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Pick 'n Pay Stores (PIK) will be the stock in focus: (Price at time of writing: R60.10 as 18 October 2017)
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Background and overview of Pick 'n Pay Stores (PIK)
Pick n Pay is the quintessential family store focused on the customer. Since 1967 when consumer champion Raymond Ackerman purchased the first few stores, the Ackerman family’s vision has grown and expanded to now encompass stores in South Africa, Namibia, Botswana, Zambia, Mozambique, Mauritius, Swaziland and Lesotho. Additionally Pick n Pay owns a 49% share of a Zimbabwean supermarket business, TM Supermarkets. Our offer to customers focuses on groceries, clothing and general merchandise, but also includes additional value-added services to cater for our customers’ expectations and evolving needs. To ensure a convenient and accessible shopping experience the Group operates across multiple store formats, both franchised and owned. For more information on Pick and Pay click here.
Pick 'n Pay is one of the largest general retailers in South Africa, doing battle with Woolworths, Shoprite and Spar for market share in this industry. PIK has been having a tough time over the last five to ten years, but their turnaround plan is starting to gain traction and they have delivered solid earnings growth over the last three years.
Problems in Zimbabwe with import restrictions is having an effect on their Zimbabwean operations .
The graphic below shows PIK share price history over the last 4 years as well as provide various technical analysis tools
Pick 'n Pay is one of the largest general retailers in South Africa, doing battle with Woolworths, Shoprite and Spar for market share in this industry. PIK has been having a tough time over the last five to ten years, but their turnaround plan is starting to gain traction and they have delivered solid earnings growth over the last three years.
Problems in Zimbabwe with import restrictions is having an effect on their Zimbabwean operations .
The graphic below shows PIK share price history over the last 4 years as well as provide various technical analysis tools
PIK share price history chart
Data for the above graphic supplied by www.psg.co.za
Financial review:
Before starting our financial review of PIK results, below a brief summary of the results as per the results announcement from PIK
- Accelerated delivery of turnaround plan, reducing costs and increasing efficiency to create headroom for lower prices and better value for customers
- Turnover growth of 5.1%; up 1.8% on a like-for-like basis - Internal price inflation restricted to 3.6%; CPI food inflation of 6.9% - Trading profit up 15.8% from R554.1 million to R641.5 million
- Trading margin improvement of 0.1 percentage point from 1.5% to 1.6%
- Normalised diluted headline earnings per share up 13.1% to 90.36 cents per share
- Normalised headline earnings per share up 11.6% to 91.99 cents per share
- Including once-off impact of VSP, diluted headline earnings per share down 23.9% and headline earnings per share down 24.9%
- Interim dividend of 33.40 cents per share up 11.7% on the prior year, in line with the growth in headline earnings per share on a normalised basis
The Group's turnaround plan since the 2014 financial year has been to grow its sales by giving customers a better value offer and a more modern shopping experience, reducing its costs, and modernising its operations, in particular by centralising its buying and supply chain. By the end of the 2015 financial year, the Group completed the first stage of its three-stage plan, having stabilised the business through strong financial control, greater operating efficiency and effective business management systems.
The second stage of the Group's plan, is to change the trajectory of performance and deliver sustainable trading margin improvement. Among the key objectives in this second stage are improved store efficiency, reductions in operating costs, and further progress on supply chain centralisation. These and other steps create meaningful headroom to deliver lower prices and better value for customers. With low levels of economic growth, rising costs and high unemployment, customers are now more than ever seeking out low prices and exceptional value. Against this background, the Group took decisive steps in the first half of this year to accelerate its plan, in particular by reducing its costs and modernising its operations in order to deliver better value and a better offer to customers.
- Accelerated delivery of turnaround plan, reducing costs and increasing efficiency to create headroom for lower prices and better value for customers
- Turnover growth of 5.1%; up 1.8% on a like-for-like basis - Internal price inflation restricted to 3.6%; CPI food inflation of 6.9% - Trading profit up 15.8% from R554.1 million to R641.5 million
- Trading margin improvement of 0.1 percentage point from 1.5% to 1.6%
- Normalised diluted headline earnings per share up 13.1% to 90.36 cents per share
- Normalised headline earnings per share up 11.6% to 91.99 cents per share
- Including once-off impact of VSP, diluted headline earnings per share down 23.9% and headline earnings per share down 24.9%
- Interim dividend of 33.40 cents per share up 11.7% on the prior year, in line with the growth in headline earnings per share on a normalised basis
The Group's turnaround plan since the 2014 financial year has been to grow its sales by giving customers a better value offer and a more modern shopping experience, reducing its costs, and modernising its operations, in particular by centralising its buying and supply chain. By the end of the 2015 financial year, the Group completed the first stage of its three-stage plan, having stabilised the business through strong financial control, greater operating efficiency and effective business management systems.
