The DIY boom that occurred when everyone was restricted to their homes due to the pandemic and decided to renovate their surroundings brought an unprecedented surge in revenue and profitability in the sector. However, it had to end at some stage as normality returned.
It was clear to market followers that the boom had ended over the 2021 festive period and into the first quarter of 2022. As the economy started to tighten, showing low economic growth, rising costs of living and increasing interest rates, updates from sector stalwarts started to show cracks, some far more than others.
Cement giant PPC started the trend. The bellwether stock is down 55% year to date, reporting gloomier trading and a dour outlook into 2023 and 2024 for the core building material division.
Cashbuild, with a market value of R4.8bn, is down 24.5% year to date. As a nationwide supplier of basic building materials, its business model was hit harder than others in the home refurbishment market. The stock started the year at R258.20 and ran to R303.89 by late February, but the cracks were forming.
A large part of Cashbuild’s business is selling pockets of cement. Comments from PPC indicated that the market was sagging, and it was inevitable that this would feed into Cashbuild. Year-end results to June released in late August showed that the dam wall had burst. Revenue declined 12% and headline earnings per share (HEPS) dived 33% — granted, off a high comparative base due to Covid. The share price slid 12% after the results announcement and kept drifting.
Cashbuild’s first-quarter update, released in mid-October, showed no respite. Revenue was down 4% and transactions fell 7% throughout the group. Again, the share reacted, falling 11%. With the recent JSE rally, led by a 15% rise in the Dow Jones index since late September, Cashbuild has clawed back some momentum, and at the time of writing is trading at R195.06.
Italtile, which has a range of offerings, from lower-end Top T to high-end Italtile, faced many of the same challenges. However, being vertically integrated and with the ability to trap margin and trim costs throughout its chain, its businesses model and results have fared far better than the rest of the sector and Cashbuild.
Cashbuild is a solid business, but in the year ahead positioning will remain tough
Year-end results to June demonstrated the resilience of the business. Despite a 2% decline in turnover for the year, trading profit rose 6% and HEPS grew 9% to 152.1c per share. Not a bad showing in a tough landscape.
Despite its blue-chip mid-cap status, Italtile’s share price has also been lacklustre in 2022, though its performance is rosier than Cashbuild’s. Year to date Italtile has declined 16.4%. Its share price has been trapped in a narrow trading range of between R14 and R17 since early 2021. It’s now trading at R14.04.
Cashbuild and Italtile are widely held stocks. However, both counters also have low levels of liquidity and are tightly held. On a current valuation basis, Italtile has the edge, and IM recognises this value differential in light of the strength of its balance sheet and its ability to continue to deliver incremental operating efficiencies to expand earnings growth.
Cashbuild is a solid business, but in the year ahead positioning will remain tough. Its target market is largely the “bakkie builders” and the large informal sector, the segment of the population hardest hit by the domestic economic malaise.
Italtile’s p:e is 9.3, vs Cashbuild’s at 10.1. IM is of the view that the current reporting season will be challenging for both stocks, but Italtile should at least show some positive growth in earnings.
At the recent Italtile AGM, management indicated that the first six months had been patchy, with slightly lower volumes and indications that consumers were trading down. But management continued to scratch away at costs and trap margin where possible.
However, given the group’s quality and value offering and its three distinct and price-differentiated market brands, Top T, CTM and Italtile, alongside its manufacturing arm, Ceramic Industries, IM feels Italtile will be able to show modest low-single-digit growth in year-on-year earnings.
Both stocks have attractions, but the greater business breadth and depth of Italtile gives it the edge in the current environment over Cashbuild. For this reason, and given the p:e rating differential, we favour Italtile over Cashbuild as our trade of the month.
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