Pepkor, Africa’s largest apparel retailer, expects further growth from its burgeoning financial services division, which is already generating more revenue than its furniture, appliances and equipment segment.
The group owns some of the country’s biggest clothing brands, including PEP and Ackermans, and intends to grow more in adult apparel where it’s under-indexed in terms of market share.
Pepkor has a strong balance sheet, and was involved in two of the three notable transactions in retail announced last year: it made a bid for Shoprite’s furniture business (House & Home and OK Furniture), and towards the end of the year said it was buying value clothing retailer Choice Clothing. It’s beefing up on adult apparel organically as well. At the end of February it launched its new brand Ayana in 32 malls across the country, and online.
Much of the action, though, is away from apparel; the growth of Pepkor’s fintech division is exceeding expectations and it plans to leverage its retail footprint of close to 6,000 stores to supercharge this performance. The insurance offering will be expanded, growth in cellular and smartphones will be targeted and retail credit interoperability across brands will be enhanced.
Fintech now accounts for about 14% of revenue and 14% of operating profit at a group level. The three main pillars for this are Flash (technology that enables informal traders to offer an affordable, safe payment system), the introduction of credit across all brands, and FoneYam — a cellular rental business that now has 1.2-million handsets in operation. In December alone, 180,000 devices were activated.
SBG Securities says in a report it is “favourably disposed” towards Pepkor thanks to its competitive positioning and developing insurance business.
The author of the report, Ya’eesh Patel, says Pepkor is now providing funeral, credit life and parcel insurance, as well as single asset insurance in the form of FoneYam. While credit life is the biggest of these now, SBG Securities suggests much of the opportunity is in funeral and single asset insurance.
SBG estimates the group’s insurance business could be valued at about R20bn over the next 12 months, a year-on-year improvement of about 45%.
Patel’s SBG colleague Charles Russell says in a separate report that Pepkor’s funeral policy sales have consistently outstripped other risk segments.
About 52% of South African adults had funeral cover in 2021, thanks in part to the growing number of providers and easier access. Pepkor is ranked 12th based on SBG Securities figures to June 2024, with recent reporting from Pepkor indicating that more than 100,000 people are covered.
Based on Pepkor’s brand resonance and distribution reach — there are 4,993 PEP stores, 2,617 Ackermans stores, 922 Speciality stores, 763 PEP Home stores and 143 PEP Cell stores — Patel says it could sneak into the top five in funeral cover.
Individuals are limited in terms of cover per policy, but they are legally allowed to increase their overall cover by taking out several policies with different providers.
Nedbank senior equity research analyst Paul Steegers expects Pepkor to see the fastest like-for-like revenue growth in its peer group over the next three years. “Further margin upside is likely, driven by the fintech business,” he wrote in a note released shortly after the group’s trading update.
Damon Buss, senior equity analyst at M&G Investments, says the outlook for Pepkor is increasingly positive with the growth of the fintech division exceeding expectations, driven by FoneYam and the insurance products, both of which are higher margin businesses than the core apparel division.
“FoneYam has a long runway of growth,” Buss says, citing annual sales of 11-million prepaid handsets a year, among other statistics.
He says the group is unlikely to make further major acquisitions given the growth of FoneYam and the significant capital required by PEP and Ackermans’ credit books.
Pepkor’s brands already hold substantial market share in their respective categories. “Growing this further is challenging in a highly competitive apparel market,” says Buss.
FoneYam has a long runway of growth
— Damon Buss, M&G Investments
To continue growing the business Pepkor will have to expand into other categories, and it is well positioned to do so thanks to the accessibility provided by its large store base, trust in its brands and its economies of scale. “We do expect the profits from financial services to grow significantly faster than the core apparel businesses,” Buss says.
There have already been changes in what drives operating profit. In financial 2022 retail accounted for 92% while financial services and the informal market were 4% each. By financial 2024 retail had dropped to 86% and financial services and the informal market had risen to 8% and 6% respectively.
Patel reckons Pepkor’s cellular business is well ahead of competitors, “and, one could argue, leading telecoms players, if you’re selling eight out of 10 devices”.
He estimates Pepkor’s mobile business accounts for about 20% of operating profit and insurance about 2%. The group has aspirations to grow operating profit from its insurance business to R1bn over the next 12 to 18 months. “I think they’d be disappointed if that’s all they achieve … If that materialises, that’s about 30% coming from your nonclothing, nonretail businesses,” Patel says.
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