Pepkor offers good value

Standard Bank said Pepkor offers good value at current levels, with a buy recommendation at a target price of R26.80 per share.

Pepkor, which owns PEP, Ackermans, Tekkie Town, The Building Company, and Incredible, reported strong headline earnings growth of 20.1% for the year ended 30 September 2022.

Stripping out the noise of the past three years, the Pepkor group grew like-for-like sales by 4.2% annually.

Over the last year, Pepkor opened 319 new stores, processed 1.9 billion transactions, and grew operating profit by 11%.

The company’s performance was helped by its defensive business model and strong position in the South African discount and value sector. Key indicators include:

• Clothing, footwear, and homeware selling price inflation was curtailed. This, together with good cost controls, helped it to keep prices low.
• 92% of sales were done in cash, and Pepkor remained highly cash-generative – R11.2 billion was generated in cash.
• Pepkor’s large store footprint and informal trader network allow it to operate in close proximity to all South Africans.

“We have focused on leveraging our physical capabilities to make it easier for customers to buy products and services at the lowest possible price,” Pepkor said.

“It has translated into 1.9 billion transactions across more than 5,800 stores and 202,000 Flash traders.”

The group performed exceptionally well in the mobile phone sector, where it sold 12 million cell phones, equating to 7 out of 10 phones sold in South Africa.

These strong results were achieved despite disruptions caused by load-shedding, the recovery from the unrest last year, and flooding.

Revenue grew 5.3% despite the negative impact of flooding of the PEP distribution centre in April 2022 and the Flash change in product mix.

The negative impacts were exacerbated by stores that have been unable to trade as a result of the social unrest of July 2021. 122 stores were only ready for re-opening during this year.

Load-shedding cost Pepkor 313,000 lost trading hours during the year, reflecting an increase of 123% compared to the prior year.

“Taking these three factors into account, revenue growth in normalised terms would have been just over 8%,” Pepkor said.

Pepkor offers good value, says Standard Bank

Standard Bank said Pepkor offers good value at current levels, with a buy recommendation at a target price of R26.80 per share.

The bank said Pepkor’s skew towards cash sales has weighed on performance, particularly over the last few months, as consumers turned to credit to fund apparel purchases.

“In our view, the credit tailwind could endure into the first quarter of 2023, after which consumers are likely to down trade as bad debts ramp up, reducing retailers’ appetite to extend credit.”

Against this backdrop, Pepkor is well positioned at the lower end of the market as middle-income consumers look for cheaper options.

Pepkor should also indirectly benefit from the extension, and potential increase, in social relief of distress grants from the government.

“We continue to view Pepkor as a defensive play in the apparel segment, particularly as the impact of elevated inflation affects consumer wallet allocation,” Standard Bank said.

“This competitive positioning, coupled with a depressed 12-month forward PE multiple of 13.1 times, keeps us favourably disposed to the share, BUY maintained.”