Quality business, but on the expensive side

“The group expects to open 40 new stores in this financial year compared to its usual 25 stores per year

Clicks was founded in 1968 when its first store opened in Cape Town, and initially listed on the JSE in 1979 as Clicks Stores. The company then changed its listing to New Clicks Holdings after corporate activity in 1996, before changing its name to Clicks Group Ltd in 2009.

The group operates in the health-care sector, predominantly in SA, after selling its Australian operations in 2004 for A$107m.

Its core brands are the health and beauty retailer Clicks and a full-range pharmaceutical wholesaler, United Pharmaceutical Distributors (UPD).

In SA, the group also operates The Body Shop (beauty products), Claire’s (a retailer of jewellery and accessories) and GNC (health and wellness) under franchise agreements. The music and entertainment retailer Musica, owned since 1992, has been operating in a declining market for several years due to a shift to online consumption of music and entertainment, and is in the process of being closed, with all stores expected to be shut down by May 31.

The group operates 847 retailers across its various brands targeting the middle- to upper-income LSM 6-10 market. The footprint is predominantly in SA but the company does have 50 stores in neighbouring Swaziland, Lesotho, Botswana and Namibia.

Half of Clicks’s customers live within a 6km radius of one of its pharmacies, making it a beneficiary of the trend started during the pandemic of convenience locations outperforming destination malls. Clicks intends to expand its pharmacy reach — it is acquiring the retail pharmacy business of Pick n Pay.

Following changes in legislation in 2003 allowing corporate pharmacy ownership, the group opened its first pharmacy in 2004 and now operates more than 600 in-store pharmacies throughout its 760 national Clicks stores.

In its recent set of results for the six months ended February 28, the group lifted turnover by 7.6% to R18.1bn (including inflation of 2.9%), compared with the pre-Covid comparable period.

Due to good cost control, margins at the operating profit level increased from 7.4% to 7.5% and diluted headline earnings rose by 9.5% to 370.6c per share (14.1% growth if Musica is excluded).

The balance sheet remains sound, with a cash balance of R1.1bn and no long-term debt.

A return on equity of 37.4% comfortably exceeds the average of the sector the company trades in.

In contrast to a large number of companies forgoing dividends as a result of Covidrelated pressure, the Clicks Group returned a total of R1.7bn to shareholders during the period. This was broken up between R1.1bn in cash dividends (a 142.5c per share dividend) and a R602m repurchase of shares. The group intends to continue its share buyback programme.

Looking ahead, the group expects to open 40 new stores in this financial year compared to its usual 25 stores per year, spending R317m on new stores and refurbishments and a further R428m on supply chain, infrastructure and IT systems.

The Clicks ClubCard loyalty programme is a strong competitive advantage for the group, allowing for personalised engagement with its 8.6million active members.

In the near term, Clicks will benefit both directly and indirectly from the rollout of Covid vaccines in SA.

Its large and geographically diverse store network positions the company favourably to assist the vaccine rollout programme and it has the capacity to administer between 600,000 and 700,000 vaccines per month.

Its UPD business also has important cold chain capabilities to allow for the distribution of vaccines.

The group is on track to restore its full-year dividend payout ratio of 65% of earnings and has said its diluted EPS will increase by between 8% and 13% for the full year (this range excludes any potential benefit from its participation in the national vaccine programme and any further Musica-related losses resulting from store closures).

This implies that on the current guidance, shareholders can expect somewhere between 814c a share and 852c a share for diluted headline earnings, putting the share on a spicy p:e ratio to August 2021 of between 29 times and 30 times, and (using a 65% dividend payout ratio) a dividend yield of between 2.2% and 2.3%.

The Clicks Group is undeniably a quality business with great cash flow, but from a pure valuation perspective there may be less expensive opportunities elsewhere for now. ●