Pick n Pay | In the mix

Pick n Pay's (PIK) store mix has been shifting to a larger compliment of corporate-owned stores versus franchise outlets. Own store margins are higher which increased Group GP margins by 100bps y/y to 19.8% in H1 ‘20. PIK has grown its corporate-owned Clothing and Boxer stores aggressively over the last three years, with maturing trading densities supportive of further mix benefits. Boxer and Clothing carry inherently higher margins relative to the traditional supermarkets. Boxer will continue to deliver margin benefits from further centralisation and range optimisation. We expect the higher GP margin to annualise in FY '20 and will gradually improve as further mix change unfolds.

PIK has 15% of its corporate-owned stores yet to fully mature, providing support to LFL sales growth of c.5% pa over the next four years. PIK will continue to add c.70 new stores pa, with a space growth contribution of c.3% each year. The change in PIK's store mix, further private label penetration (c.22% currently), buying efficiency and an increase in group centralisation (c.80% currently) will increase GP margins by 10bps pa to c.20.2% in FY '24 according to our estimates.

We expect PIK's H2 '20 earnings to grow by c.1% y/y to 221cps given PIK's high H2 '19 base and due to the drag on earnings from non-RSA operations in FY '20. PIK's sales and earnings are generally weighed 30:70 to the second half of its trading year. Thus, we estimate that HEPS will grow by c.2.8% to c.305cps in FY '20. We forecast four-year HEPS CAGR of 12.8% to c.543cps in FY '24 due to the improvement of PIK's trading margin to a more stable c.3.9% longer-term and a recovery in non-RSA operations.

We estimate that PIK is trading at a 19.8x rolled forward PE (1.9x PE relative). We calculate PIK's 12m TP to be R80/share. We upgrade PIK to an OUTPERFORM recommendation.