Pepkor at 52-

There was some big news on the JSE yesterday. Omnia didn’t exactly keep us in suspense for very long after releasing a cautionary, with the group announcing a take-private offer by Solar Industries (an Indian industrials group).

Before you get too excited about the price of R134.50, let’s zoom all the way out. We haven’t even made it back to the peaks of 2014, when the JSE hadn’t fully appreciated just how lost the Lost Decade was:

This isn’t Omnia’s fault, just to be clear. It’s a reflection of the broader issues that plagued our market for a very long time.

Aside from covering Omnia in more detail, today’s mailer will also give you plenty to think about in the latest announcement from Pepkor. The company has guided positive HEPS growth (at the midpoint at least), yet the share price is in the doldrums. These kind of dislocations make the markets far more fun.

Speaking of fun, serve yourself a scoop of gelato before making your way into the rest of the company news today:

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Well, it didn’t take long for us to find out what is happening at Omnia (JSE: OMN). The group kicked off the week by announcing that Solar Industries India wants to acquire all the shares in the company for R134.50.

That’s a premium of 35.73% to the 30-day VWAP calculated up to 10 September (the last day prior to the release of the cautionary announcement). That’s a decent premium that could result in us saying goodbye to another well-known name on the JSE.

Omnia might be leaving the market, but it won’t be leaving the country. In fact, Omnia positions this as a significant direct foreign investment in South Africa that could create jobs as Solar looks to deepen exposure to the African market. An Indian – South African deal like this is the Global South in action, tying into the broader geopolitical shifts we are seeing in the world.

Focusing on South Africa, Omnia plays a critical role in the local agriculture and mining value chains. This was evidenced by the questions from agri-focused publications on the media call that I attended in the morning. Interestingly, Omnia’s agriculture business doesn’t overlap with anything that Solar Industries currently owns, so Solar is deliberately adding this diversification to its group. This is hopefully a good sign for local farmers, as the plan would be to grow rather than rationalise this business.

But then what does Solar Group do? There are no panels here for the roof of your house, despite the name. Instead, this group’s DNA lies in industrial explosives (clear overlap with Omnia’s mining-focused business). Solar Group has also built a defence and aerospace business over the years, so this isn’t their first foray into diversification.

Omnia investors won’t need to break their brains over whether they want shares in a defence company, as Solar shares aren’t on offer here. This is a cash deal structured as a scheme of arrangement, which means that the outcome will be binding on all shareholders provided that sufficient approval is obtained.

There are lots of regulatory conditions in play here, along with the usual stuff like material adverse change clauses. Full details (as well as the opinion of the independent expert) will be included in the circular due to be sent out on 12 October.

Moving on, Pepkor (JSE: PPH) is trading at a 52-week low. I’m currently a shareholder and I’m looking to add more as part of my long-term SA portfolio. The company has now released a voluntary update for the ten months to 31 July for me to chew on as part of that decision.

FY26 will go down as a period of consolidation and investment. Pepkor faced a tough period that included the benefit to sales of the two-pot retirement system withdrawals, but they still managed to achieve decent revenue growth and increase market share. But there’s been a lot of investment in the underlying platforms, including the PlusB banking project, putting a dampener on the HEPS performance.

We may as well get the HEPS growth out of the way before digging into the underlying performance.

If you focus on continuing operations and include the PlusB project, then HEPS for the year is expected to move by between -1% and +9%, implying 4% growth at the midpoint. If you exclude PlusB, you’ll find expected growth of between 2% and 12%, or 7% at the midpoint.

Total operations includes the Shoe City business that was closed in the first half of the financial year. On that basis, including PlusB, HEPS is expected to move by between -3% and 7%, only a slightly positive performance at the midpoint.

Or, put differently, the midpoint of these ranges suggests positive HEPS growth regardless of how you cut it. Yet the share price is down 26% over 12 months. Juicy dislocation? I like it, but then again, I’m not shy to buy with a long-term lens.

Traders with a shorter timeframe would probably look at this chart and point out how hideously negative the momentum is, which would suggest an approach of waiting for consolidation before adding to a position:

Falling knife? Golden opportunity? If it was easy to know the answer to this question, markets would be boring.

Before we dig into the segments, it’s helpful to give you context to the shape of the group. The Retail segments generated revenue of R76 billion in this period vs. R4.9 billion in Financial Services and R8.2 billion in the Informal Market Platform. The PEP in your local shopping centre is only one part of this story.

Revenue from continuing operations grew by 11.9% (or 7.3% if you exclude acquisitions). Like-for-like growth of 3.1% is below the 2-year compound annual growth rate (CAGR) of 4.9%, but still respectable.

Overall, the theme here is that revenue growth is slower than we saw last year. As noted above, it’s important to keep in mind that Pepkor is competing against a base period that included two-pot retirement withdrawals.

