After the Boxer IPO, PIK should be ungeared, with substantial cash reserves, and the focus will shift to how it will execute its turnaround plan to deliver meaningful returns for shareholders. PIK previously benefitted from having 100% of Boxer’s earnings to offset Pick n Pay (PnP) division losses. This will reduce to c.68%, which could make the underperformance of PnP more apparent. Moreover, the finance costs on PIK’s debt averaged 10% in FY24, while Boxer’s return on net assets is around 80%. So, while selling a stake in Boxer is expedient to relieve PIK’s funding crises, the opportunity cost is quite significant. PnP corporate’s GPM is substantially lower than its peers, and we argue that the drop in private-label participation, the Ekuseni range rationalisation, and its waning execution of ready meals contributed to the decline in GPM. Rebuilding these ranges could take time, and a quick recovery seems unlikely. The decline in its franchise business is a concern. Franchisees may not have the patience or resources to wait for a turnaround of PIK, and their decreasing loyalty or exit could diminish PIK’s purchasing power, in our view. Boxer does not have excess cash, and the pre-IPO dividend will push it into a geared position. However, its trimmed capex (2.5% of sales, compared to 3% previously) and lower dividend payout ratio (40%, compared to c. 60% paid to PIK in FY22-FY23), coupled with its strong cash generation should result in the company returning to an ungeared position before FY27.
