NUTS AND BOLTS

Not all con­struc­tion-re­lated com­pa­nies are ben­e­fit­ing, but one thing con­sumers are still spend­ing on is their homes and Cash­build knows how to ring it up, writes Fifi Peters

Financial Mail - Investors Monthly - - Contents -

Cash­build finds the for­mula to make money in a tough mar­ket

It seems there’s plenty of money to be made for in­vestors in the nuts and bolts of DIY.

This is ev­i­dent from the rise and rise of 37-year-old hard­ware chain Cash­build, which seems to have hit on the se­cret for­mula.

In a strug­gling mar­ket where just about ev­ery com­pany is be­moan­ing the lack of con­sumer spend­ing, more peo­ple than ever be­fore are bustling through Cash­build’s doors.

In­vestors are coin­ing it too: the com­pany, worth just about R8,2bn, had shot up more than 130% in a year at the time of go­ing to press.

At its cur­rent value, Cash­build is now worth more than es­tab­lished con­struc­tion heavy­weights Mur­ray & Roberts (R5,5bn), Aveng (R2,37bn) and Group Five (R2,77bn).

Its value to­day isn’t much shy of the 123-year-old PPC, the largest ce­ment com­pany in Africa, worth around R12bn.

Fi­nan­cial di­rec­tor Eti­enne Prowse, coyly, won’t com­ment on this as­tound­ing share price jump.

“We man­age the busi­ness and not the share price,” he told In­vestors Monthly, giv­ing the stock stan­dard an­swer.

“Ob­vi­ously the share price has moved since Cash­build’s half year re­sults (to De­cem­ber last year) were above mar­ket ex­pec­ta­tions and the mar­ket seems to have rerated Cash­build.”

Those re­sults looked im­pres­sive. Rev­enue was up 12% to R4bn, but per­haps more im­por­tantly, op­er­at­ing profit was up 31% to R250m. This showed that at a time when firms in the con­struc­tion sec­tor are strug­gling with shrink­ing mar­gins, Cash­build’s are ac­tu­ally grow­ing.

On July 20, Cash­build re­leased its fourth quar­ter trad­ing up­date, which re­in­forced this per­cep­tion. For the full year to June, the com­pany’s rev­enue grew 13% from its 222 stores, 24 of which were opened in the past year. It said that “gross profit per­cent­age mar­gins have

Sup­ply­ing the one part of the mar­ket that is still re­silient has been the se­cret for­mula for suc­cess

A thump­ing vin­di­ca­tion of a busi­ness model of sup­ply­ing hard­ware to the small ‘bakkie’ builder

re­mained above lev­els re­ported at the half year”.

This all paints a com­fort­ing pic­ture for in­vestors in the com­pany, in­clud­ing the state-owned Public In­vest­ment Corp (10,9%) and founder Pat Goldrick, the Ir­ish­man who came to SA in 1996 and who still owns 10% of its stock.

Goldrick stepped down as CEO in 2012, say­ing at the time that he didn’t want to stay on the board be­cause it would “cramp the style” of the new CEO, Werner de Jager.

“If they ever want to make a phone call and in­vite me to have a beer and talk about things, they can. But I don’t go on hon­ey­moon with my chil­dren; I don’t live with them,” he told Mon­ey­web.

Goldrick will be pleased, though, with its progress since he left.

Over the past five years, the com­pany has in­creased its rev­enue from stores in SA, Botswana, Swaziland, Namibia and Malawi from R2,8bn in the six months to De­cem­ber 2010 to R3,96bn as of De­cem­ber 2014.

It’s a thump­ing vin­di­ca­tion of a busi­ness model of sup­ply­ing hard­ware — tins roofs, ce­ment, bricks — to the small “bakkie” builder.

Wayne McCur­rie, a port­fo­lio man­ager at Mo­men­tum As­set Man­age­ment, says it is this model, sup­ply­ing the one part of the mar­ket that is still re­silient, which has been the se­cret for­mula for suc­cess.

Ja­nine Weil­bach, Thebe stock­broking se­nior re­search an­a­lyst, points out that Cash­build has also gained from the dis­count­ing of ce­ment prices as sup­pli­ers like PPC, La­farge, Sephaku and Afrisam have bat­tled it out for mar­ket share in a de­pressed ce­ment mar­ket.

How much scope is there for more growth? Can the up­ward mo­men­tum con­tinue?

It’ll be a tough ask, given the fact that it cur­rently trades on a price:earn­ings ra­tio of 23 — more ex­pen­sive than the wider mar­ket.

When asked if he be­lieved there was much more up­side to the stock price, Prowse said: “I would not wish to spec­u­late.”

Imara SP Reid says that Cash­build is pricey now, es­pe­cially af­ter the in­crease in the past year.

“We be­lieve that most of the up­side po­ten­tial has been priced in… [but] we con­tinue to be­lieve it is a strong com­pany with good growth prospects,” says an­a­lyst Alex Sprules. But he says that in­vestors should prob­a­bly stick with the stock at the cur­rent price, and buy more if the share price shows any weak­ness.

In part, this is be­cause Imara is still bet­ting on good growth from the build­ing ma­te­ri­als sec­tor, and points out that the 8% con­tri­bu­tion from new stores “dis­plays the value of Cash­build’s ex­pan­sion”. Other ex­perts agree. FNB prop­erty economist John Loos also says that in­creased ac­tiv­ity in build­ing start-up deals bodes well for the mar­ket.

What has Cash­build done dif­fer­ently in the past year, from a strate­gic point of view, to jus­tify this sort of rerat­ing?

One thing it did was to strengthen its bal­ance sheet.

Says Prowse: “Shortly af­ter the cut-off for the first six months, we paid cred­i­tors ap­prox­i­mately R500m. We do not have other debt on our bal­ance sheet.”

It has also done some hard think­ing about the way it does things.

“Two years ago we con­verted our sys­tems and this caused us to be more in­ter­nally fo­cused,” says Prowse. “Since then we have con­tin­ued to fo­cus on the ex­ist­ing busi­ness per­for­mance, en­sur­ing pric­ing is com­pet­i­tive and in-store stan­dards are im­proved. Our new sys­tems have as­sisted us in man­ag­ing the mar­gin bet­ter and this im­prove­ment, to­gether with good cost con­trol, has re­sulted in im­proved prof­itabil­ity.”

There have been some lean years, though.

In Au­gust 2012 the share price touched R168, be­fore dip­ping as low as R118 by April last year. But since then it’s been on a tear, soar­ing to R321 in mid-July.

In­vestors who have stuck with it have been richly re­warded.

In March, the com­pany de­clared an in­terim div­i­dend of 376c/share for 2014, a gain of 260% since the 104c paid to share­hold­ers in 2010.

The com­pany is ri­valled mainly by Spar’s Build It and Mass­mart’s Mass­build (which op­er­ates the Builders Ware­house and Builders Ex­press stores).

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

Pic­ture: TREVOR SAM­SON

Pat Goldrick … Not want­ing to ‘cramp style’ of new CEO Werner de Jager.

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