The resilience of construction materials retailers at a time when consumer spending is waning and SA’s economy stagnates continues to puzzle market watchers.
SA’s largest hardware retailer Cashbuild is adding to the amazement, given its propensity to shine in unfavourable economic conditions.
As Sasfin Securities senior equity analyst Alec Abraham puts it: “If you look at the fiasco of SA, you cannot match the performance of the economy to the performance of hardware retailers. And Cashbuild’s performance flies in the face of macroeconomic drivers of retail”.
In a second quarter operational update, Cashbuild’s revenue was up by 15%, buoyed by the retailer’s store roll outs.
Cashbuild, which supplies building materials to cash paying customers, saw sales increase by 4% for the period. Cashbuild says its total units sold increased by 16%, with existing stores increasing by 13%. Its product inflation was 2% at the end of December 2015.
The retailer’s gross profit margins remained at similar levels to those reported for the first half of the prior year, at around 20%.
Cashbuild’s clout has been widely attributed to changes in leadership. Since the appointment of Werner de Jager as CEO in 2011 to replace Patrick Goldrick, big changes have followed, says Abraham. Some of those changes include sprucing up the retailer’s IT systems to better manage pricing points, promotions and merchandise.
Perhaps a notable change with De Jager at the helm is that retailer is concluding more acquisitions, its most recent being a small family hardware business P & L Hardware in August for R350 million. “Patrick would never make acquisitions and Werner has changed that. But Patrick was a good operator,” says Abraham.
Also, its aggressive store expansion has seemingly paid off, as it continues to grow market share to attract contractors and consumers in the do-it-yourself segment.
Stores opened by the retailer since July 1 2014 equate to 15. The retailer now operates 228 stores of which 200 are in SA. Cashbuild operates 28 stores across Botswana, Lesotho, Namibia, Swaziland and Malawi. Abraham says Cashbuild’s profit margins are supportive of further store expansions.
Although the market continues to see consumers scale back on purchasing new homes, there are signs of green shoots in the home improvement market. The levels of residential building activity are improving since the 2007/8 global financial crisis.
Absa Home Loans property analyst Jacques du Toit says levels of residential building activity improved in the first eight months of 2015 compared with a year ago, but growth remained well in the single digits.
The number of new housing units for which building plans were approved was up by 6.8% year-on-year to more than 41 000 units in the period January to August, latest figures from Absa Home Loans show. The improvement in residential building activity is likely to benefit Cashbuild and its competitors Italtile and Massmart’s Massbuild division which operates Builders Warehouse. These counters have in recent years built scale through the acquisition of independent hardware retailers, paving the way for a fragmented sector.
The FNB/BER Building Confidence Index regained some ground, rising by 4 points to 48 in the fourth quarter of 2015 – still below the 50 points level, but indicative of the sector’s regained momentum.
Cashbuild’s operational update sent its stock up by 5.04% to R281.94 at 15:30 on Tuesday. At a forward PE ratio of 13.5, Abraham says Cashbuild is attractive. Cashbuild’s stock has been the best performer in 2015 among the hardware retailers, notching up a share price appreciation of 59.3%. Italtile’s share price rose by 17.17% and Massmart’s fell by 41.77% for the year.