SPP’s restructuring over the past two years has delivered remarkable results. Net debt was cut by 46%, from R10.0bn to R5.4bn, while its leverage ratio dropped from a covenant-breaching 3.0x to 1.7x. Its operational footprint was simplified from five countries to three, reducing store count by 19.5% and headcount by 35.5%. Although SPP’s turnover fell by 12.0%, its operating profit rose by 46.3%, improving OPM from 1.2% in FY23 to 2.0% in FY25. Most of its critical challenges have been resolved, and management can now focus on two remaining issues – boosting turnover growth and restoring SA OPM to 3%.
Despite these impressive improvements, the share price remains under pressure. SPP’s forward P/E has dropped to 8.6x, which is two standard deviations below its long-term mean of 14.9x. We argue this derating is not justified, given the substantial improvement in its financial position. While mindful of the remaining challenges, we believe there is a high probability of mean reversion, which could lead to a rerating of the shares.
We believe management must refocus on expanding its franchise base to maintain market share. We think Pick n Pay’s (PIK) franchise store network could be a source of potential franchisees, as some of them may be dissatisfied with that retailer’s restructuring efforts. Even if PIK has headleases on many of these sites, defecting franchisees could set up competing stores in new sites, potentially with financial assistance from SPP, in our view.