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.

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