Our research team at Calamatta Cuschieri has recently conducted an equity valuation analysis on PG plc (“PG” or “Group”) with a Buy recommendation and a one-year price target of €2.11, implying a capital upside of 11.1% to the current price of €1.90 as at the time of this writing.
The Buy recommendation is commensurate to the solid financial performance registered by the Group during H1 2020 (year-end 30th April), whereby profitability increased by a healthy level of 28.3% over H1 2019. This is attributable to the refurbishment works implemented on the Zara® outlet in Sliema during FY 2019. In line with the fact that the Zara® outlet in Sliema will now operate in a much larger store, and given that the closure of the Sliema outlet during FY 2019 was a one-off disruption, we are anticipating further growth in terms of the Group’s franchise operations to be achieved during FY 2020.
In terms of the supermarket and associated retail operations, both Pama and Pavi kept operating at full capacity during H1 2020. However, we are of the opinion that both of the Group’s supermarkets are collectively approaching maturity stage, and as a result, we do not see any catalysts for abnormal growth in revenue in the short to medium term.
As per 2020 LTM results, PG’s operating expenses collectively decreased by circa €0.5 million over H1 2019. Such decline is attributable to several cost saving measures in terms of storage rental expenses implemented by the Group over H1 2020.
EBIT during H1 2020 increased by 40% over H1 2019 to €8.1 million, primarily due to the initiation of operations of the new Zara® outlet in Sliema and the effect of IFRS 16. In line with the expected increase in revenue to be generated by the Group, together with the anticipated decline in operating expenses as discussed above, we expect EBIT margin to improve to 13.6% during FY 2020, from 11.7% during FY 2019.
Following the adoption of IFRS 16 as from January 2019 onwards, the Group is expected to recognise an interest expense on the lease liability amounting to €1 million during FY 2020. We expect the Group to incur a lower level of finance costs moving forward, in line with the PG’s positive track record to utilise its cash reserves to repay and settle portions of its existing loans on a yearly basis.
Net profit as per 2020 LTM results increased to €10.1 million from €8.9 million during FY 2019, translating into an EPS of €0.094 and €0.083 respectively. In line with the increase in revenue anticipated to be generated by the Group, we expect net profit to increase to €10.3 million in FY 2020, equivalent to €0.095 per share.
Replacing existing IT infrastructure with a modern, robust, multi-store IT system together with the construction of an additional car park floor at the Pavi Shopping Complex, remained the Group’s focus on improving its overall efficiency moving forward. These collectively are expected to amount to circa €3 million and are planned to commence in FY 2020/2021.
The current P/E level (20.3x) at which the Group is trading at, is considered to be relatively attractive. In arriving at our price target, we utilised a P/E ratio of 23x, in which we deem to be in line with the foreign industry average, therefore we expect the share price to reflect such reality moving forward.
In line with PG’s strong cash position and capital structure, we see the current level of dividend pay-out ratio (50%) as sustainable. The shares currently offer a relatively attractive net dividend yield of 2.4%. This, coupled with the fact that PG is considered as a defensive stock, solidifies our Buy recommendation given the strong demand we are seeing for this sector.
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