For quite some time in the aftermath of the pandemic, Cashbuild’s quarterly updates were a depressing story of revenue decreasing year on year as interest rates took their toll and people emerged from their newly renovated caves and spent money on other things.
Volumes were even worse, as inflation put people under pressure and caused them to do smaller DIY projects — when such projects were even happening.
The volatility in quarterly earnings was severe in 2023. For example, in the third quarter of 2023 (representing the first few months of calendar year 2023), revenue was down 9% and volumes fell 12%. It was a dark time in South Africa — literally — and sentiment was poor.
Those who felt compelled to spend on their properties were loading up on batteries and solar projects. In a classic case of the day being darkest before the dawn, subsequent quarters (the fourth quarter of 2023 and first quarter of 2024) saw revenue come in flat year on year.
Finally, things turned positive in the second quarter of 2024 (reflecting the summer months at the end of 2023), with revenue up 5%. Every dog has its day, especially in a cyclical business.
And so the fightback began, with the third quarter of 2024 delivering 3% revenue growth and the final quarter of 2024 coming in at 4%. The first quarter of 2025 represents the latest available numbers for the quarter ended September, with growth of 5%.
It may be painfully slow, but there’s clearly an improving trend. This has injected some life into the share price, up 13% over the past 12 months. It’s now trading at levels we saw in early 2023, still a long way off the pandemic peaks (levels we aren’t likely to see again any time soon) and down 18% over five years.
Perhaps most importantly, Cashbuild is close to 52-week highs at the time of writing, so picking this stock requires strong conviction that it can power ahead of recent trends and make new 52-week highs as it delivers a recovery.
As more relief is enjoyed by South African consumers, they will have more space in their monthly budgets for household improvement projects
So, can it? There are good reasons to believe it can, many of which are macro in nature rather than company specific. There’s nothing wrong with the Cashbuild business, but there also isn’t anything particularly noteworthy or spectacular about it. They generally just get on with it, trying to navigate the pitfalls of doing business in South Africa and the impact of macroeconomic factors on consumer sentiment and spending.
This is a typical cyclical consumer discretionary play, which makes it a strong candidate for punters and investors looking to take a view on how improvements in South Africa could filter down into spending at the till.
The biggest driver here is likely to be interest rates. Guessing the timing of rate cuts is a dangerous game. Believing that the likely trajectory is one of cuts rather than hikes doesn’t require any bravery at this point. As more relief is enjoyed by South African consumers, they will have more space in their monthly budgets for household improvement projects.
Also, don’t underestimate the impact of lower rates on corporate and business performance in general, leading to better bonuses for staff and thus more lump sums ready to be invested in the types of projects that Cashbuild wants to see.
Speaking of the project types, load-shedding appears to be gone for good. We always have to be cautious here and avoid tempting fate, but even a mild return of load-shedding is unlikely to trigger another heavy wave of investment in solar and backup battery solutions, as we’ve now seen that the problem can be solved.
Based on the deteriorating financial results of companies offering power solutions, it’s clear that load-shedding was a far greater driver of spend than the multiyear cost savings of a solar project vs paying Eskom. This suggests that not only is there going to be more money in the pockets of South Africans, but they will be more likely to spend it on products that Cashbuild specialises in.
It doesn’t really matter whether consumers execute these projects as DIY initiatives or through contractors. Either way, the money flows through the tills at Cashbuild (and, of course, its competitors).
Speaking of competitors, why not Italtile, especially with a stronger year-to-date return (24% vs 7% at Cashbuild) and a 12-month return of 12%, slightly behind Cashbuild’s 13%?
There’s one really big difference between the two: Italtile is heavily involved in the manufacturing side alongside the retail side, whereas Cashbuild is purely a retailer. In recent results, Italtile went to great lengths to note risks related to excess capacity in South African tile manufacturing and the dangers to margins of a price war.
Though an uptick in demand would obviously alleviate some of the excess supply, Cashbuild just feels like a cleaner play on this trend.
IM would be long and holding as one of its GNU-themed positions.
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