The importance of a robust business model in a pandemic | Calamatta Cuschieri

Notwithstanding the damaging impact brought about by the coronavirus pandemic on the global economy in general, large supermarket chains such as Tesco, Asda and Lidl were recently leading the call for new staff, to cope with the increased demand for basic goods and necessities. Inevitably, these type of businesses have been overwhelmed by the wave of panic-buying as shoppers rushed to stock up amid the coronavirus pandemic.

On the local front, PG plc (PG), which is principally engaged in the retailing of food, household goods and other ancillary products through the operation of the Pavi Shopping Complex and Pama Shopping Village, registered a record revenue of €129.4m in its latest financial results, demonstrating an overall improvement of 7.9% on a comparable basis (FY20: €120m).

Indeed, the main driver contributing towards the aforementioned increase in revenue has predominantly been initiated through the Group’s ‘supermarkets and associated retail operations’, which on a stand-alone basis amounted to €111.3m during FY21, implying an overall improvement of 10.9% over the prior year (FY20: €100.4m). 

Despite this, management also reported that this business segment was still relatively impacted during FY21. More specifically, as the pandemic related climate persisted, sales activities in certain retail and catering sectors remained subdued throughout most of the year. In view of this, PG opted to waive minimum rent requirements during FY21, allowing its tenants to operate solely on a ‘percentage of turnover’ basis.

Similarly, the Group’s franchise operation was impacted by the downturn in local tourism throughout FY21, with overall revenue registered under this segment dropping by circa 7.5% on a comparative basis to €18.1m (FY20: €19.6m).

On the expenditure side, the Group’s total operating expenses, which is predominantly composed of cost of goods sold, increased to €113.2m during FY21 (FY20: €104.7m), reflecting the aforementioned growth in revenue registered by the Group during the year.

Nevertheless, as the profitability driven by the Group’s supermarket operations made up for the lower contribution concerning PG’s franchise operations, the Group reported an improved operating profit amounting to €16.3m (FY20: 15.1m), translating  into an overall operating margin of 12.6%.

Excluding depreciation and amortisation charges, EBITDA improved to €19m during FY21 (FY20: €17.8m), translating into an EBITDA margin of 14.7%. In addition, the Group’s interest expense tapered down to €1.3m during FY21, from €1.6m in the comparable period last year, reflecting once again PG’s track record of repaying and settling portions of its existing debt at an accelerated pace.

In view of the above, PG reported an increased profit before tax of €14.8m during FY21, illustrating an overall increase of 10.5% when compared to the €13.4m recorded last year.

Notwithstanding the challenges presented by the COVID-19 pandemic, the Group continued to exceed expectations and achieved solid results, whilst simultaneously maintaining its dividend pay-out to shareholders. To this extent, PG’s favourable cash position and relatively low leveraged balance sheet, might also possibly enable the Group to pursue new growth opportunities in its core line of business moving forward.

In conclusion, the products offered by these type of companies usually have stable, if not growing demand regardless of any economic conditions. To this extent, companies which such unique and defensive business models have the ability to maintain a healthy and stable levels of revenues and cash flows even during these unprecedent events.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.