Business Maverick


Kaap Agri rises and shines while Pick ‘n Pay growth stalls

Kaap Agri rises and shines while Pick ‘n Pay  growth stalls
Corporate magazine of Thungela Resources at the company's headquarters. (Photo: Waldo Swiegers / Bloomberg) | Sacks of oats sit in the storage warehouse at the Kaap Agri in Malmesbury, South Africa. (Photo: Dwayne Senior / Bloomberg via Getty Images) | A sign above the entrance to a Pick n Pay Stores in Johannesburg, South Africa. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

All you need to know about the market movement and reaction on Kaap Agri, Hudaco, Pick n Pay, Bowler Metcalfe, Thungela and Coronation.

Kaap Agri

In the first quarter of the 2023 financial year, like-for-like revenue at Kaap Agri increased by 17.8%.

That’s impressive, but what is even more impressive is that like-for-like expenses grew by just 2.5%. Excluding the impact of load shedding, costs fell by 1.8% on a like-for-like basis.

This is an exceptional result, powering an increase in recurring headline earnings per share of 19.8%. With the acquisition of fuel business PEG Retail Holdings completed and a strong underlying operational performance, Kaap Agri expects the full-year result to be in the upper range of medium-term targets. 

Clean-up on aisle four

As Pick n Pay’s sales growth in South Africa falls further behind Shoprite’s, the company is feeling the effects. In the 17 weeks leading up to Christmas, Pick n Pay saw only 2% growth in like-for-like sales. Although Shoprite’s latest update covered the six months to December, like-for-like growth in Supermarkets RSA of 11.1% is in a different postal code to Pick n Pay.

Pick n Pay has a few “growth engines” and one of them seems to need some oil. Discount retailer Boxer only grew by 0.2% on a like-for-like basis over this period. There was a return to form for Boxer in January (up 9.7%), so Pick n Pay’s assertion that the festive result is due to base effects (events in the comparable period) does seem to have some merit. Still, if Boxer falters, there isn’t much else to get excited about in this group.

The former family favourite is facing significant challenges. Despite Pick n Pay keeping its selling price inflation below the CPI food inflation rate, it looks as though volumes fell by about 8% in the 17 weeks to Christmas.

The silver lining is Pick n Pay Clothing, the star of the show with sales up 6.2% in that 17-week period, with stand-alone stores up a particularly impressive 11.4%.

The sales growth in Clothing doesn’t save the group’s top-line result and things get worse as you move down the income statement. Pick n Pay is practically haemorrhaging money to keep the lights on in its stores. Diesel for generators isn’t cheap, and this cost is eating into profits.

Shoprite is trading at a high valuation multiple, and with good reason. Pick n Pay is also at a high multiple and can’t justify it, with the share price down nearly 18% already this year. 

Bowler Metcalf: plastic, not fantastic

Bowler Metcalf’s operating profit took a hit in the six months that ended in December 2022, despite a 13% increase in revenue. This immediately tells you that operating costs must have been under immense pressure.

Indeed, a 25% increase in raw materials and operating costs was where the ugliness happened. A 13% increase in staff costs doesn’t help either, but was at least in line with revenue growth.

It’s no secret that Eskom is putting pressure on businesses across every industry, and management at Bowler Metcalf is particularly outspoken about this problem. They do not expect the full-year result to be an improvement, although operating costs are expected to have a less severe impact over the full year.

The share price is down 15.3% over the past year, trading at R9.28. 

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Hooray for Hudaco

Hudaco’s impressive financial results for the year ended November can be attributed to the company’s operating leverage (the level of fixed costs in the business). You can identify high levels of leverage when a percentage change in revenue drives a much larger percentage change in operating profit. It literally gets “leveraged” higher.

Revenue increased by 12.3%, driving a 23.4% jump in operating profit before fair value adjustments. This in turn led to a 22.3% increase in headline earnings per share (Heps). The company’s strong cash position also allowed for a 21.7% increase in the dividend per share.

Compared with 2019, Hudaco’s Heps is up 48%. This is a through-the-cycle growth story, not a recovery, which says a lot about the business model and management’s ability to ride the waves — even the ones with sharks in them. 

Thungela: mining executives with a cash pile

Oh dear. As experienced fund managers will tell you, it’s time to get scared when the mining houses start doing deals. Historically, this is a strong clue that we’ve reached the top of the cycle.

To be fair to Thungela, the company operates in a country with failing infrastructure. The issues with Transnet are well documented and frustrating, affecting many of our critical mining companies. In search of both electricity and working railways, Thungela has headed Down Under.

The Ensham business in Australia is a well-established coal operation with a life of mine extending all the way out to 2039. Thungela reckons that there is a short payback period of just two to three years. It’s intensely difficult to predict the supply-demand dynamics of commodities, so treat that period with caution.

This is a Category 2 transaction, so shareholders won’t be asked to vote on the deal. The share price is down 14.8% thus far in 2023 and is back to April 2022 levels. 

Coronation owes SARS a king’s ransom

With a heavy heart, shareholders must bid adieu to the Coronation dividend. The South African Revenue Service (SARS) is first in the queue, after the Supreme Court of Appeal upheld the tax authority’s appeal against a previous court ruling in Coronation’s favour.

The expected hit to earnings and cash flow is material, and the company has warned the market that the next dividend is the likely casualty. The share price tanked by 11%, as investors disappeared faster than that tiger in Edenvale. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.


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