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