Mr Price

  • 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.

Mr Price