Building supplier Cashbuild has done something rare in the Covid era. It has increased its revenue by over 20%.
There are, however, some provisos around this rise.
It was only for the first quarter (when measured year-on-year) of this financial year and the group is still coming to terms with the 17% fall in the fourth quarter and the 1% drop in the third quarter of the previous financial year.
The trading statement Cashbuild put out shows a big rise in revenue, but investors will have to wait to see how this translates into profits.
Even so, the 22% rise for the three months to end September is a good sign that the group is in a decent niche in a difficult economy. There has been a lot of talk that building suppliers are seeing an increase in sales because people have taken to sprucing up their homes after being forced to stay in them during the five-week hard lockdown, which started in March.
But is it worth buying its shares?
The group’s prospects look better than most – but with a share price at R231 and a price-earnings (PE) ratio of 19.99, it’s not cheap.
This amounts to shareholders being willing to pay about R20 for every R1 in earnings.
This is relatively high when compared with other retailers in its category; the PE for the general retail index is 12.66.
The main reason for the high PE is the share price spiking in August after Cashbuild announced a R1.075 billion deal to buy The Building Company – which includes the Buco and Timbercity chains – from Pepkor.
This move will see it take hold of 160 stores that generate R8.2 billion in revenue and R154 million in operating profit a year.
Since announcing the deal on August 4, its share price has jumped from R164 to over R231.
But even before then, the share price was on the move, having risen from a low of R101 in late March.
There are clearly some investors who see Cashbuild as a company on the up, but given the uncertain times we live in and the rallying of its share price, it’s hard to recommend it as a ‘buy’ when judged on its high PE.
It’s not a bad counter, it’s just difficult to make a call on whether there is any more room for a further rise in its valuation, and if an anticipated rise in its earnings can validate a higher valuation.
Then there’s its own admission in its latest results that it expects conditions to be “extremely challenging”. The business it’s buying is also finding its way after two consecutive years of declining operating profit.
What about return on equity?
If the PE is not a helpful measure in deciding whether to buy Cashbuild shares, maybe turning to something like return on equity (ROE) can help. This is a measure of how well a company uses its share equity. The higher the figure, the more efficient a company.
With a ROE of 12.65%, Cashbuild is lower than that of rival Italtile, which has an ROE of 18.16%.
Judging by these ratios, an investor could be overpaying for the company when compared with others in the sector and one of its closest rivals is making better use of its equity.
These ratios are not encouraging but they don’t tell the whole picture.
A big part of making a hold/sell/buy call on Cashbuild is taking a view on how well it can integrate The Building Company into its operations and whether the consumer trend that is seeing more people sprucing up their homes and taking up DIY continues.
So is it worth a punt? In this time of Covid, it’s probably best to wait until the second quarter to see what happens with the merger and whether the consumer trend that has been favouring it continues.
Listen to Ryk van Niekerk’s interview with Cashbuild CEO Werner de Jager (or read the transcript here):