TRADE OF THE MONTH

Both are solid firms, but Italtile did better than Cashbuild

“Cashbuild has more than 315 stores, principally in SA, with a wide urban and rural footprint. It also has stores in neighbouring SADC countries

The SA construction sector has been extremely challenging for a number of years and a lack of new home builds has hit many role players. But there was a degree of comfort for certain players from homeowners who made additions to or refurbished their homes.

Because of differing target market demographics and mix of products, some listed stocks did better than others. The two mentioned in this column are both well-known, profitable, highly cash-generative and well-regarded businesses; but Italtile has fared better over the past couple of years than Cashbuild, and IM expects that trend to continue into 2020.

Both stocks have reported year-end results recently.

With an R18bn market value and a share price of R13.30 at the time of writing. Italtile has a wide consumer target market. The Italtile unit is at the high end, CTM in the mid-market and Top T in the affordable lower-priced segment, and it has a network of 189 stores. It now also has a presence in East Africa. and the company has high hopes for the region over the longer term.

Italtile has the benefits of its own tile manufacturing capacity, as it acquired Ceramic Industries in 2017. This allowed Italtile to supply more of its own tile needs. It also owns divisions involved in the procurement and supply of bathroom fittings, shower enclosures and related hardware. In 2019 system-wide turnover was ahead by 15% to R10bn, and operating profit increased 18%. Earnings per share rose by 7% as there were more shares in issue from the Ceramic acquisition.

Prospects remain fair; a restructuring of CTM aided the profitability of the mid-market segment. Top T remains a strong unit and has been the recent powerhouse within Italtile. With a range of new products, an entry into lighting and ongoing efficiencies Italtile is forecasting a better 2020.

In the past year the stock rose a modest 3%, but it has sound prospects for the year ahead. The debt taken on from the Ceramic acquisition is rapidly being paid. Italtile’s strong cash-generative abilities allowed the counter to pay out a 50-year anniversary special dividend of 50c a share. The company’s decorative segment and refurbishment categories in a wider range of consumer markets will also benefit the stock in the year ahead.

Cashbuild, trading at R250 and with a market capitalisation of R8.2bn, has more than 315 stores, principally in SA, with a wide urban and rural footprint. It also has stores in neighbouring SADC countries. With a revenue of R10.6bn in the 2019 financial year, more than 90% of its business and 95% of its operating profit is derived from SA.

Its core product categories are the basics of building. These include cement, bricks, timber and roof tiles. Cement makes up about 23% of total sales and because of this high dependency the price war in cement and low-price inflation has hurt Cashbuild more than competitors.

Decorative items such as paint and hardware make up about 20% of the company’s products, and it has made inroads in plumbing and electrical aspects of the business. But the basics still dominate revenue and profit, and these have been weak in the past three reporting sessions.

Category inflation remains low and after a lacklustre 2019 financial year — during which revenue rose by only 4% and operating profits fell by 7%, leading to a 7% fall in earnings per share — the first few weeks of its new financial period has started in a subdued fashion.

Cashbuild has a solid business, but in the year ahead positioning will remain tough. Its target market is largely the bakkie builder and the large informal sector, and this segment of the population has been hit harder than others.

IM does not foresee significant earnings growth in the year ahead, and though the stock was down 17% for the year, materially better widespread economic activity in its base is needed for meaningful earnings growth to occur. ●