Pepkor shares at six-month low on weak first-half results

Weaker-than-expected first-half results from clothing and general merchandise retailer Pepkor, combined with the continued uncertainty around the future of its controlling shareholder, Steinhoff, has knocked the Pepkor share price to a six-month low. .

The share price of the retailer, which has had a tumultuous 21-months since it was listed on the JSE as Steinhoff Africa Retail in September 2017, touched a

low of R16.40 on Wednesday before recovering marginally to close at R17.32, down 2.15%. In a bid to distance itself from its controlling shareholder, during 2018, the board renamed the group Pepkor.

Turnover in the six months to the end of March was up a lower than expected 7% to R35.3bn. Headline earnings reported a muted 3.4% improvement to 52.4c a share. CEO Leon Lourens described the results as commendable, given the circumstances.

“It’s not where we wanted to be but given the tough conditions, the results are commendable,” Lourens told analysts at a results presentation on Wednesday morning. He said the group had managed to maintain operating margins at 9.7%, and “in these difficult times that is an achievement”.

Sasfin analyst Alec Abraham said the results came in significantly below his bottom-line expectations for a 13% increase. “The like-for-like sales increase at the Pep and Ackerman’s chains of just 1.6% was particularly disappointing,” said Abraham, adding that it was an indication of just how tough trading conditions were.

The group targets the lower-income segment of the consumer market and has traditionally held up well during periods of weak economic growth when consumers tend to trade down. However, the prolonged slump in economic activity and high levels of unemployment have hit the group’s core market.

“People are not only trading down, they are falling out of the market altogether as they lose their jobs,” said Lourens, explaining that this means instead of monthly income of R6,000 many consumers were having to survive on social grants of R1,500 a month.

The increase in value-added tax and higher fuel and utility prices has also dented consumers’ spending power.

Abraham said that the disappointing results and the uncertainty around the future of the 71% stake held by Steinhoff made it difficult to justify the current share price rating.

A second analyst, who attended the presentation, concurred and said there was little reason to justify buying the shares at this stage. “It’s a great company but it’s difficult to see how they can improve earnings over the next six to 12 months, and who knows what Steinhoff is going to do with its shares,” said the analyst, who wanted to remain anonymous.

Lourens said that while the current tough conditions might last “a while” there were encouraging indications that people in the business community had become more positive in the past few months. He said the group, which has depth of management, was well placed to gain market share, as well as grow organically.

• BusinessDayLive