Retailer shares somewhat overvalued, say analysts

FRESHING UP: A customer checks produce at a Pick n Pay outlet. Company boss Richard Brasher says he doesn’t want customers to prefer Woolworths for quality and freshness

Brasher said: “We’ve got a plan to keep the estate up to date.”

Of its 1 145 Pick n Pay stores, 40 were refurbished in the period under review. Brasher said it was too soon to determine the impact. “The turnover I’m looking for is doubledigit growth,” he said.

But Brad Preston, an equity analyst at Mergence Investment Managers, said despite the group’s revised growth strategy, one of the concerns was its reliance on growing volumes.

“The concern is how much market share can they win and how much volume can they grow in a competitive environment,” he said.

“We are a little concerned about how much more they can do.

“The share price is at quite a high price to earnings ratio, which means that the market is expecting higher earnings driven by margin expansion. To achieve that they are going to need to grow revenue and improve efficiencies,” Preston said.

Despite this, Brasher said: “Our ambition isn’t secret. I never want to be more expensive than Shoprite and never want our customers feeling they need to go to shop in Woolworths because of quality, freshness and convenience.”

Group turnover was up 8.2% at R72.4-billion. Gross profit margin rose from 17.8% to 17.9% through efficiencies across the procurement and supply-chain channel. Gross profit rose 8.6% to R12.9-billion. And headline earnings a share rose 26.4% to 224.04c a share.

Internal inflation was controlled at 3.1% versus CPI food at 5.3%, but Brasher emphasised that different categories yielded increases.

Pick n Pay plans to open stores in Nigeria through a joint venture with listed AG Leventis. Several South African retailers that set up shop in Nigeria later pulled out because of difficulties in importing stock.

Pick n Pay will continue to pursue opportunities on the continent including opening its first stores in Ghana by the end of 2017. The retailer opened 14 new stores in Botswana, Namibia, Zambia and Zimbabwe.

Pick n Pay declared a final dividend of 125.20c, bringing the total dividend for the year to 149.40c. WITH Pick n Pay’s turnaround strategy in full gear, analysts are saying that the group’s share price may be overvalued compared to its over-performing retail peers.

Kyle Rollinson, an equity analyst at Avior Capital Markets, said: “When you look at valuations it does seem that the share price is quite pricey at these levels, but with that being said I think there are strong backers of the turnaround story and the market has rewarded them for that.

“I think that the market and investors are willing to pay a premium for the quality earnings growth that has come through and they are expected to continue to deliver.”

In 2014, Pick n Pay’s share price was above R50, while Shoprite’s was just over R150. The stock has been trading above market expectations, gaining more than 50% since its turnaround strategy was implemented in 2014.

Alec Abraham, a senior analyst at Sasfin Wealth, said: “Assuming that this transformation programme continues to progress smoothly, in that margins move up from 3% to 4% or 5%, you could see quite significant bottom-line growth coming out of that.”

Shoprite, for instance, has a trading margin of almost 6% and Woolworths is targeting a 7% trading margin for this year. “Those are about as high as you can get even internationally,” said Abraham.

The group reported that earnings per share excluding one-time items rose to R2.24 in the 12 months to February, after a median estimate of seven analyst estimates compiled by Bloomberg adjusted earnings per share to R2.18.

According to Bloomberg, Pick n Pay’s P/E ratio was 33.8, while Spar was 21, Shoprite was 20.2 and Woolworths at 19.7.

“What the market is saying is that Shoprite’s margins are significantly higher than Pick n Pay, and if Pick n Pay can improve their margin towards the Shoprite level this would lead to higher earnings that would justify the higher price earnings ratio that Pick n Pay currently trades on,” said Brad Preston, an equity analyst at Mergence Investment Managers.

“But I do think that Shoprite has been a more efficient operator. We know that Pick n Pay has lagged Shoprite in rolling out centralised distribution in the past, and that Shoprite benefits from larger scale and lower labour costs,” he said.

Despite this, Rollinson said, “I think the sector as a whole seems quite full at these levels so I probably would be sceptical about buying into retail at the moment . . . I think there are other clients I’d rather pay for over Pick n Pay.”