PnP is turning corner

SHARE PRICE DIPS: TURNOVER, EARNINGS AND MARKET SHARE ARE UP

Figures are finally reflecting the results of the group’s long-term strategy, says analyst.

The market seemed not to know what to make of Pick n Pay’s (PnP) upbeat interim results to August 26 this year. The international retail group saw its share price spike from R65.13 to almost R68.50 in early trade, but by mid-afternoon on Tuesday it was back at R64.39, trading over 1% down. Yet, the group ticked every possible box, from growing turnover and earnings to increasing market share and efficiencies as its turnaround continued apace.

Cited by chief executive Richard Brasher as its strongest six-month trade performance, measured by volume for over five years, it grew turnover 6.4% to R41.2 billion – or 3.8% on a likefor-like basis – and headline earnings by 80% or a normalised 17% to 100.18c a share, with a similar increase in its dividend.

The group’s 2017 results have been restated, removing the onceoff impact of its voluntary severance programme of May last year, which amounted to R200 million – or R250 million for the cost of the severance packages, net of related labour cost savings and tax.

Brasher said action to reduce operating costs and increase productivity created a leaner, stronger business, able to create “headroom to invest in lower prices, better promotions and greater value for customers”. Notably, 3.5% volume growth reflects market share gains over the past six months as gains made through efficiencies, including at distribution level, enabled it to “invest in price” with its internal inflation at 0.3% against official food inflation of 3.5%. Prices were reduced on 2 500 grocery lines. PnP’s online distribution grew sales 25% and traffic on its new website increased almost 70%, with a 30% increase in customer registrations.

The Smart Shopper programme provided R2.4 billion in shopper discounts in the six months.

Trading profit from South African operations was up 11.9% and pre-tax profit was up 16.7%. Its Boxer chain, aimed at lower-income customers, grew strongly while its liquor division increased like-for-like turnover by almost 20%.

Its rest-of-Africa division grew pre-tax profit by 7.3%, underpinned by a strong performance from TM Supermarkets in Zimbabwe. The group, which has 1 732 stores, opened 60 new stores and closed 13 underperforming stores.

Sasfin senior equity analyst Alec Abraham said the figures are finally reflecting the results of PnP’s long-term turnaround.

Internal inflation is unusually low for PnP, indicating it has pumped profit and savings into price, and that has paid off. PnP has shown the market it can get volume growth, he said.

It’s providing a better shopping environment with improved availability, and there’s still room for further improvement, with its continued shift to central distribution.

There’s also room for further margin growth, as the margin is still half of what it was at the peak before the slump.

Abraham was surprised at the market’s reaction as the results were good.

He doesn’t think PnP is expensive at current levels. There are indications that there’s room “for at least two to three years growth as it drives the margin up further”.

Room for two to three years growth