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Pick n Pay CEO Richard Brasher
Pick n Pay CEO Richard Brasher

Richard Brasher leads strong share price performance


By Ann Crotty - Aug 6th 2018, 11:15

Pick n Pay CEO Richard Brasher may not have done enough to get the company’s share price over the R68 hurdle needed by November 2017, but he has overseen one of the strongest share price performances in the food retail sector over the past five years. 

Pick n Pay’s share price of R74.15 is 49% ahead of the R37 it was trading at in August 2013, just months after Brasher took the helm. Only Spar, which enjoyed a 65.5% surge in its share price over the five years, did better.

Shoprite is currently 28% ahead of its August 2013 level and the sector outlier, Woolworths, is down 21%.

So it was with some justification that Hugh Herman, chairman of the group’s remuneration committee, told shareholders at the annual general meeting this week that the 12-month extension to the November 2017 deadline was appropriate.

"We think it’s a fair balance between the interests of the executives and the shareholders," said Herman, referring to the "good shake" that shareholders have enjoyed.

The five years have been a tough time for all retail groups, not just food retailers.

Woolworths looked to Australia to protect its profits from the sluggish South African economy. It was also hoping for a currency boost from the expected decline in the rand. The R21.5bn purchase of David Jones generated much investor excitement, pushing the share price to a high of R107 in November 2015. The excitement quickly turned to resentment as the new South African owners failed to deal with the problems of the ageing store format in Australia.

Spar’s overseas venture, in Ireland and Switzerland, proved to be considerably more successful and explains the steadier upward trend the share price has enjoyed in the past five years. It is off its five-year high of R222.65 reached in March 2018, but not by much.

The Shoprite share price seemed trapped in a band between R150 and R200 until March 2017, when it began a surge to a high of R277 in March 2018. Disappointing performances from its previously strong businesses in other African countries have knocked the share price in recent months.

Over at Pick n Pay, 2017’s voluntary severance programme (VSP) and the new entry-level wage agreed with the trade unions seem to have lifted investors’ hopes that the group will finally deliver on its long-promised turnaround. The VSP removed 3,500 employees from the payroll at a cost of R200m. Herman told shareholders that the cost, which was taken fully in the first six months of financial 2018, contributed to 2017’s share price weakness.

A recent research report by JPMorgan stated that the two employee initiatives, implemented in financial 2018, should significantly reduce employee costs. According to the report, employee costs are the "key cause of the substantial operating margin differential between PIK (2.3%) and Shoprite (5.8%)".

The new entry-level wage agreement brings Pick n Pay in line with Shoprite and the regulated sectoral minimum wage, which JPMorgan estimates is about 20% below Pick n Pay’s previous entry-level wage. Given the annual 25% employee turnover and the management’s aggressive store rollout plans, the cost savings will grow as new workers are taken on at the lower rate. Chairman Gareth Ackerman is talking of 15,000 new jobs over the next three years.

Sasfin portfolio manager Alec Abraham said the expected benefits from the VSP were underpinning demanding profit expectations for the six months to end-August.

"I’m on the conservative side with an expected earnings increase of 22.8%, the Factset consensus is around 29%," said, Abraham. He said the VSP was necessary but must have been difficult for the Ackerman family, which has always prided itself on taking good care of its staff. "I’m hoping this year they’ll make good on their long-promised turnaround programme," said Abraham, who believes investors will be frustrated if there is no definitive sign of progress at the interim.

Element Investment’s Andrew Bishop, who raised concerns about the 12-month extension to Brasher’s option award at the AGM, said he understood the remuneration committee’s predicament. "But we struggle with the principle of changing the terms of the award." However, Bishop added, "Generally we’re happy with the group’s performance."

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