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Posted: 23 January 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Pick and Pay (JSE code PIK) has had a marvellous run over the past few weeks, with its shareprice  being up around 17% in three months.

 

How should we look at that? Is the business today worth 17% MORE than it was three months ago?

 

Here is the DCF (discounted cash flow) valuation on PIK which I compiled last year, and which reflected that the value (based on Feb 2011 results) was around R47 per share.  And that R47 required sustained annual turnover growth of 10%, and margin (at the Profit before Tax level) of 3.5%.

 

alt

 

Now of course the valuation is not frozen (i.e. it isn't a horizontal line on a time graph), it can be expected to rise into the future and also fall backwards into the past at a slope of the discount rate. That sloping value trajectory would represent how the valuation rises in time as the growing turnover and profit come through, and all happening in a dull/orderly way at the discount rate.

 

Here is an illustration of that, with the price (blue) against the imputed historic valuation (red).

 

alt

 

So now the pictiure is clearer - and if anything my valuation has been inline with the market in its demanded cash profit growth, since my red "value curve" is generally in the broad trend of the the truth (price). But maybe the recent developments in retail have knocked PIK off its old perch as the prime food retailer on the JSE. Yes, Shoprite has been aggressive here in SA and into Africa, and yes Walmart has taken a stake here, but into another PIK competitor Massmart, not in PIK. So the game is tougher than it  once was. 

 

Anyway, with the sharp resurgence in price, is it based on long term expected operating results, or is the market maybe hoping for a dividend bonanza from the long awaited sale of PIK's Australian foray? One hopes its operating driven, since the dividend bonanza would not be repeatable! But if I look at the interims to August, I can't see the signs...after all, turnover growth was only 7.4%, and PBT margin declined! So I suspect PIK has to pull some golden rabbits from the hat for the current year to Feb2012, and we will only know the final results in around April.

 

My conclusion?

The value has not leapt by 17%. The price may have moved too low, and has partially sought correction, and I am not a buyer at the current price.

I will look after the finals are released. Certainly, clarity after the finalisation of the Australian/Franklins story will make it a clearer call. 

 

Cheers

Stuart

 


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