PIK SJ: Company Update - Risk/Reward justified
- 17bps uplift in gross margin on improved distribution and effective management of employee costs (+5.1% y/y, LfL 1.7%) helped PIK expand its EBIT margins by 16bps in H1 17A (ACe: 27bps), offsetting mounting cost pressures.
- Based on our estimates, PIK’s Clothing business could have contributed 2.3bps to the 16bps uplift in EBIT margin in H1 17A. PIK’s clothing business grew revenues at c.20% y/y in the last three years and now contributes c.1-2% to PIK’s revenue and over 8% to EBIT, in our view.
- High growth of occupancy costs (+14.2% y/y in H1 17A) is one of the key risks for further margin expansion for PIK, despite achieving productivity gains and a gradual improvement in distribution efficiency.
- PIK’s growth remains best among peers at FY 16 - 19e EPS CAGR of 19%, but its current valuation (PE of 23x, 20% above peer group) implies seamless execution. Weakening consumer, stronger competition and lack of control over occupancy costs are key risks to the turnaround.
Pick n Pay is an investment holding company. Co. has two operating segments, namely South Africa and Rest of Africa. Co. provides food, non-edible groceries, clothing, liquor and tobacco, health and beauty products, building and hardware and general merchandise. Co.'s offer also includes additional services such as financial transactions at till points (including mobile money), ticketing services and the sale of gift cards. In addition to manufacturer-branded products, Co. has a number of Pick n Pay and Boxer private label products to suit every budget. Co. operates on both an owned and franchise basis. Co.'s stores range from hypermarkets to small convenience stores.
Established in 2007, Arqaam Capital is a specialist emerging markets investment bank, bringing regional and international product offerings to the emerging markets. Arqaam Capital combines international best practice with expertise in the markets in which we operate. Our primary role is to provide financial intermediation and create investment opportunities for frontier and emerging markets investors looking to invest in their own markets and abroad, as well as international investors seeking opportunities in target frontier and emerging markets. Arqaam Capital is headquartered in the Dubai International Financial Centre (DIFC), with additional offices in Libya, Lebanon, Egypt, and South Africa.
Arqaam Capital's research platform provides the largest coverage footprint of MENA equities and one of the largest on the African continent with a total of 300 stocks under coverage. Arqaam Capital is ranked as one of the leading research providers in the region - a reflection of its broad coverage universe, its in-depth and high quality research, as well the compelling investment ideas that the team generates. The analysts closely analyze their sectors and issue in-depth company and sector research while the strategy team connects the micro with the macro, focusing on index analysis, macroeconomics and strategy research.
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