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Pick n Pay - "Chipper stuff" 18/10/2017

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On Tuesday, 17 October, grocer Pick n Pay reported interim results, which were presented to fund managers and analysts in Cape Town. The CEO, Richard Brasher, was chipper, and so he should be, despite challenges. I called my note dated 4 October “In shape for tougher times”, which sums up the investment case too, with the stock up 7% since then.  

“Chipper stuff”

Pick n Pay

Sector: Food & Staples Retail

Share price: R60,10 

Net shares in issue: 482,3 million

Market cap: R29,0 billion

Forward PE year one: 19,8x

Forward PE year two: 16,7x 

Dividend yield year one: 3,4%

Dividend yield year two: 4,0%

Fair value: R70,00 

Target price: R70,00

Trading Buy and Portfolio Buy 

TWEET THIS ANALYSIS

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Mark Ingham's Fundamental analysis 

What you need to know:

TWEET THIS ANALYSIS

On Tuesday, 17 October, grocer Pick n Pay reported interim results, which were presented to fund managers and analysts in Cape Town. The CEO, Richard Brasher, was chipper, and so he should be, despite challenges. I called my note dated 4 October “In shape for tougher times”, which sums up the investment case too, with the stock up 7% since then.  

Pick n Pay reported a respectable interim result for the 26 weeks to 27 August 2017. Whilst attributable earnings decreased by 23%, due to the voluntary severance programme, underlying earnings increased by 15% and normalised headline EPS by 12% to 92 cents.

I mentioned in my last note that I’d interested to see how the Board treat the dividend declaration given that actual earnings will be down but normalised earnings will be up. The Board in fact declared a dividend on normalised earnings so the interim dividend is up 12% to 33,4 cents per share.

The fact that the dividend is up, notwithstanding the net R145 million severance programme, is a positive signal – it sends a message that there will be the anticipated future efficiencies and that the costs will be recovered by the end of this financial year.

Turnover is up 5,1%, trading expense growth is well-contained at 5,1%, whilst trading margin, as forecast, edged up to 1,6%. Other trading income, which is largely commissions and value-added services, was a boost to profits, up 24% but up by 8% on a normalised basis. Cash generated is up 9%, excluding the severance costs.

The Group continues to invest in modernising the estate, with 40 new company owned stores opened during the period together with 34 refurbishments.

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I am content to hold to my forecasts. For the full year to February 2018, I estimate 15% growth in normalised HEPS to 304 cents. In 2019, I have EPS at 360 cents, an increase of 18%, with 2020 EPS forecast to be 407 cents, growth of 13%.

Despite the difficult political and economic climate, Pick n Pay is capable of double digit earnings growth because of internal management initiatives.  

Recommendation:

TWEET THIS ANALYSIS

Whilst Shoprite will remain the dominant force in grocery retailing, Pick n Pay is doing things differently, focusing on improving efficiencies and not going for a land grab. These latest results show the team is focused on execution on a clear strategy. The profitability of the business is well leveraged to fairly small increases in top line.

Pick n Pay is therefore worthy of consideration. Whilst the PE ratio, at close to 20x, seems high, this degrades to more attractive multiples on a forward basis given the underlying earnings growth. The one-year forward yield is relatively attractive at 3,4%.

Trading Buy and Portfolio Buy maintained.   

Wishing you profitable investing, until next time.

Mark N Ingham     

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