(The following statement was released by the rating agency)
Sept 18 – Fitch Ratings has affirmed South Africa-based Pick n Pay Stores Limited’s
(Pick n Pay) National Long-term rating at ‘A(zaf)’ and Short-term rating at ‘F1(zaf)’. The
Outlook on the National Long-term rating is Stable.
The affirmation and Stable Outlook reflect Pick n Pay’s strong business profile, including
its leading market position in the domestic food retail industry and the diverse range of its
product mix, which incorporates both branded and private label products. They also factor in
Fitch’s expectation that the steps taken by management under its transformation strategy, such
as the focus on reducing costs, better working capital management and supply chain focus, are
sustainable.
Successful implementation of the transformation strategy should increase Pick n Pay’s
competitiveness and provide operating cash flow relief and EBITDA margin protection from FY13.
However, Fitch recognises that Pick n Pay has been slow to identify and adapt to changes in the
market and, as such, its competitive position has weakened.
In FYE12, Pick n Pay achieved turnover growth of 8.1% (like-for-like sales increased by
6.2%) while the EBITDA margin weakened to 3.8% from 4.2% a year before. Revenue growth was
primarily driven by high food price inflation of over 8% in South Africa. Fitch expects food
price inflation to remain high in the medium term, boosting top line growth in FY13 to FY14.
Fitch notes that significant progress have been made in FY12 in rolling out Pick n Pick’s first
loyalty programme (Smartshopper) with active users increasing to over five million. The company
also made progress with rolling out its centralised distribution centre, with 36% of total
groceries supply centralised by year-end. Fitch expects the transformation strategy underway
will start realising monetary rewards by 2014, translating into a gradual improvement in
operating margins to a level commensurate with the current rating.
Cash flow has been positively affected by working capital inflows in FY12 due to improvement
in the supply chain during and after the sale of the group’s Australian subsidiary, Franklins,
to Metcash Limited for ZAR1.2bn was completed. However, capital expenditure has been
higher than the historical level due to the continued roll out of the centralised distribution
strategy. Fitch expects expansionary investments to remain at an elevated level in the medium
term.
Liquidity is considered adequate with short-term debt of ZAR693.3m, including ZAR400m
outstanding under its three-month corporate paper programme and a ZAR250m short-term unsecured
loan maturity versus committed undrawn bank facilities of ZAR1.5bn and existing cash on balance
sheet.
Pick n Pay’s credit profile continues to be dependent on the domestic consumer economy
(92.3% of revenue derived from South Africa). While Fitch notes the increased diversification
from retail operations outside South Africa, the agency remains cautious that consumer
disposable income will be under pressure in the near term and that the increasingly competitive
environment is likely to result in anaemic organic sales growth in FY13.
Continued…
