Company Results Analysis 24 November 2017 Recommendation: Underweight JSE Capped SWIX weighting: 0.80% Recommended Exposure: 0% JSE Code: MRP Current Share Price: ZAR 20700c MR PRICE GROUP LTD Sector: Consumer Discretionary Max Sector Weight: 32% Nature of Business: Mr Price Group is a fashion value retailer, selling predominantly for cash. The group retails apparel; homeware as well as sportswear, with brand names including Milady s, Mr Price, Mr Price Home, Mr Price Sport, Mr Price Money and Sheet Street. Stock Data: Market Cap (R'bn) 56.1 52-Week High 21 175 No. of shares 256 52- Week Low 13 862 Avg. daily value (R'm) 3 06.6 1 Year TR 50.95% Free-float 81.0% 1 Month TR 17.57% Beta 1.00 Source: Bloomberg Interim results for the period ending Sep-17 Key Financial Data: 10% Sep-17 Sep-16 Headline EPS 434.1 HEPS Growth 23.6% -7.4% Historical P/E 21.3 Turnover Growth 6.7% 1.5% NAV 2 566.3 Operating Margin 15.7% 13.7% P/NAV 8.1 Interest Cover 100.0 100.0 Current assets NAV 1 674.5 Effective Tax Rate 28.5% 28.4% NTAV 2 392.5 ROE 42.9% 52.0% DPS (last 12 months) 717.8 Debt/Equity -19.5% -14.9% Dividend Yield 3.5% Cash/EPS 1.1 1.1 PEG Ratio* 117 ROC 38.3% 35.2% Share Price 20 700 Quality Rating** 45% 70% See *Value Filter and/or **Quality Filter Comments on results: Franco Pretorius Head of Equity Research +27 (11) 996 5200 Franco.Pretorius@psg.co.za Mr Price delivered a good set of results for the interim period ending September 2017, driven by an improved performance from MRP Apparel, Miladys and MR Money. MRP Home and Sport came under pressure, as the merchandise offers in these chains are considered a more discretionary buy. The group added 29 stores during H1 increasing trading space by 2.3%. The group traded out of 1240 stores at 30 September 2017. Total turnover increased by 6.7% to R9.8bn, with retail sales up 6.4% (LFL: +4.6%) to R9.1bn and other income up 11.2% to R643.3m. Cash sales increased by 7.2% and accounted for 82.4% of total sales. Credit sales was 5.1% higher. RSP (Retail Selling Price) inflation was 2.6% and units sold increased by 4.2% to 97m. Gross profit increased by 14% to R4.4bn, resulting in a higher gross margin of 44.7% (2016: 41.7%). Merchandise gross profit margin improved 280bps to 42%. Adjusted EBITDA grew by 23% to R1.7bn, which combined with a 30% increase in the depreciation expense, resulted in a 22% increase in adjusted operating profit to R1.5bn and 200bps improvement in the operating margin to 15.7%. Bianca Haywood Equity Analyst +27 (11) 996 5200 William.Eatwell@psg.co.za
Ultimately headline earnings came in 24% higher to R1.1bn, supported by 91% increase in the net interest income. Diluted HEPS was up 24% to 424.1cps. A gross interim dividend of 279cps (net dividend: 223.2cps) was declared, 22% higher than in previous year. Cash generation remained strong. Divisional overview: Operating Profit Revenue Operating Profit Revenue -Apparel: (contributed 71% to group retail sales and 69% to operating profit) The Apparel segment retails clothing, sportswear, footwear, sporting equipment and accessories. Retail sales increased by 9% to R6.9bn, while operating profit grew by 42.5% to R1.1bn, resulting in a higher operating margin of 16.1% (2016: 12.3%). *MPR Apparel retail sales increased by 10.2% (LFL: +7.8%) to R5.6bn, with RSP inflation of 2.6% and unit sales growth of 7.4%. The group continued focus on assortment and value proposition started to yield results. Ladies and men s outwear as well the junior RT business recorded double digit growth. Local and foreign sales rose 10.5% and 6.2%, respectively. Online sales recorded robust growth of 29.7%. MPR Apparel has the highest number of Facebook and Instagram followers in the SA fashion retail sector. Operating profit improved on the back of strong gross profit. Trading space increased by 3.4%.
