How the townships can lift Pick n Pay off the planks

IT WAS a big number bonanza last Thursday week, when Boxer invited SA’s anlyst community for a 6-hour tinkerfest under the retailer’s metaphorical hood, ahead of its listing on the JSE later this year. 

And what’s been shown so far – including Pick n Pay’s likely valuation of the asset – could mean that buyers of Pick n Pay shares now are essentially getting the Pick n Pay group, ex-Boxer, for free.   

Boxer’s headline figures, for starters, are arresting: From a store base of 477 now, it wants to double in size in six to seven years, keeping its turnover growth going at double digits.

The retailer, which is focused on SA’s lower LSM consumers and trades mainly in townships and rural areas, has excellent form in this regard already. Turnover growth, annualised, has been at 19% over the last three years. It made R37,4 bn in sales in the last financial year, and R2,1 bn in profit.

That puts its trading profit margin at 5,6% – way in excess of its parent Pick n Pay’s and above even Shoprite’s 5,5%. Shoprite, remember, trades at profit margins that are not only the envy of South African grocery groups but those the world over.  

Unsurprising then, that unbundling a portion of Boxer will be a surefire way to raise capital for the Pick n Pay group, which, together with this year’s R4bn rights offer should return to a net cash position.

That’s some turnaround from where it was six months ago, when there were genuine fears that Pick n Pay could go bust. While Pick n Pay has yet to state exactly how much of Boxer it will be selling to outside investors – the market expects it to list anything between 30% of its shares in Boxer to 49,9% - the fact that it’s hoping to raise R8bn from the offer gives a good idea of what the whole group is worth.

Working backwards, that’s anywhere between R24bn to R30bn according to the analysts that Currency spoke to. 

“I think that once the Boxer IPO occurs, people will be able to see what the business is worth inside Pick n Pay. And then maybe people will realise: We’re buying Boxer and getting the rest of Pick n Pay at a negative value,” says Cobus Cilliers, analyst at All Weather Capital. 

Consider that Pick n Pay’s current market capitalisation is R21bn. In other words, the entire Pick n Pay store base outside of Boxer is worth less than nothing, which is clearly absurd.

Snapping up shares

It means All Weather is happily snapping up the retailer’s shares.  They’re not the only ones.

Umthombo Wealth’s Alex Duys says: “We expect demand for Boxer shares to be very high, so it’s prudent in our view to get exposure to Boxer by buying Pick n Pay shares in advance of the IPO”.   

Cilliers gives the credit for the turnaround at CEO to Sean Summers, who was brought back into the company a year ago to try to salvage what once was SA’s premier retailer. 

“If you spoke to people a few months ago, people were talking as if Pick n Pay was going to hit the wall,” he says. Now, “it's a very different conversation”.

Pick n Pay has about 349 corporate stores and identified a further 100 problem stores that they plan to close or convert.  

“Not all stores are loss-making. Once again, if you look at how much cash they will have on their balance sheet post this IPO, that buys you a lot of time. I think Sean is going to be conservative and pragmatic as to how he converts these stores. There’s a lot he can do and I don’t think the market gives him the advantage of that,” reckons Cilliers. 

But back to Boxer, which first opened its doors in KwaZulu-Natal in 1977. Pick n Pay swooped in 2002, scooping up not just an entry into the mass discount market, but a management team that has stayed the course; CEO Marek Masojada, for example, has headed the company for 30 years.

Currency asked for an interview with Masojada but was told there would be no media engagements ahead of the IPO.  

Boxer is a “soft discounter”: It sells a limited range of goods that bridges the gap between hard discounters – shops that carry very limited ranges and offer no fresh foods – and traditional supermarkets, which carry everything.

Ultrasensitive to social grant payments 

The group is ultrasensitive to social grant payments – which hit R250bn last year, going to almost half SA’s population. Boxer expects this number to hit R300bn by 2027. 

Looked at on a map, the chain’s all over KZN and the Eastern Cape, but hardly a contender further south. “It does seem like a proper gem if you look at the topline growth and the store growth potential they’ve highlighted,” says Ninety One analyst Achumile Mashalaba.

 “I’m from the Eastern Cape and in the former Transkei there are Boxers everywhere you look but I’m currently based in the Western Cape and you don’t really see many Boxers unless you go and visit the townships. So if you look at the map, the growth potential they are talking about is there.”

Especially for a food retailer, store growth helps drive top-line growth, which in turn helps lift profit margins; being bigger means companies get better rebates from suppliers. 

“The question down the line is if you’ve grown the store base and you’ve gone from 500 to 800 or 1000, will they still be able to generate the margins they are currently generating? Other competitors won’t sit still. But we’ll probably revisit that conversation in five years’ time,” says Mashalaba. 

Potential pitfalls

This is also where Duys sees potential pitfalls. “Boxer has ambitious growth targets and that does come with execution and capital allocation risks. Managing costs and working capital won’t be easy, and if not done right could lead to major disappointment for shareholders” he warns. 

Probably the closest competitor to Boxer is Shoprite’s Usave division, which grew sales 13,2% in the year to end-June 2024, out of 463 stores. Shoprite doesn’t split out Usave’s turnover or profits in its financials but together with the Shoprite brand, it brought in sales of almost R100 billion. 

Asked whether he’d buy Boxer or Shoprite, Cilliers says: “The metrics are very good at Boxer; some of them are better than Shoprite depending on what you look at. Shoprite executes exceptionally well, they’ve got very good technology, but within the specific slice where Usave (trades), Boxer is very competitive. And I think in some formats I think they’re probably a little better”.   

One of the striking features of last week’s presentation is how independent Boxer is from the general Pick n Pay group. “It is run very differently to how Pick n Pay is run: It’s a very small head office unlike Pick n Pay which has a monster head office,” says Mashalaba. 

There are overlaps – as in IT systems, and accounting, which may diminish over time. “I guess down the line, as Pick n Pay sells more of what they own in Boxer the question is what will happen to those relationships from a systems perspective, but I don’t think it’s a concern,” says Mashalaba. 

Cilliers sees Boxer as a “unique” asset. “It’s perfectly positioned for the South African market and it’s going to trade at a higher multiple – similar to what Shoprite trades at, maybe even a premium. But we have to see what happens with the listing price”. 

While it’s good practice to set the listing price below the maximum of what you could get, in order to see a share price bounce at the beginning, Duys reckons the institutions who’ve been invited to get a look-in (as opposed to retail investors) are going to be falling over themselves for a piece of the action.   

“In such a scenario Pick n Pay Group wouldn’t need to sell too much of their stake, which will be very value-enhancing for Pick n Pay shareholders,” he says.  And with a perky balance sheet and management attention entirely focused on fixing the core group “the probability of a successful turnaround seems more plausible”, says Duys.     

♦ VWB ♦

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