A landmark year for PG plc

Article #726 by Edward Rizzo - Published Weekly

Last week, PG plc published its interim financial statements for the 6-month period between 1 May 2021 and 31 October 2021. The company immediately held a virtual meeting for financial analysts providing a more detailed review of the supermarkets and retail businesses as well as the Zara® and Zara Home® franchise operations.

The 2021/22 financial year which comes to an end on 30 April 2022 is a particularly important year for PG plc since it could represent the first financial year when all three operating assets would be operating at full capacity. Since the company offered its shares to the general public during the first half of 2017, it upgraded the PAVI Shopping Complex and carried out a large investment in 2018 in the Zara® and Zara Home® flagship store in Sliema.  Since the outlet in Sliema was shut in July 2018 and the enlarged store reopened for business in late 2018, this had a negative impact on the 2018/19 financial performance. The subsequent two financial years (the 2019/20 financial year as well as the 2020/21 financial year) were also both heavily disrupted by the COVID-19 pandemic which resulted in the closure of the flagship store in Sliema and the retail outlets within both supermarket complexes in the first half of 2020 and also in March 2021.

In the event that no COVID-19 disruptions impact their business negatively in the next 5 months, the current financial year of PG to 30 April 2022 will provide financial analysts and the investing public a better feel of the true business potential of the three operational assets within the PG Group.

During the six-month period between 1 May and 31 October 2021, PG’s overall revenues increased by 12.1% to a fresh record of just under €71 million reflecting the higher level of turnover achieved by both the ‘Supermarkets & Associated Retail Operations’ (+12.1% to €58.5 million) and the ‘Franchise Operations’ (+43% to €12.5 million). The rate of growth in revenue of the Zara® and Zara Home® franchise operations must be seen in the context of the pandemic-induced lockdowns in the comparative period in 2020 (i.e. between May and October 2020). Nonetheless, the ‘Franchise Operations’ still posted a record performance with revenues and operating profits (“EBIT”) well ahead of those registered even before the onset of the pandemic. This is the main reason for the commendable initiative by PG to return the Government wage supplement amounting to €150,000 through a donation to charitable organisations.

With respect to the performance of the Zara® and Zara Home® franchise operations, PG’s Chairman Mr John Zarb explained that the negative impact from the decline in tourism numbers in summer 2021 compared to the situation pre-pandemic is being offset by Maltese residents effecting larger purchases possibly as a result of less travel overseas.

In its presentation to financial analysts, the company explained that revenue within the PAVI complex registered a growth of 9.7% between 1 May and 31 October while PAMA’s revenue increased by 10.5%. The growth in revenue by both complexes led to an 11.7% increase in operating profit of this business segment to €7.4 million, with the additional rental income of just over €570,000 during the past six months being the main contributor to such a steep rise in profitability. The operating profit margin was maintained at 12.6%.

The operating profit margin of the Zara® and Zara Home® franchise operations edged up to 15.7% during the first half of the 2021/22 financial year from 15.5% in the comparative period and 16.4% in H1 2019/20.

Meanwhile, the operating profit achieved by this business segment of just under €2.0 million is a record six-month performance by the Zara® and Zara Home® franchise operations showing the remarkable popularity of this brand and vindicating the large investment undertaken in the Sliema outlet in 2018.

PG generated a pre-tax profit of €8.64 million (+20.1%) during the first half of the 2021/22 financial year and after accounting for a tax charge of €2.43 million, PG’s net profit amounted to €6.21 million (H1 2020/21: €5.14 million). This translates into a continued robust annualised return on equity of 25.4% which is an important metric for shareholders to monitor on a regular basis.

The financial strength of the PG Group continues to be evident from the balance sheet of the company with overall shareholders’ funds of €52.1 million and a very negligible level of net debt amounting to a mere €0.89 million when excluding lease liabilities. PG has successfully managed to reduce its overall indebtedness in a staggering manner in recent years as this amounted to just over €31 million in the 2019/20 financial year following the completion of the large investment in the flagship store in Sliema.

The strong balance sheet of PG plc with a very low level of debt provides the Group with the financial muscle to pursue opportunities for expansion. This has been repeatedly mentioned by the company’s executives over recent years who again reiterated that a number of potential projects are being assessed including the possible extension to both the PAMA Shopping Village as well as the PAVI Shopping Complex. PG again reported that there remains a consistently strong level of demand for more retail space within both complexes amid the continued popularity by a growing clientele. As such, the company is therefore working hard to secure additional space to ensure continued success by the major contributors to overall Group results.

During last week’s virtual meeting, Mr Zarb also indicated that the positive financial performance during the first half of the year continued in November and December with growth rates of circa 8% within the ‘Supermarkets & Associated Retail Operations’ segment and 28% for the Zara® and Zara Home® franchise operations. Although the company warned that the extraordinary growth rates experienced so far this year may not necessarily be repeated in the second six months, it is very evident that PG is on course for a highly successful financial year showing the significant earnings potential of the overall Group.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.