Investors overdose on Dis-Chem’s JSE debut

DIS-CHEM, South Africa’s second-largest pharmaceutical retailer after Clicks, made its debut on the JSE on Friday, gaining as much as 27% to R23.45 as private investors dived into the stock.

The share beat the initial offer price of R18.50, which valued the business at about R16-billion, showing that the sector is attractive for those willing to pay for a pharmaceutical retailer.

This week, Dis-Chem placed 236.8 million shares in a private placement, the equivalent of a 27.5% stake in the business, with institutional investors, raising R4.4-billion.

Alec Abraham, a senior equity analyst at Sasfin Wealth, said that because large institutions were favoured in the share allocation, demand for the stock pushed up the share price on Friday.

“There were a lot of private individuals who would’ve liked shares but they couldn’t get any allocation . . . that demand is pushing up the price today [Friday].”

Abraham said that from an earnings-growth momentum point of view, Dis-Chem had a higher earnings trajectory than its direct competitor, Clicks.

“If you’ve got 100 stores and you open another 10, it has a far bigger impact on your bottomline profit than Clicks, which has 500 stores and opens 10,” said Abraham.

“The stores take a year or two to reach optimum profitability, so the stores that were open in the last year or year and a half haven’t reached full profitability.

“So we are going to see some margin uplift from that as well,” he said.

Clicks has 511 stores, 400 of which offer pharmaceutical services.

Dis-Chem, with 106 stores, plans to open a further eight stores before February next year and at least 18 stores during 2018, the company said in a statement on Friday.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said that when there was a new listing of a stock that was closely related to another one in the same sector, they were seen as alternatives to each other.

“Fund managers sell some of the listed stock to create some cash to buy the new one, but only provided that the new one is coming in at a better valuation,” he said.

Dis-Chem’s stock is trading at a price-earnings ratio of 35, compared to Clicks’ 22.3.

Abraham said: “It [Dis-Chem] is not cheap — it’s got a slightly better growth momentum but it has a much higher P:E.

“Over the next three years, I’m expecting growth of about 15.5% per annum [from Clicks], whereas with Dis-Chem you are probably looking at growth of about 20% per annum.”

Yet Takaendesa said that when there were new listings which were oversubscribed, they tended to go up a lot in the first few days of listing but started to ease off afterwards.

“They will do very well in the first week, but afterwards will start to normalise to come to a reasonable valuation,” he said.

Dis-Chem is the 14th company to list on the JSE this year.

On Friday, Dis-Chem shares closed 16% higher at R21.48, while Clicks shares closed at R116, with no gains.

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