TRADE of the MONTH

Clicks and Dis-Chem square up in a bat­tle for in­vestors

Financial Mail - Investors Monthly - - Opening Bell - Stafford Thomas

is-Chem has fi­nally listed on the JSE, seven years after its CEO and co-founder Ivan Saltz­man first hinted it was a move be­ing con­sid­ered. The ques­tion in­vestors will now be ask­ing is: which is the bet­ter bet, Clicks or Dis-Chem?

It is not an easy choice. Both have pow­er­ful man­age­ment teams, ro­bust busi­ness models and well-de­fined growth plans.

His­tor­i­cal per­for­mance pro­vides one means of weigh­ing up their mer­its. Clicks has shone un­der David Kneale, its CEO since Jan­uary 2006.

In the 10 years to Au­gust 2016 Clicks set a crack­ing pace, grow­ing head­line EPS (HEPS) at an av­er­age of 20%/year and div­i­dends at 23.4%/year. Over the 10 years, re­turn on eq­uity soared from 14% to 49%.

Un­for­tu­nately Dis-Chem does not pro­vide a depth of his­tor­i­cal data, its prelist­ing state­ment dis­clos­ing fig­ures only for the three fi­nan­cial years to Fe­bru­ary 2016 and in­terim fig­ures for the 2017 and 2016 fi­nan­cial years.

Dis-Chem’s fig­ures present a mixed picture, ar­guably a rather dis­ap­point­ing one which swings the in­vest­ment odds strongly in favour of Clicks.

Be­tween its 2014 and 2016 fi­nan­cial years Dis-Chem grew head­line earn­ings from R408.65m to R498.23m, a rise of 21.9%. But at the HEPS level a num­ber of fac­tors, in­clud­ing a big jump in is­sued shares, es­pe­cially in the 2016 fi­nan­cial year, left HEPS down 8.5%.

Clicks out­shone Dis-Chem, grow­ing head­line earn­ings in the two years to Au­gust 2016 from R838.36m to R1.098bn, an in­crease of 26.5%.

DAt the HEPS level the in­crease was a stronger 30.2% thanks to share buy­backs, a hall­mark of Clicks’ pol­icy of re­turn­ing sur­plus cash to share­hold­ers.

Dis-Chem’s per­for­mance in the latest six months to Au­gust was also unin­spir­ing, with net income of R297.9m be­ing 7.9% down on the com­pa­ra­ble pe­riod in 2015.

Another big fac­tor drag­ging on Dis-Chem’s bot­tom line growth has been a soar­ing debt level. In no small way it’s a re­sult of re­cent mega div­i­dends.

Since the 2014 fi­nan­cial year, R2.54bn has been paid in div­i­dends, R772m (43%) more than to­tal net profit over the pe­riod.

Of to­tal div­i­dends, R1.927bn was paid over the 18 months to Au­gust with al­most R1.3bn go­ing to the Saltz­man fam­ily.

Dis-Chem ended the latest six months to Au­gust with debt of R2.3bn (all short-term), up from R406m in Fe­bru­ary 2014. Though R700m of the listing pro­ceeds will be used to re­duce debt it will still remain a size­able R1.6bn, or around 180% of eq­uity.

It is a very dif­fer­ent sit­u­a­tion at Clicks, which ended its latest fi­nan­cial year with an ungeared bal­ance sheet sport­ing cash of R370m.

It re­flects a con­ser­va­tive stance which, in un­cer­tain times, must give Clicks another edge over Dis-Chem as an in­vest­ment.

How­ever, the bot­tom line is that nei­ther is at bar­gain lev­els. At cur­rent share prices, an­a­lysts’ es­ti­mates in­di­cate Clicks in its year to Au­gust 2017 is on a for­ward 22.4 p:e while Dis-Chem, in its year to Fe­bru­ary 2017, is on a very sim­i­lar for­ward 22 p:e.

Clicks and Dis-Chem will have to jus­tify their rat­ings by pro­duc­ing bot­tom-line growth that is con­sis­tently aboveav­er­age. Both re­tail­ers have ag­gres­sive ex­pan­sion strate­gies aimed at do­ing just that.

At first glance Dis-Chem ap­pears to have the edge. Its strat­egy calls for dou­bling store numbers from the cur­rent 101 over the next five to eight years. It rep­re­sents an an­nual ad­di­tion of 13-20 new stores and, as with ex­ist­ing stores, all will have phar­ma­cies.

The strat­egy at Clicks is to add 20-25 new stores an­nu­ally to its ex­ist­ing base of 511.

The difference be­tween the two re­tail­ers lies in store size and lo­ca­tion. Dis-Chem is mar­ried to shop­ping mall-based, big-for­mat des­ti­na­tion stores with a tar­geted size of 1,000 m2-1,800 m2 while Clicks’ fo­cus is pri­mar­ily on smaller con­ve­nience stores.

“The av­er­age size of a Clicks store is 600 m2,” says Kneale. “We have only 50 large-for­mat stores.”

With its ex­pan­sion, Dis-Chem will add more trad­ing space than Clicks. Taken at the av­er­age an­nual pace of their ex­pan­sion plans, Dis-Chem will add about 9,000 m2 trad­ing space more than Clicks an­nu­ally. Dis-Chem’s trad­ing den­sity (sales/m2) is also no­tably higher than Clicks’.

It gives Dis-Chem a growth ad­van­tage over Clicks. Or does it?

Clicks’ fo­cus on con­ve­nience stores places it in the fastest grow­ing seg­ment of SA re­tail.

“Con­ve­nience shop­ping is the name of the game,” notes re­search firm Ur­ban Stud­ies in a new re­port.

Clicks has another plus go­ing for it. Though it and Dis-Chem are run­ning neck and neck in the re­tail phar­macy sec­tor with a 19.6% share each, only 400 Clicks stores (78%) have phar­ma­cies.

It is rem­e­dy­ing this by adding 30-35 new phar­ma­cies an­nu­ally with the ob­jec­tive, says Kneale, of hav­ing a phar­macy in every Clicks store.

A phar­macy acts as a big at­trac­tion to cus­tomers and when added to an ex­ist­ing store, holds the prom­ise of a big boost to the front store which ac­counts for more than 70% of the sales of a Clicks store with a phar­macy.

As Dis-Chem co-founder and MD Lynette Saltz­man notes, the front store is “the profit engine”.

It is cer­tainly not clear-cut whether Clicks or Dis-Chem will be the win­ner in the profit race game over the com­ing years.

But for now, the wiser in­vest­ment move ap­pears to be to stay with Clicks, the busi­ness with the long­est dis­closed record of out­stand­ing growth.

Clicks out­shone Dis-Chem, grow­ing head­line earn­ings in the two years to Au­gust 2016 from R838.36m to R1.098bn, an in­crease of 26.5%

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