Pepkor Holdings (PPH) – Refining its focus

PPH performed well in 1H24, with revenue growth attributed to a strong performance within the Clothing and General Merchandise (CGM) segment. The Group’s GPM expanded due to the recovery of the Ackermans brand, which realised more full-price sales and lower markdown activity. Operating costs for the business did increase, which weighed on OPM. Revenue rose 7.5% y-y in CGM, driven by improved trading, particularly in 2Q24. We are concerned that supply chain disruptions related to imported goods at Durban harbour have not improved. Management is particularly concerned that if the relatively warmer weather in SA persists into the third quarter, it could pose a risk to store inventories and lead to markdown activity.

JD Group achieved modest growth of 4.5% y-y off a low base in the prior period, as performance improved due to a better second quarter, with a successful Black Friday campaign and festive trading season. The Home division performed better due to promotional activity, with the Tech division maintaining revenue growth in an increasingly competitive market.

FinTech experienced strong revenue growth of 24.5% y-y, mainly driven by the normalisation of the Flash revenue and the extension of credit interoperability across the South African CGM brands. However, we are concerned with the rollout of credit in this challenging economic environment, where a significant number of new credit clients in PPH are new to retail credit and are therefore a risk, given that PPH has no history on them.

We expect the sale of The Building Company (TBCo) to be approved as the disposal will not be to a direct competitor within the building materials sector. The consideration of R1.2bn will be utilised by the Group to service debt, with the remainder kept for any investment opportunities that may arise.