Pick n Pay (PIK) – This could be the turning point

PIK’s dismal FY24 results, with losses wiping out its equity, underscores the need to recapitalise the business. Our analysis shows the underperforming stores account for 59.7% of corporate stores, which indicates widespread systemic issues, in our view. The closure or conversion of 112 PnP stores will result in the chain shrinking to become the smallest competitor in the middle- to high-income food retail segment.

We consider the impact of the recapitalisation plan and estimate that PIK will need to dispose of 35.0% of Boxer to raise R7.4bn. These proceeds, together with the R4bn from the rights offer, should extinguish its debt and leave PIK in a strong cash position. The cash will need to be split between PnP (PIK) and Boxer, and we highlight the importance of sound governance in overseeing the separation process.

We calculate that the R4bn rights offer could increase the shares in issue by 178m (a 36% dilution). The ungeared PIK should be able to resume dividend payments, but at a more prudent cover of c. 1.8x, in our view.

We commend the steps taken to improve governance but note that some long-serving NEDs are up for re-election at this year’s AGM. We think a clean-up of the board should go beyond the rotation of long-serving members and the board should take some responsibility for the decline in PIK’s performance over the past 13 years. We argue that the loss of control by AIH makes the complicated B-share structure obsolete, and PIK should unwind this structure.