Pick n Pay warning

 ·30 May 2024

Protea Capital Management founder and CEO Jean Pierre Verster warned that Pick n Pay must overcome many challenges to ensure a successful turnaround.

Verster commented on Pick n Pay’s recently released annual results and the subsequent share price increase.

On Monday, Pick n Pay released its audited annual results for the year that ended 25 February 2024.

The retailer reported a 373% decrease in net profit. It swung from a R1.17 billion profit to a R3.2 billion net loss.

Even more concerning is that the company was technically insolvent, with total liabilities exceeding total assets by R183 million.

Pick n Pay’s finances are so dismal that it has breached all its debt covenants. This means it cannot ensure it can meet its debt repayments.

Its lenders relaxed the debt covenants on the condition that Pick n Pay pledge additional security in the form of 100% of Boxer’s shareholding.

It was clear that Pick n Pay had to change course. The company brought back former chief executive Sean Summers to turn it around.

Summers’s new Back-to-Basics strategy focuses on simplicity, quality, affordability and sustainability. He also put a new management team in place.

He told investors the new strategy had already been implemented, some in place since February, with encouraging early results.

As part of the new strategy, many struggling stores will be closed, and Qualisave stores will be converted back to Pick n Pay stores.

Many investors liked what they heard, and the share price increased by 8% since the results were released.

It showed that they believed in Summers’ strategy, which Sasfin analyst Alec Abraham said was comprehensively thought-through.

“The plan has targeted timelines, is focused on the key problem areas, and is plausible. It also helps that it was delivered by the charismatic Sean Summers,” he added.

Boxer’s improved disclosure further clarifies its profitability relative to the Pick n Pay chain, which should enhance its valuation when listed.

This could potentially net Pick n Pay greater proceeds from the listing while limiting the size of the stake that the group needs to list, thus retaining a more significant stake.

Pick n Pay warning

Protea Capital Management founder and CEO Jean Pierre Verster

Protea Capital Management CEO Jean Pierre Verster said he is cautiously pessimistic about Pick n Pay’s prospects.

He highlighted that Pick n Pay is technically insolvent, which means it has negative equity. To address the weak balance sheet, it wants to raise billions.

“They want to raise R10 billion to R12 billion. It includes a R4 billion rights issue and another R6 billion to R8 billion by listing a minority stake in Boxer,” he said.

He said the positivity around Pick n Pay comes from stripping out Boxer and saying it makes a profit of between R1 billion and R1.5 billion.

Analysts then multiply Boxer’s profit by a price-to-earning (P/E) ratio of fifteen to twenty, which gives a big number. You then discount the rest to zero.

“I question that type of calculation, which a lot of the sell-side analysts and brokers are doing,” Verster said.

One of the big problems is that, according to its own targets, the Pick n Pay group will take at least three years to become profitable again.

“They will be up to be a billion-rand cash flow negative for the next year, and potentially the year thereafter.”

“When you do a segmental analysis of a company with a very profitable division, I always wonder about the cost allocation.”

It raises the question of whether Boxer will remain as profitable as the pro forma numbers show if it becomes a standalone business.

“They have not finalised the transfer pricing, where Boxer may use Pick n Pay’s head office,” he said.

“There is a lot to be done here, so I am cautiously pessimistic about Pick n Pay.”

Alex Duys from Umthombo Wealth is more upbeat about Pick n Pay’s prospects, saying he is cautiously optimistic.

However, a successful turnaround is not guaranteed, as the retailer must deal with a weak economy, limited time, and a poor balance sheet.

“The question is whether Pick n Pay can execute its turnaround plan within these parameters efficiently enough,” Duys said.

He said Summers’ turnaround plan makes strategic sense. “The question is whether they will have enough time to implement it and whether the economy will allow it.”

Declining inflation will add pressure to Pick n Pay’s top line, and revenue will come under pressure because the company’s focus is not on sales and marketing.

Despite these challenges, if Summers can get the core Pick n Pay business back to break even, the overall basket will have a lot of upside.

Duys highlighted that this will rely on Boxer’s successful listing and that the evaluations provided are achieved.

Read: How much the price of bread, milk, and eggs increased in South Africa

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