The market took kindly to what appeared to be a rather uninspiring set of results, achieved in a trading period where Covid-19 and the subsequent lockdowns resulted in approximately R1.8bn in lost sales.
The share price rallied by 7.82% to R168.40 due to several positive factors, the most important was the fact that no equity raise was necessary despite the pending R1.6 bn acquisition of the Power Fashion chain of retailers.
This group of 170 stores is situated mainly in the high streets and community centered malls serving low to middle income households. It retails largely apparel merchandise to family units, and also sells household items and value cosmetics.
The broad focus appears to fit in with the cash-based value philosophy of Mr Price, and appears to be targeting Pepkors hold on the deep value segment of the market. Power appears to be a similar market profile to that of Pep stores and Ackerman’s. Organic growth prospects with the launch of a baby and school range within the apparel division is estimated to be worth R3.8 bn.
Mr Price’s management appears to have seen a gap in this market after having been successful in identifying niches in their core markets in the past. They believe that they can replicate this success and add value in a deal which is bolt-on in nature. The size of the transaction approximately 4% of the market capitalisation of Mr Price. In addition Mr Price believes that the acquisition will immediately be earnings accretive and is not dependent on group synergies.
These announcements came simultaneously with that of the release of the interim results which reflected a decline in sales of 14.4%. HEPS came in at 333.5c per share, a decrease of 24.8%, and a reflection of the challenging trading conditions.
However the group was highly cash generative with cash on the balance sheet of R6.4bn at the end of the period, which enabled it to pursue opportunities in their niche segment in the mid and lower end of the markets.
The other positive was the declaration of a dividend of 210c, resuming the policy of a 63% pay-out ratio. Additionally the diversified cash retail businesses, ranging from apparel, household, financial services and cellular, showed double digit sales increases over the past six weeks as the economic recovery from lockdowns gains momentum.
Management remains cautious for the outlook for the second half of 2021, but the forward PE of around 14x to 15x in a defensive retail counter could offer the patient investor good long term growth prospects.