Jury is still out on Pick n Pay’s survival

Questions remain around Pick n Pay’s turnaround prospects, with analysts adopting a wait-and-see approach to the company as it offers potentially strong returns but not without substantial risk. 

The retailer also faces intense competition, with Shoprite’s Checkers brand going from strength to strength, Woolworth’s food business continuing to take market share, and SPAR planning to expand its offering. 

Old Mutual Investment Group’s head of equity research, Meryl Pick, explained that there are sectors of the economy where there is just not enough growth to support all the players in the market. 

Pick explained that those left standing have a lot to gain in this environment, taking market share from struggling or failing competitors and, ultimately, boosting their bottom line by picking up the pieces. 

At the asset manager’s second quarterly update for the year, Pick outlined this phenomenon, which she termed the ‘survivorship factor’. 

This has become a major driver of earnings in some sectors, due to established players going out of business, leaving space for their competitors to take large chunks of market share. 

Pick said the country’s lacklustre economic growth over the past decade is the main factor behind this, with the cracks beginning to show in some sectors of the economy. 

“There is just no growth, and I think over time, there will be a survivorship factor. We have seen businesses exit. We have seen sectors where there is not enough growth to support the current market,” Pick said. 

“For example, Edgars has left the building, and then the remaining companies get profit growth because they are just there to pick up market share.”

This has also happened in the construction sector, where some companies are growing their earnings by 30% to 40% a year, not because the economy is booming, but because they are picking up the work left by those that went out of business.

“There is definitely competition in all of these sectors, and with low economic growth, you are beginning to see the cracks,” Pick said. 

“Pick n Pay is another one. The jury is still out on whether they actually survive over the long term. If they fall out, that is a boon to Woolies Food, Shoprite, and potentially SPAR.” 

Pick said that in almost every sector of the economy, you can point to the weakest link, and if it falls out, then those left standing benefit greatly. 

Wait and see

Other analysts in South Africa echo Pick’s comments, with many watching Pick n Pay’s turnaround closely to determine whether it is worth investing in. 

Pick n Pay CEO Sean Summers has begun implementing a turnaround plan at the retailer, which has been positively received by the market. 

While it is beginning to bear fruit and the company is trading at a relatively low valuation, it is still unclear whether the Pick n Pay that emerges will be able to compete effectively with Shoprite and Woolworths. 

Some analysts would prefer to use Pick n Pay as a way to invest in Boxer at a discount, due to the parent company’s low valuation. 

PSG’s Ricus Reeders is one such analyst, saying that if he were holding Pick n Pay, he would do so to get discounted exposure to Boxer. 

Even then, Reeders said he does not have enough reason to invest in Pick n Pay because it is undergoing a turnaround process. The analyst prefers to wait and see how the retailer emerges from the other side. 

“I am not in favour of holding companies, which I don’t like the operational management of. There is a lot that needs to be done to turn that business around,” Reeders told BusinessDay TV. 

“As I always say, I do not want to be part of that process. I would rather go and put capital in a place where I know it is working and will continue working.” 

“I think Boxer may be an option, but Pick n Pay is just too 50-50 for me to go and take a bet that they are going to turn it around.” 

On the other hand, some analysts like the optionality that Pick n Pay offers, with an investor able to get exposure to Boxer through the company. 

Thus, the investor has the potential to benefit from Boxer’s strong performance and the upside offered by a potentially successful turnaround. 

Nitrogen Fund Managers’ Rowan Williams said he likes these situations, where there is some optionality involved. 

“I think in terms of the current spread in valuations, if you buy Pick n Pay, then you will get exposure to Boxer and its fundamental performance,” Williams said. 

Williams also said that Pick n Pay has made some strong progress in its turnaround, with its balance sheet looking much healthier following Boxer’s separate listing and Pick n Pay’s rights issue. 

“I think the progress made to date inside Pick n Pay and its balance sheet with regard to its turnaround, you will see the emergence of a very different business,” he said.

“What I think you are going to see is a smaller, profitable business. The clothing business is already a nice, profitable business, and the supermarket business can still do well. It is still a strong brand with good sites.”

As a result, Williams said, you may be left with a business that has cut its losses and is much smaller and profitable, with a controlling interest in Boxer. 

“So at this point, we would prefer Pick n Pay over Boxer. We like the Boxer story, and that is part of why we like Pick n Pay as well,” he explained.