The two retail segments are putting in remarkably similar performances if you exclude acquisitions. Clothing and General Merchandise (CGM) grew by 6.1% on that basis, while Furniture, Appliances and Electronics (FAE) was up 6.3%.

Including acquisitions tells a different story, as CGM would be up 10.4% and FAE up 16.3%. The acquisition of the non-South African component of OK Furniture has made a big difference to the FAE segment.

Group cash sales were up by 9.0% and lay-by sales reduced by 2.0%. Credit sales, core to Pepkor’s current strategy, increased by 24.3%. Credit sales now contribute 18.0% of total sales, up from 16.0%. Management has noted that the pace of high-quality credit extension has moderated, a fancy way of saying that they are being more cautious.

Looking at channel performance, don’t make the mistake of thinking that online sales don’t work in value retail. Online was up by 38.9%, including 81.9% growth in the CGM segment. With more than 18 million members on the group’s customer value platform, the group has enviable digital reach. This is going to be very important when the banking operations come around.

Digging into the underlying banners (store formats), PEP led the way with growth of 5.4%. Ackermans struggled with negative growth in lay-bys and low levels of selling price inflation, leading to growth of just 0.4%.

The newly acquired Legit business has exceeded management expectations, driving growth in the Speciality segment of 51.5%. To show how significant the impact of an acquisition can be, Speciality was up just 4.3% on a like-for-like basis.

Beyond our borders, PEP Africa was up 6.4% and Avenida grew by a pleasing 13.7%, both in constant currency.

The financial services segment grew by 28.6% in this period, with the FoneYam cellular device rental business increasing its customer numbers by 14.7% to 2.6 million. Importantly for the economics of this business, the lifetime value of a customer is being extended by the trend of customers taking up a second rental after the completion of the first.

Abacus insurance is taking full advantage of the broader Pepkor distribution engine by offering embedded and bundled insurance offerings. Again, if you have distribution, you can find lots of clever ways to make money.

Interestingly, the Capfin business has deliberately curtailed its credit expansion and will reduce the book in future. This is because the plan is to grow credit through PlusB, the banking initiative. This makes sense, as the bank should be able to fund those loans through retail deposits, the cheapest source of funding around. PlusB is expected to launch in the second half of the 2027 financial year, with the total build cost still expected to be below R1 billion.

The Informal Market Platform segment grew revenue by 8.7%, with the Flash business enjoying growth of 19.0% in throughput to R58.4 billion. In July, Pepkor announced a transaction to merge Flash and Shop2Shop, thereby creating a business named FintechCo – hopefully a temporary name. The combined business would have annual throughput of over R200 billion, giving Pepkor significant participation in this high-growth part of the market.

Amazingly, the words “gross profit” appear just once in the entire announcement, with Pepkor noting that group gross profit margin has improved. I would’ve liked them to make more of a fuss about this, as it’s a really important way to protect profitability during a period of heightened investment in growth.

In balance sheet news, the company has structured a sale and leaseback of three distribution centres. Pepkor has retained a 35% minority interest and has unlocked R2 billion in capital that Pepkor can redeploy into high-growth opportunities within the group. The leases are 15-year triple net leases that ensure no near-term disruption at all to the existing operations through this transaction. Pepkor has also used this opportunity to anchor Badger Properties as a B-BBEE property fund, so there’s a clever empowerment angle to the deal.

Selected Director Dealings:

Do your own research and speak to your financial advisor. Nothing you read or listen to in Ghost Mail should be interpreted as financial advice. This is not a complete review of SENS and does not replace the need for you to refer to company announcements and reports yourself. Every effort is made to avoid errors in Ghost Bites and related podcasts, but I am only human.

Technology and industrial stocks led declines on Wall Street overnight, as risk-off sentiment took hold amid continued war escalation, rising yields, a firmer oil price and growing expectations of a US rate hike at this week's FOMC meeting. Artificial intelligence related shares came under additional pressure after OpenAI and Anthropic leadership called for a slowdown in AI development, citing humanitarian risks, while markets also reacted to news that OpenAI will likely delay its Wall Street listing until next year.

US futures continue to slide in early trade this morning. Asian markets are mixed, with the Hang Seng lower, the Nikkei higher, and the Kospi and Shanghai Composite tracking sideways.

The dollar remains firm and continues to weigh on metal prices in the short term. The rand is softer against this backdrop, and we expect a flat open for the JSE All Share index.

This update is provided by Shaun Murison, Senior Market Analyst at randswiss.com. Connect with him on LinkedIn here and follow him on X here.

Key Indicators: 

USD/ZAR R16.31/$ | US 10yr 5.02% | Gold $4,290/oz | Platinum $1,774/oz | Brent Crude $102.18