Expensive leader of the pack
IT’S A BIT puzzling Pick n Pay is currently the most expensive stock of all South Africa’s top four food retailers on the JSE. Recent performance by the company doesn’t justify its valuation of 23,3 times its earnings multiple. Its closest rival – Shoprite – trades at a forward earnings multiple of 20,8 times. That’s also expensive. Franchise group Spar is also not far off the mark, with its forward earnings multiple at 17,8 times.
In general SA’s food retailers are a bit overpriced. But it’s particularly interesting to see Pick n Pay leading the pack, given it’s the most underperforming food retailer. In fact, the group has woefully lagged all its major peers over the past couple of years. Thus you’d generally also expect the share to be cheaper to buy. Even more so, the company’s 2011 financial year is unlikely to be anything but astonishing. The prevailing low food inflation creates anxieties, especially viewed against a rising cost base.
But investors seem to be projecting ahead. They seem willing to sacrifice shortterm uncertainties in the hope of great future earnings. Analysts polled by McGregor BFA expect Pick n Pay to grow its 4,2% earnings yield to 6,9% over the next three years. Dividend yield is expected to rise from 3,6% to 5,5% over the same period.
Part of Pick n Pay’s lagging of its competitors is its delayed rollout of SAP and building distribution centres, which is now being corrected, with a sense of urgency written all over the company’s management team. And while there remain questions about the group’s long-awaited pulling out of Australia, via selling Franklins to Australia’s Metcash, at least the group is now committed to accelerating in Africa.
All of these factors should ideally provide for a great investment case in Pick n Pay for long-term investors. But the 23 plus earnings multiple is a bit of a turn off. The reality is that other defensive stocks could be bought at much less undemanding earnings multiples. Nevertheless, the share is worth holding onto if you want to be part of its growth story.