SIMON BROWN: I’m chatting now with Gary Booysen, portfolio manager at Rand Swiss. Gary, two pieces of news out yesterday: MTN and Pick n Pay. Let’s start with Pick n Pay, their trading update. Certainly the market seemed to like it, pushing the stock higher on the back of it.
GARY BOOYSEN: Yeah, I think it’s a nice result for Pick n Pay. We’re seeing a reversal of, I suppose, the down-trend in earnings over the last two years. I think it’s getting back to normal, even though the trading statement was very heavily focused on the damage that they took over the civil unrest in KZN and Gauteng. But it seems to be doing well. Sales up 5.2% on a group level. Their selling-price inflation only at 2.9%; like for likes up 4.4%. So they’re getting some volume growth. Clothing is doing very well, that up 21%. So it seems like they’re taking market share there as well.
A little bit of a chatter on Pick n Pay ASAP, but you still get the sense that Checkers Sixty60 is doing better in the online delivery space. But I think it will be a focus as the business starts to split, really trying to revamp those Pick n Pay Select stores, which are targeted at the higher-end consumer, and then of course a more aggressive or a lot of Boxer [focus] as well, obviously keeping the selling-price inflation low and trying to present a value offering in a very difficult environment for the low-end consumer.
SIMON BROWN: Having a look at the charts – Shoprite, Pick n Pay, Spar – the latter two were call it flat over the last year. Shoprite up 60%. Has Shoprite stretched its valuation where Pick n Pay may be worth a look now?
GARY BOOYSEN: It’s a good question, but I don’t think so. Let’s look just in terms of earnings. Pick n Pay’s earnings are a little bit messy, of course, with that civil unrest. The Sasria claims have all been absorbed by the 2022 period, but there’s some business-interruption insurance that’s not been allocated, and that could be as much as R1.8 billion, let’s say about R2.7 billion in total sales. So it is a little bit messy.
But looking at, let’s say, a one-year forward PE, you’ve got Pick n Pay on a one-year forward at about 19, and Shoprite only at 22. So not particularly different for a company that seems to be doing so significantly [better]; that’s at least if you look at a one-year price to book. For example, Pick n Pay coming in at 6.7, Shoprite at 5.78.
Personally, I don’t think Shoprite is particularly extended compared to Pick n Pay, and I think people are buying into the turnaround strategy that Pick n Pay is going to deliver. Maybe [it’s] not quite there yet … maybe a little more convincing before we see the share price rerating.
SIMON BROWN: Yeah. I take your point on that, and valuations not so stretched, even after 60% up.
MTN – the news was actually on the wire on Tuesday. It came out on Sens yesterday, ahead of the market open. In Nigeria, if you [haven’t] an ID associated with your mobile phone, you can’t make outbound calls. This is apparently to stop kidnapping. At the end of the day, it’s only about 3% of group revenue. It’s going to squeeze margins, but it’s nowhere near the $5 billion fine they got back in, what, 2015?
GARY BOOYSEN: Yeah, absolutely. There’s a couple of risks and there’s a couple of different ways that you can have a look at this. On the one hand, yes, that 3% number, which is the group service revenue, that’s for the unregistered SIMs that they’re going to have to cut off. That is going to have a potential impact on the earnings, of course, because it’s 3% of service revenue. People can’t make outbound calls. They can still receive inbound calls, they can use all other services, they just can’t make outbound calls.
But I think the risk that the market is definitely feeling is what this means in regard to the NCC [Nigerian Communication Commission] – could there be a potential fine? MTN has reiterated they have followed the order, they have cut off all of [those] SIM cards. There’s not going to be any further regulatory action – at least, there should be no regulatory action like we saw in previous times. Also I think they’re very supportive of this. The idea of having your SIM Rica’d – or their version of Rica, at least – is incredibly important; as you say, [it’s] to stop kidnapping, to bring Nigeria into a more stable situation.
A more stable Nigeria is very good for MTN because it accounts for, what, on 2021 numbers about a third of their revenue. So bigger than South Africa at only 27% of revenue.
So it’s an important jurisdiction and this will help.
At the same time legitimate users of those SIMs will reregister, so it’s not that that group service revenue is lost forever. Yes, you might go and register with Airtel or someone else, but in Airtel’s comments earlier in the week, they were saying they expect all legitimate registrations to come back on by the fourth quarter anyway. So people will reregister.
MTN has already rolled out 4 200 enrolment points so that you can go and basically update your details. So I think they’re handling it very well. We’ve got an investor call with them on April 8, so all investors can log in and hear the full update. I think the market overreacted and there’s that sensitivity to what happened last time. But if MTN hasn’t learned their lesson by now, you should sever all ties with them.
SIMON BROWN: But your point there – I think they are handling it better. I love your point that a more stable Nigeria is good for MTN. That’s Gary Booysen, portfolio manager at Rand Swiss.