The second stage of the Group's plan, is to change the trajectory of performance and deliver sustainable trading margin improvement. Among the key objectives in this second stage are improved store efficiency, reductions in operating costs, and further progress on supply chain centralisation. These and other steps create meaningful headroom to deliver lower prices and better value for customers. With low levels of economic growth, rising costs and high unemployment, customers are now more than ever seeking out low prices and exceptional value. Against this background, the Group took decisive steps in the first half of this year to accelerate its plan, in particular by reducing its costs and modernising its operations in order to deliver better value and a better offer to customers.
Scroll over or click on the funnel chart to get more details of PIK's latest financial results
As can be see from the funnel chart above (and as has been the case with PIK in the past, and probably always will be), one can hardly see the value for their profits as the amount is so small compared to their turnover achieved. As was the case with Shoprite (SHP), margins for general retailers are extremely thin in South Africa, because of the amount of competition out there. This does bode well for consumers though as price wars between large retails helps to keep inflation in check. But of course there is not a lot of meat on the bone in terms of profits being taken home after bringing in such large amounts of revenue. PIK has a net profit margin of just 1.1%.
The graphic below shows the contribution of some of PIK's operating divisions
As can be seen from the pie charts above, PIK earns the majority of its revenue from its South African retail operations. As this makes up 94.3% of their reported revenue. However 31.3% of their pre-tax profit is made up from their operations outside of South Africa. Clearly indicating that margins in South Africa is squeezed due to the though competition in its home market. Margins seem to be a lot stronger on their operations outside of South Africa. And this phenomenon has not changed since our previous valuations on Pick 'n Pay
While diluted headline earnings per share amounted to 60.8c a share, assuming the same earnings in the next 6months PIK will have earnings of R1.20 per share, placing PIK on a massive PE of 50. Which is extremely high, especially considering the thin margins they are working with, and the lack of room to increase their margins. At this rate an investor will wait 50 years for profits earned per share to match what they are currently paying for the share. Concerning to investors should be the fact that diluted headline earnings per share declined by 23.9% compared to the previous period.
PIK did however generate R3.94 per share which shows they are for the most part a cash business and not dependent on credit sales. With Woolworths and Shoprite in the same space, PIK has its work cut out for it competing against the biggest retailer in Africa which is Shoprite and the more luxurious retailer, Woolworths.
PIK announced a 33.4c a share interm dividend (if the dividend is repeated at year end) it will place PIK on a dividend yield of 1.1%. Hardly shooting the lights out with that dividend.
While diluted headline earnings per share amounted to 60.8c a share, assuming the same earnings in the next 6months PIK will have earnings of R1.20 per share, placing PIK on a massive PE of 50. Which is extremely high, especially considering the thin margins they are working with, and the lack of room to increase their margins. At this rate an investor will wait 50 years for profits earned per share to match what they are currently paying for the share. Concerning to investors should be the fact that diluted headline earnings per share declined by 23.9% compared to the previous period.
PIK did however generate R3.94 per share which shows they are for the most part a cash business and not dependent on credit sales. With Woolworths and Shoprite in the same space, PIK has its work cut out for it competing against the biggest retailer in Africa which is Shoprite and the more luxurious retailer, Woolworths.
PIK announced a 33.4c a share interm dividend (if the dividend is repeated at year end) it will place PIK on a dividend yield of 1.1%. Hardly shooting the lights out with that dividend.
A few financial ratios for PIK (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 2.16 (more than 2 shows high levels of financial leverage).
- Current Ratio: 0.53 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 0.01 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 2.38%
- Return on Equity (ROE): 7.33%
- Net Profit Margin: 1.1%
- Dividend Yield: 1.1%
Valuation:
Based on PIK's financial results, the markets they operate in and the economic environment they find themselves in, we value PIK at between R59.20 and R59.35 a share. We therefore feel that PIK is fully valued and would not recommend investing in them yet. It has come down since our last valuation when we mentioned that it is over valued, but our advise stands, we would rather suggest looking at Shoprite or Woolworths, and feel that PIK's turnaround plan as started in 2014 is yet to show the kinds of results that warrant's PIK's current PE ratio of basically 50. In addition to this the ROE is essentially the same as interest earned on the money market. Thus PIK is not really providing investors with greater returns than the money market, and investors needs returns greater than the money market to compensate them for the additional risk of investing in a company instead of investing on the money market.
We use our Share Valuation Calculator as guide to valuing shares.
We use our Share Valuation Calculator as guide to valuing shares.