Few green shoots in building, home improvement sectors
● As the work-from-home model unwinds and consumers spend more on food, fuel and paying off debt, the building and home improvement sector is expected to remain in the doldrums.
Cashbuild, Italtile and Massmart, which owns the Builders brand, have all flagged a decline in home renovation activities which picked up during lockdown, citing a shift in consumer spending after the lifting of the pandemic regulations.
The lockdown, which forced people to spend more time working from home, drove spending on renovations.
This is now reversing as more people return to the office.
With interest rates, inflation and the cost of living picking up substantially, consumer spending has shifted to non-discretionary food, groceries, fuel and utilities, rather than discretionary categories such as home improvement and apparel, said Sasfin’s senior equity analyst Alec Abraham.
This week, Cashbuild reported a 33% decline in headline earnings for the year to June to R436m, while revenue was down 12% to R11.1bn and operating profit decreased by 16% to R876m compared with the year to June 2021, when it experienced record trading conditions and reported increases in revenue and headline earnings of 25% and 151% to R12.6bn and R650m respectively.
Abraham said robust economic growth “appears unlikely” and activity and hardware sales were very low compared with the pandemic spike, when everyone readied their homes for work-from-home and spent more time there.
“With all that improvement done there is a lull in activity and demand,” he said.
Chris Reddy, portfolio manager at All Weather Capital, said the outlook was challenging for the sector amid high interest rates and higher costs of living coupled with limited jobs growth.
“We are unlikely to see large increases in the overall spend in the sector.
“Therefore earnings growth is likely to come from gaining market share, offering a product that is preferred by clients and value for money, and tight cost control including inventory management coupled with profitable store rollouts,” he said.
Reddy said more vertically integrated companies — such as Italtile — have an advantage in terms of managing margins in this environment as they have better control over the supply chain and manufacturing process.
Italtile is a franchiser, manufacturer and retailer of tiles, sanitary ware, bathroom ware and other related home-finishing products.
Last week, Italtile CEO Lance Foxcroft said lower customer footfall at stores and a decline in demand was widespread across the construction industry. He said the operations were also affected by “several successive interest rate increases and accelerating inflationary pressure on building costs”, which “subdued investment sentiment further and reduced affordability, influencing cost-conscious homeowners to defer or scale down on renovation and building projects”.
Moreover, Abraham said, there had not been a recovery in employment losses from the pandemic.
“Many of those job losses that haven’t been recovered are for unskilled jobs.
“This impacts Cashbuild more than the other companies because of its over-indexed exposure to lower income groups, peri-urban areas and RDP housing recipients. He said: “Builders Warehouse and Italtile, on the other hand, had a higher degree of exposure to middle- and upperincome groups.”
Cashbuild CEO Werner de Jager said “management expects trading conditions to remain challenging due to subdued prospects, in South Africa as well as globally. Unstable market conditions and inflationary pressures are a reality, impacting the affordability of products and placing pressure on sales growth.”
Cashbuild said group revenue for the six weeks subsequent to year end was 3% lower than the prior year’s comparative six-week period.
It said trading conditions were expected
to continue to be under pressure.
Massmart said Builders’ total sales for the 26 weeks to June 26 declined 3.1% to R7bn compared with the same period in 2021, while comparable store sales decreased by 2.2% over the same period.
Sales from South African stores decreased by 3.3%. Total trading profit fell 51.9% to R292.1m. Massmart also cited the normalising of consumer spending habits after the surge in DIY spend during lockdown in the prior year period.
Reddy said there were a few green shoots.
“As per the latest Afrimat construction index, we have seen an improvement in buildings completed, wholesale trade, building materials and plans passed.
“The latest Massmart results also showed an increase in yard sales in Builders Warehouse, which is typically wholesale trade but which comes with lower margins,” he said.