News24 | Pepkor bleeds after update, but JP Morgan still sees a ‘clear winner’

Growth is being moderated by a subdued retail environment, a high comparative base and investment in longer-term growth projects including its PlusB banking business, Pepkor said.

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Pepkor shares tumbled the most in more than three years early on Tuesday after the South African discount clothing retailer forecast muted profit growth as the cost of building its new banking business weighs on profit.

Earnings excluding certain once-off gains and losses are likely to decline as much as 1% or increase as much as 9% for the year through September 30, the Cape Town based retailer said after Monday’s market close.

The shares fell as much as 7.7% in early trading in Johannesburg on Tuesday, the biggest intraday decline since May 30, 2023.

It closed the day down 2% at R18.36.

Growth is being moderated by a subdued retail environment, a high comparative base and investment in longer-term growth projects including its PlusB banking business, Pepkor said.

Paul Steegers, an analyst at the corporate and investment banking unit of Nedbank Group cut his recommendation on Pepkor to market perform from outperform and set a price target of R22.

Launching its PlusB business brings execution risk and upfront costs as Pepkor builds banking infrastructure and acquires customers without a banking partner to share the burden. The retailer expects the build to cost less than R1 billion.

Shaun Chauke and Elena Jouronova, analysts at JPMorgan Chase & Co., were more upbeat, retaining their overweight rating.

They said Pepkor’s 9.8% retail sales growth for the 10 months through July compared favourably with recent peer performances and that the company is the “clear structural winner” in South African value retail.

Still, they flagged potential drag on operating expenses and free cash flow as Pepkor invests in the new lender and other financial-services initiatives.

Same-store sales increased 3.1% in the period and the company said it continued to gain market share while offering a lot of discounts.