PIK operating margins boom (#374)

Simon Shares

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• Ascendis Health (JSE code: ASC) trading updates illustrates the risks of relying too much on net asset value (NAV). They are writing down R4.2billion of "goodwill, intangible assets and property, plant and equipment". In other words everything. But the company has a market cap of only R2.2billion and that R4.2billion equates to some 850c per share totally destroying the reported NAV of 1435c.
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• Sasol (JSE code: SOL) taking pain again on Tuesday, off over 7% on a Cadiz report suggesting the dividend may be cut. For the past 10-15 years the Sasol dividend yield has averaged just under 4%, chunky. Right now the historic is almost 5% but a slashing of dividend by 50% will still see 2.5%. So maybe an even greater slash of the dividend? I think that's pretty certain as they need to pay down debt aggressively. This share has been a horror show.
• Prosus (JSE code: PRX) is making a takeover bid for Just Eats, which has been rejected by the board but time will tell. More interestingly is the Prosus theory which is that eating at home is going to largely disappear. Much like we mostly made our own cloths in the 1800s but today nobody does. They say cooking at home will be the same, in time nobody will cook at home. Interesting idea, especially in terms of home design - saving space in the kitchen and money on appliances. But then spending that money on delivery.
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Operating margins

Pick n Pay (JSE code: PIK) results were good, but the increase in operating margin was outstanding and this had a serious boost to profits.

Operating margin is the profit after the costs of sales, such as salaries, rentals and products, but before paying interest or tax. Hence a 'clean' profit margin as opposed to net margin that will also have interest, tax and other costs deducted first.

It is especially important for retailers but not banks or miners for example. For those sectors we need other metrics such as impairments, cost-to-income and head grade etc.

Every since Richard Brasher took over at Pick n Pay I have been moaning about their operating margin. He's been getting much right but the operating margin was stuck at 2%. Then in the last set of results tey crept a little higher and now are solid 2.8% up from 2.5%.

This too me suggests the turn around at Pick n Pay is now complete.

Of note is that Shoprite* (JSE code: SHP) has an operating margin of over 5% and even the recent earnings collapse saw it stay above 4%, so they earn about double from every 100c spent at their tills. The question is how high can the Pick n Pay operating margin go? Shoprite benefits form higher margins in the rest of Africa, Pick n Pay doesn't. So 5% may be too far for Pick n Pay, but can they get to 4%?

A last point. Pick n Pay Tuesday results saw most retailers rally on the back of hope that the result wee not only a good performance from Pick n Pay but maybe also an improvement in consumer confidence and spending.

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