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Pick 'n Pay Stores (PIK) will be the stock in focus: (Price at time of writing: R69.85 as 30 March 2016)
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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.
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.
Scroll over or click on the funnel chart to get more details of PIKs latest financial results
Financial review:
As can be see from the funnel chart above, one can hardly see the value for their profits as the amount is so small compared to turnover achieved. As was the case with Shoprite (SHP), margins for the retailers are extremely thin. And not a lot of meat on the bone in terms of profits being taken home after bringing in such large amounts of revenue.
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 94.5% of their reported revenue. However 25.6% 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.
While earnings per share only amounted to 66c a share, their second half financials have historically been a lot stronger (as this includes the December holiday period spending). The 66c per share was a 22% increase on the year before that. Using that 22% growth and applying that to their last year end results, their next financial year end earnings per share will be R2.12 putting PIK on a forward PE ratio of 32. Which is extremely high, especially considering the thin margins they are working with, and the lack of room to increase their margins. They did however generate R4.50 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.
While earnings per share only amounted to 66c a share, their second half financials have historically been a lot stronger (as this includes the December holiday period spending). The 66c per share was a 22% increase on the year before that. Using that 22% growth and applying that to their last year end results, their next financial year end earnings per share will be R2.12 putting PIK on a forward PE ratio of 32. Which is extremely high, especially considering the thin margins they are working with, and the lack of room to increase their margins. They did however generate R4.50 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.
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 R64.78 and R65.20 a share. We therefore feel that PIK is overvalued and we would rather recommend looking at Shoprite or Woolworths at this point in time. Woolworths would be our number one bet currently. PIK needs to work on improving margins to try and squeeze out a little more in profit from those revenue numbers.
We use our Share Valuation Calculator as guide to valuing shares.
We use our Share Valuation Calculator as guide to valuing shares.