The Finance Ghost: The lowdown on Pick n Pay, EOH, Hyprop and Primary Health Properties

22 Oct 2023

Pick n Pay’s 5.4% increase in turnover in the 26 weeks to 27 August isn’t terrible, but a drop in the gross profit margin from 19.4% to 18.5% certainly is. When combined with a surge in trading expenses of 13.7%, the result is a drastic 97.5% decline in trading profit.

The ubiquitous green scooters featuring Checkers Sixty60 branding have become a form of stock research in themselves, exemplifying the importance of common sense in making investment decisions.

By comparison, how many Pick n Pay asap! scooters have you seen this week? How many of your friends are singing Pick n Pay’s praises? Frankly, how many of them are even shopping at Pick n Pay these days?

Shoprite’s share price performance of 2.8% this year makes it the best of a bad bunch. A great deal of growth and defensiveness is priced into the stock already, which is why shareholders have only received a modest reward despite the underlying business doing so well. By contrast, Pick n Pay has lost 57% this year.

The market didn’t seem to fully appreciate the warning in the trading statement, as the stock fell further on the day of detailed results. This is odd, as the statement made it clear that Pick n Pay was incurring losses even before factoring in diesel expenses.

A 5.4% increase in turnover in the 26 weeks to 27 August isn’t terrible, but a drop in the gross profit margin from 19.4% to 18.5% certainly is.

When combined with a surge in trading expenses of 13.7%, the result is a drastic 97.5% decline in trading profit. In absolute terms, the group could manage only a meagre R31.8-million in trading profit. Once you factor in net finance charges and other line items, the losses mount to more than R830-million.

It’s therefore not surprising that the dividend is a thing of the past. Returning CEO Sean Summers needs as much capital as he can get his hands on. Perhaps he will be able to take the success in Pick n Pay Clothing and find a way to inject that energy into the rest of the group.

EOH: stable, but uninspiring

There’s a large difference between saving a company and turning it into something appealing. The former was achieved at EOH, even if the road was long and painful.

Some of the company’s assets were sold off, debts were repaid and eventually shareholders were asked to put in more money to stabilise the balance sheet.

With only a 3.3% increase in revenue in the year ended July, the end result isn’t exactly a rocketship. Although operating profit is up, there’s an 11.5% decline in earnings before interest, taxes, depreciation and amortisation (Ebitda) and the adjusted Ebitda margin was just 5.2%.

CEO Stephen van Coller and CFO Megan Pydigadu are both on their way out, perhaps to avoid dying from boredom as this business trends sideways.

Good properties are expensive — perhaps too expensive?

Hyprop is acquiring Table Bay Mall. If you know anything about Cape Town and semigration, you’ll know that many families are moving to this oasis by the ocean in pursuit of a life with lower suburban crime and fewer potholes. Table Bay Mall is located in Sunningdale, an area that is perfectly capturing the semigration trend.

To give you an idea of growth, there are 5,000 to 7,500 residential units in the pipeline in the area over the next five to 10 years. Although it’s hard to imagine how the traffic will cope in what is already a busy area, the mall is certainly a gem and sits right in the heart of this area.

This makes it a great acquisition for Hyprop, right?

Well, maybe. But also maybe not. This R1.6-billion deal has been priced at a forward yield of 7.7%, calculated by looking at net property income over the next 12 months and comparing it with today’s price. That’s expensive, which means that much of the growth in the region has already been priced in.

The deal also puts more debt on the balance sheet, taking the loan-to-value ratio to about 40.3%.

This is a strategic deal and the mall is a good fit with the quality of the rest of Hyprop’s portfolio. Investors may have to be very patient to see the benefits, though.

Primary Health Properties: there’s a new kid on the block

You need to get ready for a new offshore real estate investment trust (REIT) listing on the JSE. New listings are a rare sight these days, so just about any new opportunity gets some attention.

Primary Health Properties, a healthcare REIT, garners 89% of its income from UK and Irish government bodies. This implies reliable rent payments, evidenced by an increase in the dividend for 27 years in a row. The annual rent roll is a 5.3% yield before expenses and debt, with net overheads accounting for about 10.1% of gross rental income.

This is likely to appeal to South Africans looking for hard currency exposure with a yield underpin. Another such example is British American Tobacco, which sits at the opposite end of the health spectrum to this group. One might argue that owning both is a vertical integration strategy! DM

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 R29.

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Business Maverick

EOH: stable, but uninspiring

Good properties are expensive — perhaps too expensive?

Primary Health Properties: there’s a new kid on the block