘n Pay forms part of the share selection universe for the Seed Equity Fund, and is also held in the Seed Flexible Fund by one of our equity managers.
* Cor van Deventer graduated from the University of Stellenbosch at the end of 2009 – Actuarial Science; B.Com (Hons) – and is currently completing his final actuarial exams. He spends most of his time producing investment policy statements for institutional clients and developing software systems for research and reporting purposes. Cor also assists with research on investment opportunities for Seed’s share portfolio.
