Pick n Pay stores worth ‘less than zero’
Investors have so little trust in Pick n Pay that its effective market cap is negative when the Boxer value is removed.
On Monday, 11 November 2024, Pick n Pay announced that it would list Boxer on the main board of the Johannesburg Stock Exchange (JSE) on 28 November 2024.
Pick n Pay wholly owns Boxer and has been the retail group’s standout performer in recent years.
However, Pick n Pay’s financial woes have forced it to take drastic measures to turn the company around, which include a capital raise and listing Boxer.
In May 2024, Pick n Pay revealed that it was technically insolvent, as its liabilities were higher than its assets.
Pick n Pay announced its two-step recapitalisation plan to strengthen its balance sheet and become solvent again.
Step one was completed three months ago, with its successful R4 billion rights offer helping the Pick n Pay Group return to a positive equity position of R2.9 billion.
The second step is the Boxer initial public offering (IPO), through which the company plans to raise between R8 billion and R8.5 billion.
Pick n Pay will use the proceeds of the boxer IPO to settle its outstanding debt and reinvest in the core Pick n Pay supermarket business.
Boxer Superstores is a fantastic business. It is South Africa’s leading discount grocery retailer with an annual turnover of R37.4 billion. It further boasts a trading profit of R2.1 billion.
Boxer’s turnover grew at a CAGR of 18.6% between FY2022 and FY2024, with like-for-like growth of 7.7%.
The company has 489 stores and a market share of 68% of the discount grocery retail market in South Africa.
It expects to add 65 new stores by the end of this financial year. The medium-to-long-term aim is to double its store footprint by opening 60 to 70 stores yearly for the next six to seven years.
Considering these numbers, it is easy to see why Boxer is the feather in the Pick n Pay group’s cap.
Boxer finances
Pick n Pay pre-listing statement for Boxer revealed detailed financial information on Boxer in isolation. This was not previously available.
It showed what many people knew. Boxer had strong financials and was behind most of Pick n Pay’s positive performance.
Boxer’s revenue grew by 19% in 2023 and 17% in 2024 to R37.8 billion. It was the engine of the Pick n Pay group.
Boxer also has strong profitability. It reported a net profit margin of 3.7% in its latest financial year, higher than Shoprite’s comparable net profit margin of 2.6%.
Over the past 3 reporting periods, Boxer’s net profit margin strengthened, indicating that the company is growing its revenue at a faster pace than its expenses.
Pick n Pay versus Boxer
Boxer will issue 190,476,191 shares with a possible additional 11,904,762 shares if the IPO is oversubscribed.
The price range of the Boxer shares are estimated to fall between R42 to R54 per share. This translates into a market capitalization of between R23 billion and R29 billion.
This would put Boxer’s IPO price at a P/E ratio of between 16- and 21-times earnings.
What’s interesting about this, is that Pick n Pay, which currently owns 100% of Boxer, has a market cap of only R19 billion.
Pick n Pay stores in isolation therefore has a negative market cap, meaning it reduces the value of the overall Pick n Pay group.
When isolating Boxer’s equity and revenue figures from that of Pick n Pay it becomes clear that Pick n Pay stores are valued negatively.
Boxer’s lowest expected market cap puts its price-to-sales ratio at 0.6 times revenue and its price-to-book at 12.3 times equity.
This means that the Pick n Pay group’s market value increases by R0.60 for every unit of revenue and by R12.31 for every unit of equity.
When isolating Pick n Pay’s revenue and equity at the group’s current market cap, it has a price-to-sales ratio of -0.01 times revenue and a price-to-book ratio of -3.6 times equity.
Every unit of Pick n Pay store revenue decreases the group’s value by R0.01, and every unit of Pick n Pay store equity reduces the group’s value by R3.60.
This means that Boxer’s value is lower within the Pick n Pay group structure as the presence of Pick n Pay stores’ finances subtracts from the group’s value.
If Boxer were to achieve its lowest estimate of a R23 billion market cap, it would imply that Pick n Pay stores contributed negatively to the group’s value by R3.5 billion.
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