Cashbuild to almost double revenue after agreeing to buy Pepkor’s Building
Building materials group aims improve its retail presence in coastal regions
In a vote of confidence for SA’s embattled building sector, Cashbuild has agreed to buy Pepkor’s The Building Company (TBC) for almost R1.1bn — a move it says will improve its retail presence in SA’s coastal regions.
The acquisition would almost double Southern Africa’s largest building retailer’s revenue, with CEO Werner de Jager saying the acquisition would also give Cashbuild additional access to SA middle-to-high income consumers.
The group was also attracted to TBC’s expertise in offering specialised services for residential, commercial and industrial building contractors, its wholesale import business, as well as its delivery networks, De Jager said.
The sale includes 13 brands including Timber City, Bildware and Tiletoria, with 160 outlets and 21 franchise stores, employing 7,000 staff. TBC also has stores in Nambia, Botswana and Zambia, generating R8.2bn in revenue in Pepkor’s year to end-September 2019.
Cashbuild is expected to generate about R10.1bn in revenue for its year to end-June 2020, and currently has 296 stores, including stores in Zambia, Malawi and Botswana.
Pepkor said the sale would streamline its portfolio of businesses. It intends using the proceeds to settle debt, which stood at R14.1bn at the end of March. TBC generates about 12% of Pepkor’s revenue
Pepkor may have gotten a better price for TBC, but considering SA’s economic outlook, they had to make it an attractive proposition, said Mergence investment analyst Lulama Qongqo.
It was worth noticing that out of R8.2bn in revenue for the year to end-September, TBC only made R153m in operating profit, she said.
“Cashbuild is inheriting what looks like a headache — but because this is their forte, I think in the long run we will find that TBC might be worth more than this sale price,” Qongqo said.
Cashbuild said the acquisition would help the group tap into SA’s middle-to-higher income customer segment, particularly in KwaZulu-Natal, the Western Cape and Eastern Cape.
De Jager said Cashbuild was historically under-represented in these regions, and while it is expecting severe pressure on the building sector for the foreseeable future, there was pentup demand after the Covid-19 lockdown, as well as a housing backlog in SA.
“I do believe when you have a good value offering, and offer good services, there is opportunity.
“There is still money in the economy,” he said.
The business had a better outlook in Cashbuild’s hands than in Pepkor’s, given the former’s footprint and expertise, said Sasfin senior equity analyst Alec Abraham.
“Although I must stress that this is heavily dependent on a turn in the country’s economic
— and hence consumers ’— fortunes, which I personally have serious reservations about,” Abraham said.
While Cashbuild was picking up the assets at a low price, integrating 13 brands across four countries was a big task, said Small Talk Daily’s Anthony Clark.
“I have concerns over the operational risk of this deal, despite it being transformational,” he said, adding that Cashbuild faced stiff competition from the likes of Italtile and Kaap Agri.
De Jager said it would probably take about a year to integrate TBC, although that might be optimistic, with the deal still subject to regulatory approvals, and thus only likely to be completed in 2021. He added that TBC would be bringing in an experienced management team.
In a separate statement on Tuesday, Cashbuild said it expected profits to fall by a more than a fifth in its year to endJune, with revenue falling a quarter in the three months to end-June, and 7% for the year.
In afternoon trade on Tuesday, Cashbuild’s share was up 2.05% to R162, giving the group a market capitalisation of just over R4bn. Cashbuild’s share has fallen about 28% so far in 2020.
Pepkor’s share was up 2.93% to R10.18, having lost about 43% in the year to date.