The year of the fight

The year 2017/2018 is a year that the direction of Pepkor would prefer to forget.

President Jayendra Naidoo calls this the year of the fight. A year filled with crises and tragedies and demanding extraordinary resistance from members of the Board of Directors and management.

During the year, Steinhoff, who owns 71% of Pepkor's capital, imploded spectacularly shortly after Pepkor was dissociated from Steinhoff and listed on the JSE, causing a chain reaction that threatened the very foundations. valuable retailer. The year was spent on firefighting, the most important of which was the refinancing of RBD 16 billion of Steinhoff shareholder funds, which then released the corresponding financial guarantees, and the most "irritating" is the low-intensity war that continues between Pepkor and his founders in the city of Tekkie. This resulted in the release of about 100 more experienced staff members from the city of Tekkie.

Sales of Tekkie City before and after staff departure

Source: presentation of Pepkor results

However, Leon Lourens, CEO of Pepkor, says that in the face of all these challenges and many more, deflation appears to be the most challenging test of the problems encountered over the past year.

"Deflation is very difficult for a retailer to handle," he told investors at the company's earnings presentation on Monday. "We pbaded on lower costs to consumers, which means you have to generate even more difficult sales to offset a deflation of around 4.5% in the apparel and footwear sector."

Despite this and other challenges, the group managed to produce some good results for the year ended September 30, 2018. Turnover increased by 10.9% to 64.2 billion euros, while operating profit rose 10.7% to 6.4 billion. However, after taking into account the exceptional fixed badets and the cost of € 511 million resulting from the Group's exposure to the financial guarantee and related loans (presented in the half-year), the operating result increased by only 1, 9% to 5.9 billion euros.

Earnings per share (Heps) was 36.7% lower at 84.5% (2017: 133.6%). About 30% of this amount resulted from the issuance of 882 million shares in 2017 by the group for the acquisition of Tekkie Town and 15% were absorbed by the aforementioned one-time costs. On a normalized basis, Heps was 99.3%.

Double-digit growth of Pep and Ackermans

"Operating activities have maintained a high level of performance, with double-digit growth of Pep and Ackermans," says Naidoo. The JD group has almost reached its breakeven point and the specialty brand group (which includes Tekkie Town and Shoe City) has grown by 12.5%, a substantial improvement over last year, did it? he declares. "We are aware that this year's results are below what we wanted to achieve, however, it is a very competitive result compared to our peers."

"The revenue growth was good considering the deflation in some of their sales categories," says Reuben Beelders, portfolio manager at Gryphon Asset Management. "Pep and some of its related companies are companies that should benefit from the current" constrained "consumer environment in the sense that consumers are disengaging in order to extend their underpressure budgets."

He noted, however, that Pepkor's operations in Africa were poor, with sales growth declining 1.8% in the 12 trading countries. "This is no different from what other SA listed groups have experienced in Africa." The company attributes this problem to the late effect of low commodity prices, currency shortages and high inflation rates that continue to weigh on consumer spending.

The company has continued to distance itself from Steinhoff to rebadure investors about the measures taken to limit "contamination". Pepkor will now fund its own loans for JD and Capfin, and has agreed to terminate its existing trading relationship with Century Capital (Fulcrum) in stages. "JD Group finances 28% of all furniture sales, we needed the certainty that this funding would remain available," says Lourens. This will require capital funding of R4 billion over three years, of which R $ 2.2 billion in 2019 alone.

Source: presentation of Pepkor results

During the year, Pepkor also closed the discount furniture retailer, Poco, and rebadessed the capital it allocates to barn companies whose results are suboptimal. "We are working hard to restore confidence and credibility in the market," adds Lourens. "Simply providing audited financial accounts, which seems to be a small thing to my knowledge, can help restore this situation."

Net debt increased to 12.2 billion rand (2017: 12 billion rand) and the group's ratio of net contractual debt to EBITDA (earnings before interest, taxes, depreciation and amortization) was 1.64 times. "It's higher than we are comfortable with," he says. "The goal is to reduce this figure to less than 1% by now three years."

The group generated cash flow from operations of 5.3 billion rand during the year. Cash generation was affected by additional investments in inventories, resulting from increased store clutter prior to the December peak period, the holding of directly imported mobile phones, previous inventory inflows and some carryovers from the previous season due to reduced sales.

Due to future capital commitments, strategic investments and the Group's ambition to reduce its conversion to a net debt equivalent to Ebitda in the medium term, the Board of Directors has approved a revised dividends providing coverage at three times the profits.

The board of directors declared a final dividend of 27.8 cents per common share, the dividend being the first dividend paid by Pepkor. Although debt is not a major concern, Beelders notes that with the group investing cash to "build" its debt portfolio over the next two years, shareholders will not feel the benefit of short-term profitability. "However, these long-term initiatives should benefit shareholders," he said.