By Mike Lawrenson
Much excitement greeted the listing of Boxer on the 28th of November 2024, the first listing of a discount retailer in South Africa. Boxer can trace its genesis to 1977 when the business was founded in KwaZulu-Natal and later acquired by Pick n Pay in 2002. Boxer has positioned itself as a “full-service discount supermarket” catering to the needs of the middle to lower income consumer market, with additional format offerings in liquor and builders’ hardware.
The Boxer offering marries the customer focus on value, quality and service with a highly efficient operating model, which prioritises the re-investment of cost savings and operational efficiencies into lower prices and deeper value for customers.
Growth by the numbers
Post its acquisition by Pick n Pay in 2002, Boxer has grown from 35 stores with a turnover of R800 million to 477 stores and turnover of R37bn in its most recent financial year to February 2024 – compounded annual growth rate (CAGR) in revenue of 19% in the past 22 years. This growth profile is even more impressive given it was achieved with zero debt and while paying out 70% of its earnings in dividends to Pick n Pay.
The decision to separately list Boxer arose as a result of financial difficulties facing Pick n Pay. The Boxer listing was multiple times oversubscribed with the company placing 157.4 million new shares at R54 raising fresh capital of R8.5 billion. Laurium Capital successfully participated in this listing.
This R8.5bn does not remain within Boxer; instead, it is paid up to Pick n Pay holding company to settle a pre-initial public (IPO) offering declared dividend. This capital together with the R4bn raised in the July 2024 rights offer will be used to settle long term debt at Pick n Pay level, resulting in a net cash position of R4.5bn.
This war chest will be used to fund the planned turnaround in the core Pick n Pay supermarket business. This will comprise investment into store refurbishments, technology, the roll-out of new stores and where applicable, selective store closures.
The IPO price of R54 placed Boxer on a one-year forward price to earnings (PE) valuation of 17 times, which at the time implied a 15% discount to the Shoprite multiple of 20 times.
The investment case for Boxer is premised on the following:
– Although the company begins its listed life with a small amount of debt, very soon it will be completely ungeared.
– Directing the majority of retained earnings (60%) and cashflow towards driving organic growth.
– Management targets a doubling in revenue in the next five years to February 2029. This 15% CAGR growth rate will be driven by:
– Doubling of the total estate to ~950 stores by rolling out 60 to 70 new stores per annum over the next six to seven years.
– Expected mid-single digit revenue growth
– Maintaining operating margins at around the 5% level – with much of the scale benefits from store and revenue growth being reinvested in pricing and operating efficiencies.
Successfully achieving the above should drive mid-teens growth in normalised headline earnings and free cash flow.
Thus the outlook for Boxer appears very attractive with a relatively ungeared balance sheet, which provides a solid foundation for strong store and earnings growth. However, at the current price of approximately R65 the one-year forward PE valuation has risen to just more than 20 times placing it at a similar rating to Shoprite. At this level we believe it is fairly valued.
Mike Lawrenson, a resource analyst at Laurium Capital, part of the PPS Stable Growth Fund investment team
BUSINESS REPORT