by Jalpa Bhoolia
As part of its recapitalisation strategy that also included a R4 billion rights offer, Pick n Pay has opted to list Boxer separately, via an IPO, on the Johannesburg Stock Exchange (JSE) with a secondary listing on the A2X. The Boxer listing will add an additional R8.5 billion to Pick n Pay's coffers. Pick n Pay shareholders will not receive Boxer shares as part of the listing, but the company will retain a majority stake in Boxer of 65.6% post-IPO.
Prior to listing, Boxer contributed 33% to total group turnover (in FY24, up from 27% in FY22). The group was the only contributor to positive trading profit in FY24, up from a 47% contribution in FY22.
After listing, these contributions will fall by 34.4%.
On the balance sheet, the largest adjustment will be on interest bearing debt - the IPO is expected to eliminate all Pick n Pay long-term debt, aside from ongoing working capital facilities and lease liabilties, alleviating the current interest cost.
Pick n Pay's recent financial performance
In October, Pick n Pay released results for the 26 weeks ended 25 August 2024:
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The headline loss per share came in at 136.60 cents compared to a loss of 117.48 in 1H24.
- Turnover increased 3.7% y/y, with like-for-like growth of 2.9%. Internal selling price inflation slowed to 4.3% from 7.3% in FY24.
- Pick n Pay sales fell 0.3%, with like-for-like sales growth of 0.5%. Liquor sales grew 2.3%. Sales in South Africa was slightly higher at 0.1% and 1.1% on a like-for-like basis.
- Clothing grew 9.8%, with like-for-like turnover growth of 0.2%.
- Online sales grew 60.6%, building on the strong 74.4% growth reported for FY24.
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The gross profit was flat, with the margin declining by 60bps to 17.9%.
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Trading expenses increased 1.8% (like-for-like: 2.6%) to R11.4 billion.
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Net funding costs (excluding leases) increased 61.1% to R392 million due to higher average debt and higher interest rates.
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As expected, no interim dividend was declared.
Sales growth across both the Pick n Pay and Boxer segments slowed in the last few weeks of 1H25 but momentum has since recovered, with sales growth for the first eight weeks of 2H25 for Pick n Pay South Africa of -1.0% (like-for like: +1.3%).
The group expects FY25 earnings to show a meaningful improvement y/y, supported by sustained earnings growth in Boxer, a reduced trading loss in Pick n Pay (the current target is to half the FY24 trading loss), and a reduction in interest charges.
Investment case Summary
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Pick n Pay is a fundamentally good business that has been plagued by operational inefficiencies which can be addressed, with the major recapitalisation plan providing some much-needed stability to the balance sheet.
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The group is set to face a new era - the refreshed management and a simplified operational structure could be supportive of its turnaround strategy and performance.
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Pick n Pay will have the option to potentially make a shift towards more premium and higher-quality offerings at higher price points, which could provide margin expansion opportunities.
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Pick n Pay will still hold a majority stake in Boxer (65.6%), allowing it to maintain exposure to the high-growth discount segment of the market and strong expected growth in Boxer medium term.
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The online shopping platform has been thriving and we think there is still more room for growth in this space.
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Pick n Pay Clothing is a well-established segment within the group that could see further expansion as operations are refined.
Risks
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Adverse geopolitical and macroeconomic conditions could constrain consumer disposable income and in turn, impact the group's performance.
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The group faces formidable competition in food retail, which can put pressure on margins. The perception of its stores having higher price points than Shoprite, for example, is certainly a headwind that can continue to affect market share.
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Pick n Pay can no longer piggyback fully off Boxer's strong growth which exposes it to performance risk.
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The management structure (particularly the involvement of the founding family) had been a concern for Pick n Pay in the past. Recently, however, significant leadership changes have been made, with the founding family dialling back its involvement in the group,
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There is execution risk in the turnaround of the supermarkets business and even if successful, it may still take some time to take shape and filter through to the financials. Pick n Pay supermarkets are expected to remain cash flow detractive medium term.
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Pick n Pay can no longer piggyback fully off Boxer's strong growth which exposes it to performance risk.
Unboxing valuation considerations
We ran a Sum of the Parts Valuation separating Boxer from Pick 'n Pay.
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Our conservative forecast assumes a R54 market valuation for Boxer, translating to a R18.90 valuation in Pick 'n Pay including a holding company discount of 15%. Our bullish forecast assumes a R60 valuation for Boxer, also with a 15% holding company discount.
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We value Pick 'n Pay (ex-Boxer) on an EV/EBITDA basis using peer multiples and calculate a value of the business at R4.31 at the bottom end and R11.96 at the midpoint. We do not think Pick 'n Pay will demand a premium valuation given that it will remain free cash flow negative in the short-to-medium term.
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We calculate a valuation range of R23.20 to R32.95 or R28.08 at the midpoint, which means it is likely that the current share price fairly values the company.
