Clicks takes a sedative

The group has had a wobbly start to the year, as the market digests its prospects against a sky-high share price

● A recent wobble in Clicks shares — the stock fell as much as 7% on the day it went ex-dividend — has again raised fears that one of the best retail investments of the past 15 years could be stalling.

While Clicks has grown earnings and sales with astounding consistency, its shares are pricey: they trade on a historic p:e of 37 and a forward p:e of 30. That means investors are ponying up a lot of money in the hope that the company delivers on its growth promise.

Intriguingly, the share is now owned largely by overseas investors with only three of the top 20 shareholders based in SA.

Brian Thomas, portfolio manager at Laurium Capital, believes there is still growth potential for Clicks and rival Dis-Chem. “There is still a big road of being able to consolidate independent pharmacy outlets — the combined market share for both is about

50% and there’s a runway for them to consolidate that market over time.”

But, he says, pure organic growth in stores is dependent on GDP growth, which makes Clicks expensive.

“The level of growth forecast is not commensurate with the p:e multiple it trades on. It’s a valuation story — both Clicks and Dis-Chem are good businesses, they’re just both very highly priced.”

Asief Mohamed at Aeon Investment Management fears that Clicks’s increasing size — it has plans to roll out a significant number of stores — makes it more difficult to achieve the growth the market is looking for. It’s a similar scenario with food and beverage company AVI, another top performer with an expensive valuation, he says.

Another potential worry is the departure at the end of December of CEO Vikesh Ramsunder, one of several recent changes in senior leadership. Ramsunder held the post for just two years, having taken over from

David Kneale.

“You can’t put your reliance on growth on one person and I’m sure there’s a depth of people, but there comes a time when a company just can’t grow in a market like they used to,” says Mohamed.

So what are Clicks’s options to deal with a near-stagnant economy? There’s expansion into Africa, and online sales and deliveries.

Protea Capital Management CEO Jean Pierre Verster reckons there is much more that Clicks can do with its pharmacy rollout.

“They’ve given an indication of the potential of the rollout, and they’re still quite a way from that number,” he says.

Clicks has reaped the benefit of Covid vaccinations at its pharmacies thanks to the additional purchases consumers make when they’re in the stores for their shots.

But, Verster says, “for the next year to 18 months there may be very little same-store growth on the horizon if you remove the vaccination boost, but with the continued store rollout plus some inflation coming back, growth will pick up again when taking a longer-term view.”

Casparus Treurnicht of Gryphon Asset Management says he’s “amazed” at Clicks’s continued growth rate. “In some ways it is almost too good to be true. Existing store sales are punching above expectations time after time.”

But, he says, “one thing that has always bothered me was that management left when the business is doing so well. This is strange given that local retailers are now hiring from overseas.”

Treurnicht takes a more bearish outlook on