It’s amazing how quickly sentiment can change.
At the end of January, the flavour of this review would’ve been the positive sentiment in South Africa and how this is highly likely to flow through to increased investment in fixed property. At the time of writing in February, we’ve had a terrible time on social media in South Africa and the air feels heavy. These conditions aren’t conducive to consumers putting more money into fixed assets in the country, which is bad news for Cashbuild and any other businesses that specialise in durable goods.
Some of this negativity does seem to have found its way into the Cashbuild share price. Down 10.5% year to date and having taken a 3.5% knock in the first week or so of February, Cashbuild clearly hasn’t been immune to the sell-off that has hit the retail sector since the champagne was popped to welcome a new year. Frustratingly for investors, this is despite Cashbuild not enjoying anywhere near the rally that the clothing retailers experienced in 2024, so it’s been dropping off a less exciting base.
To understand why the mood in South Africa is problematic for Cashbuild, you need to think about how consumers spend their money. The basics happen first, of course, with food and essential human needs right at the top of the list.
Then, when there’s some spare money, there’s a chance to buy new clothes and items for the home. The next logical step is furniture and more durable items such as appliances, which is why Lewis had a terrific festive season and showed an exciting growth rate. After that, it should be Cashbuild’s turn as consumers look to improve their fixed property.
Everything was lined up perfectly for Cashbuild to start seeing an uptick in 2025. Then along came the politicians. Hopefully, the wave of negativity will pass.
The benefit of another interest rate decrease should be felt in household budgets, so that should also help. Negative news has a short lifespan unless there are ongoing events to keep feeding it. On the plus side, at least the return of load-shedding lasted just one day.
If this all sounds like conjecture and guesswork, then welcome to investing in consumer businesses — and especially sellers of durable goods. The human factor is critical, as these businesses are directly exposed to the combination of consumer spending power and confidence. If either ingredient is missing, there’s almost nothing they can do to fix the problem.
The recent second-quarter operational update suggests Cashbuild has been ticking over reasonably well, with group sales up 6%. It achieved 5% growth in existing stores and the extra 100 basis points came from the addition of new stores. Combined with the first-quarter performance, this gives revenue growth of 5% for the first half of the year.
Everything was lined up perfectly for Cashbuild to start seeing an uptick in 2025. Then, along came the politicians
Goodness knows this isn’t exciting, but at least there was positive growth in volumes sitting underneath this result. Selling price inflation was 1.5% at the end of December 2024. Though that’s a point estimate rather than an average, it indicates a high likelihood of a few hundred basis points of growth in volumes. This was the benefit of improved consumer sentiment, along with the impact of lower inflation and how this boosts demand.
Now, if the revenue growth rate was well ahead of inflation, we could speculate that margins have gone in the right direction. With just 5% growth though, it’s not clear what the profitability story will look like for this period. Mix effects can have a significant influence on gross margin. In terms of store-level costs, it’s unlikely that they’ve grown by much less than inflation.
We will find out for sure when interim results are released, but it’s probably best to assume mid-single-digit growth in profit. Headline earnings in the prior interim period were 551.8c a share, and in the second half of financial 2024 they stood at 395.2c a share (including the 53rd trading week, but the pro forma number to adjust for it gives an odd answer). Assuming 5% growth for the interim period, the past 12 months’ view of headline earnings is about 975c a share. This puts Cashbuild on an estimated earnings multiple of 19.5, which suggests plenty of growth is being priced in.
This is a vulnerable situation, as it really comes down to your view on whether interest rate decreases will offset deteriorating sentiment.
* The writer has a long position in the stock after taking advantage of an exceptional tactical entry point in August 2024, and is “holding it for now in the belief that macroeconomics will be stronger than sentiment on social media”
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