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Dis-Chem Pharmacies heads for the JSE

Pharmaceutical, toiletries and cosmetics tend to be fairly defensive – Alec Abraham, senior equity analyst – Sasfin Securities.

SIKI MGABADELI:  Dis-Chem Pharmacies plans to start trading in Johannesburg. South Africa’s second-biggest pharmacy chain by store numbers looks to double its outlets in the next five to eight years.

Goldman Sachs, Investec and Standard Bank have been appointed as joint coordinators and book runners. Dis-Chem says that the offering will comprise private placements to selected institutional investors or people buying shares for R1 million or more.

Alec Abraham is with Sasfin Securities and joins us now. Alec, thanks for your time this evening. So Dis-Chem finally comes to market. I think we expected it. Is it a good move on their part?

ALEC ABRAHAM:  Yes, thanks for having me on your show. It is a good move to come to market, especially as they’ve got some really ambitious plans to double the store numbers in the next five to eight years.

However, it also seems a little bit of a difficult time to come to the market because at the moment we are facing a very, very difficult consumer environment, and also with the US most likely raising interest rates in the next month or two. You may well see also an outflow of funds from emerging markets. So it’s quite a difficult time in the market right now, and quite an uncertain time. So the timing may have question marks around that, but obviously raising funds for expansion is all a good story.

SIKI MGABADELI:  Let’s talk about their performance. This is a business started by a couple in 1978. They’ve seen massive growth over that time. How have they performed financially as well?

ALEC ABRAHAM:  Being a non-listed company it has been very difficult to see the financial performance of the business in any detail, and the numbers that they’ve given in this announcement today are also fairly scant. But obviously, we see some good growth from these numbers.

If I compare just on a very high level the ebitda margin of Dis-Chem compared to Clicks, which is probably the closest competitor, they appear to be on a higher ebitda margin and their growth seems to be quite good. They’ve mentioned that they have grown in excess of 20% over the last two years, which has been a very, very strong level of growth and it has exceeded by and large that of Clicks over the past few years. So it looks like they’ve had some good growth and some good margin in the business.

SIKI MGABADELI:  And I suppose it’s nice to have a competitor to Clicks that is listed so investors can actually make a comparison when they are deciding which one to buy.

ALEC ABRAHAM:  Yes. That’s quite true. At the moment in terms of the pure play pharmaceutical retailing, we’ve only had Clicks as an option. And now they’ve certainly opened it up.

But it has also for me raised a couple of questions on whether you are going to see a lot of money switching out of Clicks now and getting exposure to Dis-Chem. So it’ll be quite interesting to see how the Clicks share price performs if you have some of that switching out of the one into the other.

SIKI MGABADELI:  You mentioned that right now retailers are facing a number of headwinds. We have weak domestic consumer confidence, we’ve got high interest rates, a rand that has depreciated and an economy that’s very slow at the moment. What are the prospects for a business like this one and Clicks as well?

ALEC ABRAHAM:  Well, by and large, in terms of the retail categories, your pharmaceutical and toiletries and cosmetics tend to be fairly defensive. Just like food and groceries, probably the next defensive is pharmaceuticals and toiletries. So from that point of view they are probably better off as a retail category than apparel and general merchandise or household goods and things like that, because people switch more to the less discretionary items in tough times.

So from that point of view you may still see good sales of toiletries, cosmetics, pharmaceuticals in tough economic times. We certainly see a lot of money coming out of spending on durables, on household equipment, on things like that. You’ve certainly seen that switch by people, with higher inflation and higher food costs particularly, none going back into there, pushing the discretionaries a little lower.

SIKI MGABADELI:  We’ll leave it there. Thanks for your time today, Alec Abraham from Sasfin Securities.

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