An ad­mirable per­former, but no need to rush in

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

In a re­tail sec­tor that has de­liv­ered more than its fair share of suc­cess sto­ries, few can ri­val that of Clicks. It is a suc­cess story built on a rock-solid cash-only drug store model gen­er­at­ing earn­ings and div­i­dend growth in good and bad times.

“A com­bi­na­tion of health care and beauty is one of the most sus­tain­able busi­ness mod­els,” says Clicks CE David Kneale.

Spear­headed by 473 Clicks stores and 346 in-store phar­ma­cies, the model is also hugely prof­itable, pro­duc­ing a re­turn on eq­uity (ROE) of 55%-60% with clock­work con­sis­tency. Av­er­ag­ing 57,4% over the past two re­port­ing pe­ri­ods, Clicks’ ROE is the high­est of any listed re­tailer.

Its strat­egy re­mains very much ex­pan­sion­ary in SA. “There is still a lot of scope for us to ex­pand [here],” says Kneale. “We are in­vest­ing a record R379m this year [to Au­gust] and will end it with 488 Clicks stores. Our longer-term tar­get for stores in SA is 600.”

In the drug store realm Clicks has one no­table chal­lenger: Dis-Chem, which is tipped by sec­tor an­a­lysts to list this year.

In­de­pen­dent re­tail an­a­lyst Syd Vianello be­lieves that ex­clud­ing Clicks’ UPD phar­ma­ceu­ti­cal dis­tri­bu­tion busi­ness, Dis-Chem could ri­val Clicks on turnover — about R14bn an­nu­ally. Dis-Chem has a fo­cus on Gaut­eng, where 48 of its 84 stores are, and Vianello says it is also “ex­pand­ing ag­gres­sively.”

But Stan­lib re­tail an­a­lyst Theresa Heath does not see Dis-Chem as a ma­jor threat to Clicks. “Dis-Chem has very large des­ti­na­tion stores while Clicks stores are mostly smaller and pro­vide an im­por­tant niche con­ve­nience ser­vice,” says Heath.

What­ever the Dis-Chem fac­tor may be, Clicks has con­tin­ued to per­form ad­mirably un­der tough mar­ket con­di­tions. Re­flect­ing this, in the six months to Fe­bru­ary 2015 the Clicks stores di­vi­sion upped sales 10,5% year on year to R6,7bn, and sales vol­ume ad­justed for 3,9% prod­uct price in­fla­tion by a solid 6,6%. Like-for-like store sales lifted 7,6%. “Clicks con­tin­ues to gain mar­ket share,” says Kneale. In Clicks’ key front-shop health, skin­care and hair­care seg­ments mar­ket shares in the six months to Fe­bru­ary stood at 28,9%, 26,2% and 25%, re­spec­tively, while in the phar­macy sec­tor it held an 18,5% share.

The abil­ity of Clicks’ busi­ness model to excel does not end at the store level. The com­pany is also hugely cash gen­er­a­tive.

With cash gen­er­a­tion way above ex­pan­sion and work­ing cap­i­tal re­quire­ments Clicks has long pur­sued a pol­icy of re­turn­ing ex­cess cash to share­hold­ers. Share buy­backs have been a key fea­ture of this, to­talling R1,62bn since 2010. Put in per­spec­tive, this ex­ceeded Clicks’ share­hold­ers’ funds of R1,57bn at the end of its lat­est in­terim re­port­ing pe­riod.

Scope for fur­ther buy­backs ap­pears limited by share mar­ketabil­ity considerations. The al­ter­na­tive is re­duc­ing div­i­dend cover. It is an ap­proach that seems to be un­der way, Clicks in­di­cat­ing that its div­i­dend cover in the year to Au­gust 2015 will be 1,7 times head­line EPS (HEPS), down from 1,8 times in the past three fi­nan­cial years.

Though fur­ther div­i­dend cuts ap­pear prob­a­ble, Kneale gives noth­ing away be­yond say­ing: “The cut sends the mar­ket a sig­nal that we are con­fi­dent of our abil­ity to grow the busi­ness.”

Clicks is un­de­ni­ably a blue-chip com­pany with out­stand­ing man­age­ment. How­ever, qual­ity and value should never be con­fused. The big ques­tion is: do Clicks’ im­me­di­ate growth prospects jus­tify its cur­rent su­per-pre­mium 25,6 price-earn­ings rat­ing?

On Clicks’ guid­ance, HEPS will rise 10%-15% in its year to Au­gust, a pace not dis­sim­i­lar to the av­er­age 10,6%/year over the pre­vi­ous three years. Good, given tough mar­ket con­di­tions, but it leaves Clicks look­ing ex­pen­sive com­pared with its mean PE of 17,4 over the past 10 years.

For pa­tient long-stand­ing share­hold­ers Clicks rates a hold. For would-be in­vestors there ap­pears to be lit­tle ur­gency to rush in and buy.

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