Friday, January 21

Pepkor prepares a great recovery – Moneyweb


Pepkor’s results for the year ending September 2021 show a big change in his luck during a very interesting and challenging year.

While management noted that overall earnings increased by 115% and that it achieved and then exceeded its ambition to restore profitability to 2019 levels, actual figures on the balance sheet show that the recovery was much greater than suggested. The management.

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The profit for the year recovered from a loss of R2.86 billion in 2020 to R4.88 billion in 2021, although it should be noted that the main reason for the loss in the previous year was a large amortization of the fund of Commerce. Goodwill was reduced by a huge amount of R4.7 billion which had to be reflected in the income statement.

However, the income statement also shows that Pepkor did things well. Revenues increased 9% and cost of sales slightly less.

CEO Leon Lourens comments in his comment to the results that the total gross profit margin increased by 10 basis points to 34.3%. “From a retail perspective, gross profit margins increased by 40 basis points as a result of more full-price sales and lower markdowns.

“The discount and value retail sectors continue to be favored by customers due to reduced consumer income as a result of rising unemployment and the effects of an underperforming economy,” says Lourens, citing the fact that the Unemployment in South Africa is at record levels.

Read: Pepkor’s 2021 performance surpasses pre-pandemic figures

Less in credit sales

Credit sales on store accounts are still only 7% for the entire Pepkor group. One benefit of the high cash sales is that debtor costs (which include bad debts on credit sales) improved significantly, decreasing by almost R1 billion compared to the difficult previous year.

Financial costs also decreased, by almost R1 billion compared to the previous year.

The strong cash flow allowed Pepkor to reduce debt and low interest rates did the rest.

The notes to the financial statements revealed another windfall of about 1 billion rand. “Favorable lease renewals, consolidation of the retail footprint and derecognition of right-of-use assets and lease liabilities related to the acquisition of a portfolio of leased properties resulted in a total gain (IFRS 16) of R903 million in 2021, “according to the statements.

Pepkor announced in April that the acquisition of 12 leased properties from Steinhoff International Holdings received the necessary approvals and all related conditions were met. The transfer of 11 of the 12 properties was completed during the year.

Riots and looting

Pepkor also received a total of R671 million from insurance companies as compensation for damages suffered in the July riots and civil unrest in KwaZulu-Natal. Management says an amount of R500 million for infrastructure damage and inventory losses represents only the initial payment of their claims, as well as R171 million received from insurers for business interruption losses.

Lourens notes that the civil unrest that broke out in KwaZulu-Natal and Gauteng during July 2021 resulted in the looting of 549 stores across the group.

Read:

Pepkor: more than 500 stores looted and damaged, but most to reopen in September
Pepkor talks about renovation spree after riots closed stores

“As reported on July 16 and 23, 2021, this represents approximately 10% of the group’s total retail store base. One of the JD Group’s distribution centers in Cato Ridge, KwaZulu-Natal was also looted.

“Commerce was disrupted, with several stores closed intermittently in the affected areas as a precautionary measure to ensure the safety of employees and customers. In addition, the group’s supply chain and distribution operations were severely disrupted in the affected areas as the group took swift action to implement extensive tactical measures to protect and safeguard its infrastructure, ”says Lourens.

Pepkor had reopened 413 of the affected stores by the end of October 2021, 75% of the affected stores.

80% of the looted stores are expected to be reopened by December 2021, and the rest will be delayed due to rebuilding of infrastructure or shopping complexes that have yet to reopen.

“As previously reported, the group has comprehensive insurance coverage in terms of material damage and business interruption. An initial claim for property damage of 1.2 billion rand was submitted to the South African Association of Special Hazard Insurance (Sasria) and an interim payment of 500 million rand (net of VAT) was received and recorded in the results.

“An initial claim for business interruption of R717 million was filed and an interim payment of R171 million (net of VAT) was received and recognized. The group’s insurance coverage is expected to mitigate the impact of the civil unrest on the group’s bottom line, ”says Lourens.

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Management appears optimistic, despite noting that the retail market remains tight as SA faces record levels of unemployment.

“The full effect of Covid-19 is still unfolding and has a huge impact on consumers at the lower end of the market,” says Lourens.

“Sales growth has been under pressure during the first part of the new financial year. However, the performance compared to 2019 is still positive.

“Disruptions in the supply chain have affected the group, leading to increased costs and delays in product entry. The order book has been improving and inventory levels are expected to return to normal for the December trading period, ”he says.

Pepkor’s share price reflects changes in fortunes. The share price also more than doubled from the low of just over R10 when the JSE had a severe case of coronavirus in early 2020.

The current share price of just below R24 places the stock at a price-to-earnings ratio of more than 17 times.

Casparus Treurnicht, an analyst at Gryphon Asset Management, says the stock was likely a little ahead of itself, as the stock price is up 30% compared to earnings growth of 10.5% since 2019.

“Long-term investors are probably opting for this fish that is still growing in a cloudy and shrinking pond.

“My concern, from a margin perspective, is that everyone is going for the value segment,” says Treurnicht.

“Second, we’ve had headwinds from the commodities sector and government employment, which appears to be at its peak and could be changing.”

However, he adds that Gryphon is not very optimistic about the retail sector in general.

Read: SA rate hike could signal the end of cheap money in the region

“There is a big change that most of the tailwinds are turning [a] headwind, ”he says. Inflation is picking up and the Reserve Bank of South Africa has started raising interest rates.

Listen to Ryk van Niekerk’s interview with Pepkor CEO Leon Lourens:


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