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PG plc: Strong FY20 performance and COVID-19 impact

PGTOMand

As per latest results (FY20), PG performed particularly well in the first ten months, which overall has resulted in the Group reporting a robust and a record financial performance.

Over recent years the Group went from strength to strength in terms of profitability, whereby PG’s net income over the last four financial periods increased by a significant 31.2%, in line with Pavi and Pama operating at full capacity, and the overall positive performance stemming from the Group’s franchise operation.

Although PG reported a record financial performance for FY20, the Group’s operations were still materially impacted by the implications brought about by the COVIID-19 outbreak in Malta and abroad. It is thus fundamental for investors to keep in mind that the pandemic’s impact on PG’s FY20 results was only restricted to a two-month period, given that the Group’s financial year end is 30th April.

FY20 results highlights:

Revenue

The Group’s revenue during FY20 amounted to circa €120m, reflecting an improvement of 11.1% over FY19. This improved performance was supported by the successful operation of its Zara® outlet in Sliema and the overall franchise operation (+29.9%), a steady performance at Pama (+3%) and sustained growth at Pavi (+16%), which has benefited from a substantial refurbishment programme that is now in its final stages. In accordance to the guidance provided my management, which will be discussed in further detail below throughout this article, we anticipate the Group to achieve a lower revenue level for FY21.

EBIT

Notwithstanding the increase in operating expenses exclusive of depreciation (+8.7%) followed by the aforementioned improvement in revenue (+11.1%) for FY20, EBIT margin as per FY20 results improved from 11.7% during FY19 to 12.6%. In line with implications brought about by the COVID-19 pandemic on the Group, we expect EBIT margin to marginally taper down during FY21.

Operating expenses

These mainly consist of cost of sales, selling and marketing costs and administrative expenses. Cost of goods sold incurred as per FY20 results increased by 10.2% to €99.4m, which is deemed to be in line with the increase in revenue during the period. Selling & distribution costs together with administrative expenses incurred during FY20 collectively decreased by circa €0.9m over FY20. It is important to note that such operating expenses figure incorporates the changes brought about by the adoption of IFRS16.

Finance costs

Due to the implementation of IFRS16, the Group’s net finance costs increased to €1.6m during FY20. Moreover, PG has a positive track record of utilising its cash reserves to repay and settle portions of its existing loans on a yearly basis. As such, we expect lower finance costs on a comparative basis.

Dividend

The Group distributed an interim net dividend of €2m in December 2019. Furthermore, despite the COVID-19 situation, a second net dividend of €2.8m was distributed in July 2020, bringing the total FY20 net dividend to €4.8m. As at this time of this wring such dividend offering translates into a net dividend yield of 2.34%, which given the current climate, we deem as attractive.

COVID-19 impact

In the final two months of FY20, the Group’s operations were materially impacted by the COVID-19 outbreak. Management confirmed that whilst the Group’s supermarket operations were not materially impacted other than incurring higher costs, PG’s tenants within the retail and catering units at Pama and Pavi shopping villages, have been hit hard.

In such regard, management confirmed that PG waived all rents due in March, April and May in terms of the aforementioned tenants and are currently sticking to contracted percentage of sales, waiving minimum rents.

Moreover, in line with the fact that the Group’s retail offering was classified as a non-essential service, the Group’s franchise operation was closed over a stretch of two months during 2020, more specifically from end of March 2020 till beginning of May 2020.

Conclusion and outlook

Upon estimating when PG is expected to fully recover from the current crisis, it is key to highlight that much will depend on both the duration of this crisis and the extent of the impact on the local economy as well as, the scale and effectiveness of mitigating measures provided by the local and EU authorities.

Notwithstanding the points discussed above, it is important for investors to keep in mind that the PG Group is fully geared to benefit mainly from their franchise and retail mall operations once the current COVID-19 situation will push the local economy to sail within calmer waters. Once this situation is overturned, we should see an increase in consumption in terms of the Group’s franchise operations.

However, it is key to note that for FY21, the Group is projecting a 3% and a 5% revenue increase from the Pama and Pavi shopping villages and an overall 30% shortfall in rental income. In terms of the franchise operation, sales will fall by 50% up to August, declining to 40% and to 25% in following quarters. Such expectations are built on the assumption that there will be no further lockdowns, especially throughout the Christmas period.

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