A small player, but an intriguing proposition

he life assurance sector might not be the most obvious place to scour for value. The prolonged lockdown has meant salary cuts, job losses and increased pressure on disposable income. This is bound to see policyholders rethinking their policies, maybe even having to let policies lapse.

However, Clientèle is an intriguing proposition.

The share is fairly illiquid, with about 87% of the issued shares owned by two sharethe

Tholders. IM started taking an interest in Clientèle when noticing that financial director Iain Hume has been a persistent buyer of the share since end-april. By IM’S calculations Hume has snapped up shares worth around R11m — which would suggest the company’s main number cruncher sees upside in the stock.

Investors will need to speculate why Hume does not share the market’s jaundiced view on Clientèle’s prospects. The share has more than

2020 off a base of 170 stores, with a further 21 planned in the coming year.

Dis-chem ranks as SA’S second-biggest pharmacy chain after Clicks. But it has not had a great start to 2020.

Year to date the stock has declined by 26%. Clicks, with a market valuation of R55.3bn, has slipped 12.4%.

A series of self-inflicted and market-related missteps have beset Dis-chem. In the past month the company has been accused by the Competition Commission of price gouging on masks, and Dis-chem started a spat with its landlords when the pharmacy chain embarked on a rental payment slowdown to mall owners in reaction to the government lockdown.

For a business that in 2020 had revenue of R23.9bn and operating profit of R1.2bn, these accusations led to an uncomfortable media period.

Further discomfort was inflicted as the year-end results came in short of market expectations, with headline earnings declining 17% to 70c a share. The final dividend was passed

— which is fairly standard for retail counters in these times.

Revenue for the year rose 12%. Higher operating costs and some margin squeeze in the total and retail segments saw operating profit fall by 9.3% and profit before tax slip 15.7%.

On a one-year, three-year and five-year share price Dischem has underperformed Clicks. On a three-year view Dis-chem has declined 31% while Clicks has risen 62%. On a five-year view Dis-chem is down 7% with Clicks up a staggering 151%.

With prospects for 2020 looking uncertain, IM believes Dis-chem and Clicks, given their aggressive p:e ratings, are simply too fully priced.

On current trading, Dischem went into Covid-19 with some bounce. Consumers stocked up on products and sales in March rose 46% ahead of the March 27 lockdown. During lockdown, revenue growth reversed as only essential goods could be sold.

The difficult trading in April and May will have an effect on interim and full-year results. Both are yet unquantifiable as

doesn’t have the same liquidity constraints as many of its peers and seems to have largely shrugged off the rise in rental arrears property companies across the globe have experienced following Covid-19 lockdowns. Chetty refers to Sirius’s retention of its rent collection level of close to 99% in April and May. He ascribes this to Germany emerging from Covid-19 in better shape than most other European countries following extensive government support for its business sector.

Chetty also likes management’s proactive asset management approach: its strategy is to buy mostly older, underrented industrial buildings on the outskirts of key German cities and to redevelop the properties into a mix of office, warehouse, light manufacturing and storage space.

Typically half of the company’s rentals come from secure, long-term leases with large corporations while the balance comes from so-called “smart space” products — flexible units that can easily be reconfigured to be let on short-term leases to small and medium-sized business owners.

However, Sirius won’t be completely immune to the pandemic. Sirius CEO Andrew Coombs says it’s likely that 10%-15% of tenants may ask for rent deferrals or a payment plan over the next few months now that the country has gone back to work and people have to get by without government subsidies. But he is confident that Sirius’s balance sheet is strong enough to withstand any potential drop of rental income.

Also, the vacant space in the portfolio consists mostly of “smart space”, which allows management to adapt its product offering quickly to meet changing tenant demand.

Despite the share already running hard over the past 18 months, it seems it still deserves a place in property portfolios. Garreth Elston, chief investment officer of Reitway Global, says: “I believe that Sirius’s investment proposition still holds. The flexible nature of its portfolio and management’s value-add skills will be attractive to investors in a post-covid economy.”