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You can’t knock a bargain. Discount retailers have lured shoppers and investors with everything from cheap toiletries to costume jewellery. The UK’s B&M is worth more than Marks and Spencer and Pets at Home bundled together. In the US, Dollar General outranks Walgreens Boots Alliance. That has emboldened Steinhoff, a conglomerate rooted in South Africa, to offload Pepco Group, operator of discount chains Poundland, Dealz and Pepco.
A Warsaw float — reflecting the predominance of Polish stores within Pepco — would have a mooted enterprise value of about €4.7bn, including net debt of €187m. At 21.3 times last year’s ebitda, that would put Pepco at a premium to regional peers, including B&M.
However, lockdowns shuttered many stores last year. Using typical pre-pandemic numbers brings the ebitda multiple down to a more affordable 14 times. That looks closer to US discounters. Sales at stores that remained open in the last quarter of calendar 2020 were up 5.5 per cent, which augers well for growth.
The pandemic has not been Pepco’s only challenge. The group has also suffered from the woes of a parent left reeling from a 2017 accounting scandal. Struggling to settle with angry creditors and investors, Steinhoff hardly had the resources to nurture its European retail unit.
That has changed and Pepco is expanding its 3,200 store estate as it extends into new geographic territories. Demand looks assured. Discount stores’ allure for shoppers predates pandemic-straitened times. Witness the rise of names such as Primark, TJ Maxx, Aldi and Lidl. In Japan, the Daiso chain even boasts a branch that stretches over seven floors.
While rising costs will weigh on margins, some respite will come from lower rents. Poundland is renegotiating leases up for renewal at an average discount of about a third.
Much depends on the IPO price, and Pepco is unlikely to bring quick returns. But consumer trends are in its favour. Income inequality is growing and has benefited dollar stores in the US. Separation from a controversial owner should also help the group.
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