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Is there growth potential in PG p.l.c.?

06744 CC Trader Talk V2

The research team at Calamatta Cuschieri recently distributed an equity research report on PG p.l.c. (“PG” or “Group”) with a “Buy” recommendation and a one-year price target of €1.90, implying a capital upside of 2.7% to the current price of €1.85 as at the date of this writing.

PG plc is engaged in the retailing of food, household goods and other ancillary products through the Pavi Shopping Complex and Pama Shopping Village, and the selling of Zara® clothing and Zara Home® household goods as a franchisee of the Inditex Group.

The Group also leases a number of retail outlets within Pavi Shopping Complex and Pama Shopping Village to third parties.

Car parking facilities operated at both Pavi Shopping Complex and Pama Shopping Village are made available to customers at no additional cost. The free of charge car parking offering constitutes an integral part of the Group’s business model.

PG’s latest financial results (FY2019) illustrate a further increase in revenue of 9.6% under the ‘supermarket and associated retail operations’. The refurbishment implemented on several outlets (Chinese and Bakery) within the Pavi Shopping Complex, coupled with the initiation of Sunday trading and the commencement of on-line shopping, have all contributed towards double digit growth in revenue relating to Pavi. Management also confirmed that revenue growth concerning Pama has gradually started slowing down.

In such respect, 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 from the supermarket operations in the near future.

In terms of the Group’s franchise operations, revenue decreased by 8.3% given that the Zara® outlet in Sliema ceased operations from July till November 2018 due to refurbishment works, which proved to be successful. Post refurbishment, sales were 39% higher than in the corresponding period before the project was undertaken, exceeding managements’ previous target of 30%. We are anticipating further growth in terms of the Group’s franchise operations going forward, given that the Zara® outlet will now operate in a much larger store.

Although the Group incurred a higher level of administrative expenses in the year under review due to the increased staff count relating to the larger Zara® outlet in Sliema, EBIT margin marginally increased to 11.7% (2018:11.5%). This improvement has been primarily initiated due to the increase in revenue registered during 2019.

Furthermore, the Group went from strength to strength in terms of profitability over recent years, whereby PG’s net income over the last three financial periods increased by a significant 21.4%, in line with Pavi and Pama operating at full capacity.

During FY 2019, PG declared a final net dividend of €0.042 per share, translating to a net dividend yield of 2.4% and a dividend pay-out ratio of 50.4%, in line with PG’s 50% dividend policy at IPO. Going forward, we anticipate that given the strong cash position of PG we see the current attractive net dividend yield of 2.4% to be maintained.

As part of PG’s focus on improving its overall operational efficiency, the Group is looking to undertake additional investments such as replacing existing IT infrastructure and replacing it with a modern IT system, together with further refurbishment at Pavi Shopping Complex.

Nevertheless, PG has the potential for investments in additional supermarkets in other areas as well as potential expansion of existing premises, including the ex-pasta factory (Qormi), which the Group has bought during FY 2018 for a total consideration of €3.5 million.

We anticipate the Group to continue building on its growth trajectory, albeit at a slower growth given that both supermarkets are approaching saturation point. Based on this, combined with the maintained attractive dividend yield of 2.4%, we rate these shares a Buy.

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