Trading density declined by 0.7%. Management indicated that the stock at hand is much better shape than compared to prior period. *MPR Sport (9% of Apparel retail sales): retail sales increased by 1.5% to R644m (LFL: -4.6%), with RSP inflation of 0.9% and unit sales growth of 1.1%. Sales were impacted by the discretionary nature of sports merchandise. Footwear sales grew 10.4%, while ladies, men s and youth apparel all recorded growth of between 3% and 4%. Equipment and outdoor departments disappointed. Gross margins improved, while operating margins were impacted by inflation and space growth. Trading space grew by 6.3%. Trading density declined by 3.5%. *Milady s (8.5% of apparel retail sales): retail sales increased by 11.9% (LFL: +11.8%) to R651.8m, with RSP inflation of 9.3% and a 3% increase in unit sales. Apparel and non-apparel sales rose 16.7% and 5.1%, respectively. Gross profit improved on the back of lower marked downs. Trading space contracted by 0.5%. Trading density improved by 5.8%. - Home: (contributed 23% to group retail sales and 19% to operating profit) Retail sales declined by 0.6% to R2.3bn, reflecting the continued pressure on homeware sector. Operating profit fell by 16% to R304.7m, resulting in a lower operating margin of 13.4% (2016: 15.9%). *MRP Home retail sales declined by 2% (LFL: -3.4%) to R1.6bn, but would have been flat if it was not for the closure of the group s flagship store due to storm damage. RSP inflation average 2.1%, while units sales was 3.5% lower. Profits was impacted by a very strong comparator. Trading space rose slightly by 0.3%. Trading density declined by 1.1%. *Sheet Street s (30% of homeware retail sales): retail sales increased by 2.1% (LFL: +1.1%) to R694.7m, with RSP inflation of 5.2%, offsetting a 2.7% drop in unit sales. The livingroom department recorded sales growth of 8.2%, while bedroom department sales fell by 1.4%. The gross margin was impacted by increased promotional activity. Operating costs were well contained below inflation. Trading space marginally increased by 0.1%, while trading density improved by 3.2% - Financial Services and Cellular (mrpmoney): (Contributed 6% to group retail sales and 12% to operating profit). The Financial Services and Cellular segment manages the Group s trade receivables and sells financial services and cellular products. Retail sales increased by 4% to R545m, while operating profit only rose 12% to R202m. *Credit: (Contributed 42% to mrpmoney revenue) Credit revenue arising from interest and charges rose by 6.6% to R229m. The monthly service fees increased to R8.5m, while the initiation fee remained unchanged. The total debtors book grew by 4.3% to R2.1bn, with an impairment provision rate of 7.3%, comfortably ahead of net bad debt rate of 5.9%. New account application was up 6.6%, while account approvals was flat, limited by income verification rules. *Insurance: (Contributed 22% to mrpmoney revenue) Insurance revenue increased by 15.2% to R121m, driven by a good balance between growth in volumes and price. *Cellular: (Contributed 36% to mrpmoney revenue) Cellular revenue declined by 5% to R195m. mrpmobile temporary slowdown to focus on process improvement. The group tested the sale of handsets, simcards and accessories through an in-store kiosk and results exceeded management expectations, with further rollout planned. Airtime sales rose 4%.
Consensus Forecast: Forecast Date HEPS (cents)* Forward P/E Dividend (cents)* Forward Dividend Yield % 2018/03/31 1 034 20.0 688 3.3% Growth year 1 16.5% 3.1% 2019/03/31 1 150 18.0 762 3.7% Growth year 2 11.2% 10.8% 2020/03/31 1 280 16.2 850 4.1% Growth year 3 11.3% 11.5% Source: Bloomberg *ZAR Company prospects: The group successfully completed its new distribution facility in Hammersdale on time and within budget. Congestion at the Durban port remains a concern, however management are looking into solutions to minimize disruptions. The group added 29 stores in H1, placing it on track to achieve its annual target of 43 stores. The group expects trading environment to remain challenging, however the first signs of positive summer trading was experienced in October with sales growth of 8.3% and positive momentum continued into November. Recommendation: On a relative basis the share is trading in line with its historic P/E average and its historic premium to local competitors. However, on an absolute basis we feel the share s attractive fundamentals are fully reflected in the current share price and we would recommend an underweight position in the share. The group boasts an exceptionally high ROE, high operating margins and strong cash generation. Short-term opportunity to regain lost market share after the group underperformed relative to its competitors. Given Mr Price s high component of cash sales, it is unlikely to be affected to the same extent as other retailers by new credit regulations. Nevertheless, no material improvements are expected in the consumer environment in the near term. Intense competitive pressures are likely to persist. High level of discounting and promotional activities in the apparel retail sector has changed consumer s perception of value and will continue to weigh on margins. However, the group s margins are still on a high base relative to its peers. The opening of a new distribution facility in Hammersdale is anticipated to yield efficiencies.
Portfolio guidance: MR Price has a weighting of 0.80% in the Capped SWIX. We feel that the share is fully valued and would recommend 0% exposure.
About PSG Wealth recommendations: PSG Wealth provides medium to long term recommendations based on the premium or discount that a company trades at relative to our estimation of intrinsic value. We expect companies to rerate towards their intrinsic value over a one to three year period. The Long-Term Valuation is a quantitative based valuation based on the fundamental performance of each company in the past, as well at their future forecasts. The fundamental features used are based on profitability and includes EPS growth and Return on Equity (ROE). *PEG Ratio: The calculation is based on the normalised historic P/E Ratio / Forecast sustainable average growth over next 5 years. By using the PEG we envisage to outperform by selecting not only companies with low P/E ratios as such, but those companies with P/E ratios low relatively to their EPS growth. Above 140 the Peg ratio will be displayed in red pointing to a possible overvalued situation. Between 75 and 140 the yellow illustrates a fairly valued position. The green is for PEG's between 35 and 75 and this is where the best values can be found. Below 35 times the share is either very cheap or insiders know of bad news that has not yet been announced (thus not reflecting in our valuation). This is why we classify these shares as speculative. Investors should ensure that they have a lot of knowledge about shares classified as speculative before investing. These ranges are stated as an indication only. For more information refer to the actual publication. Although widely used, the PEG method is unstable when applied to companies showing volatile EPS trends. All assumptions and valuations are constantly updated and published in comparative tables per sector (Value Filter). **Quality Rating: The Quality Investor is an attempt to quantify certain financial ratios of a company to result in a quality rating. 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