VENTURES: Pepkor Pumping Great Profits
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EVER since delisting from the JSE in 2003 Pepkor, founded and shaped by super savvy investor Christo Wiese, has left many business watchers wondering just how well this iconic Cape Town-based fashion retailing conglomerate has performed.
In short, Pepkor is doing well…very well, and perhaps set to get even better.
Other than Wiese, Pepkor’s other major shareholder is investment specialist Brait, which recently reported results for the period ending March 2012 that provide some fascinating insights into the Pepkor machine.
First of all, Brait values its 37% stake in Pepkor – which comprises Pep Stores, Ackermans, Best & Less, Shoe City, Jay Jays, Dunns, John Craig – at R6.7 billion. That would imply an inferred value for Pepkor of some R18 billion – a substantial value but smaller than Mr Price (JSE valuation: R26 billion), Foschini (R30 billion) and Truworths (R42 billion).
Perhaps Pepkor, which is clearly valued on the conservative side by Brait, would be worth a fair amount more if listed on the JSE.
There are some compelling attributes that might see Pepkor growing faster than its listed peers in the years ahead.
In a recent investment presentation Brait makes no bones about liking Pepkor’s sprawling distribution platform and a sizeable footprint in its various chains (that will not be easy to build or replicate).
Brait also believes cash retailer Pepkor has operating leverage and an ability to expand its gross profit margins and improve sales densities.
Founded in 1965, Pepkor has already undergone a dramatic transformation from what was essentially a low price retailer of basic fashion. Pepkor still sells mainly clothing – but this core offering has been complemented with higher margin product lines like footwear, housewares, personal accessories, cellular products and financial services.
The retail network – supported by two clothing factories in SA and Zimbabwe as well as two sourcing offices in China - has grown to over 3 000 stores over nine retail brands.
This is the operating leverage that impresses Brait, who notes Pepkor owns and controls entire process from sourcing to sale. In terms of pure sales reach, Pepkor generated R22 billion in sales in the year to end June 2011. Pep accounted for 54% of the annual sales with another 20% coming from Ackermans.
Gross profits for this period were an impressive R2.5 billion.
Brait also believes continued focus on operating efficiencies to increase margins and profitability, which in financial 2011 were already an impressive 11.3%. Pep’s interim results to end December 2011 showed Brait’s faith is not misplaced. Turnover of R13 billion, which translated into gross profits of R1.4 billion and after tax profits of R600 million.
To contextualise this growth, it might be worth pointing out that Pepkor’s turnover has grown steadily for the past five years from around R15 billion in financial 2007.
If Pepkor can keep growing its top line at this rate – particularly by following its retail cousin Shoprite’s (also headed by Wiese) successful forays into Africa – Brait will be a very happy investor.
Most compelling is that Pepkor is amazingly efficient at converting its profits into cash. In the 2011 financial year cash flow from operations was nearly R1.9 billion – which translated into a very useful free cash flow of over R1 billion after Pepkor mobilised R837 million for capital expenditure.
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