Does Clicks need a pick-me-up?

A recent wobble in Clicks shares — the stock fell as much as 7% on the day it went ex-dividend — has again raised fears that one of the best retail investments of the past 15 years could be stalling.

While Clicks has grown earnings and sales with astounding consistency, its shares are pricey: they trade on a historic p:e of 37 and a forward p:e of 30. That means investors are ponying up a lot of money in the hope that the company delivers on its growth promise.

Intriguingly, the share is now owned largely by overseas investors with only three of the top 20 shareholders based in SA.

Brian Thomas, portfolio manager at Laurium Capital, believes there is still growth potential for Clicks and rival Dis-Chem. "There is still a big road of being able to consolidate independent pharmacy outlets — the combined market share for both is about 50% and there’s a runway for them to consolidate that market over time."

But, he says, pure organic growth in stores is dependent on GDP growth, which makes Clicks expensive.

"The level of growth forecast is not commensurate with the p:e multiple it trades on. It’s a valuation story — both Clicks and Dis-Chem are good businesses, they’re just both very highly priced."

Asief Mohamed at Aeon Investment Management fears that Clicks’s increasing size — it has plans to roll out a significant number of stores — makes it more difficult to achieve the growth the market is looking for. It’s a similar scenario with food and beverage company AVI, another top performer with an expensive valuation, he says.

Another potential worry is the departure at the end of December of CEO Vikesh Ramsunder, one of several recent changes in senior leadership. Ramsunder held the post for just two years, having taken over from David Kneale.

"You can’t put your reliance on growth on one person and I’m sure there’s a depth of people, but there comes a time when a company just can’t grow in a market like they used to," says Mohamed.

So what are Clicks’s options to deal with a near-stagnant economy? There’s expansion into Africa, and online sales and deliveries.

Protea Capital Management CEO Jean Pierre Verster reckons there is much more that Clicks can do with its pharmacy rollout.

"They’ve given an indication of the potential of the rollout, and they’re still quite a way from that number," he says.

Clicks has reaped the benefit of Covid vaccinations at its pharmacies thanks to the additional purchases consumers make when they’re in the stores for their shots.

But, Verster says, "for the next year to 18 months there may be very little same-store growth on the horizon if you remove the vaccination boost, but with the continued store rollout plus some inflation coming back, growth will pick up again when taking a longer-term view."

Casparus Treurnicht of Gryphon Asset Management says he’s "amazed" at Clicks’s continued growth rate. "In some ways it is almost too good to be true. Existing store sales are punching above expectations time after time."

But, he says, "one thing that has always bothered me was that management left when the business is doing so well. This is strange given that local retailers are now hiring from overseas."

Treurnicht takes a more bearish outlook on Clicks than some of his peers, arguing that "institutional" pharmacy groups have very little room to expand as the final independents are taken out. "That growth vector is disappearing. And at an almost 40 p:e, Dis-Chem and Clicks are priced for perfection."

Alec Abraham, senior equity analyst at Sasfin Securities, says investors need to remember that the bigger a company gets, the more stores it opens, the less each marginal store contributes. For this reason, he feels that Dis-Chem has better growth opportunities as an investment.

Clicks has also been able to flatter its historical growth rate by buying back shares, says Abraham.

"Consistency is really what you’ve had out of the business all along. Is that consistency going away? I don’t think so. Will that growth slow down? I don’t think so. The marginal accretion from every store is just much less."

He points out that Clicks and Dis-Chem’s growth is intrinsically tied to consumer spending, which in turn is tied to an economy "in desperate need of structural change".

Abraham says SA needs to grow 6%-8.5% to make any real difference to unemployment and spending. A tough ask, especially as inflation and interest rates are expected to surge.

Abraham’s big concern is that with the ANC elective conference coming up in December, there will be plenty of jockeying for position, but no-one will have their hands on the wheel. "We will be in for a very tough time. That will be a major cap on even a defensive stock like Clicks," he says.

In the trading update, Clicks said its retail health and beauty sales, including Clicks franchise brands The Body Shop, GNC and Claire’s, were up 14.4% for the 20 weeks to January 16.

Total managed turnover at United Pharmaceutical Distributors (UPD) was up 10.1% and group turnover was up 10.4% to R15.1bn.

Newly appointed CEO Bertina Engelbrecht said Clicks administered 1.8-million vaccines during the period, "generating sales of R685m, an uplift of 6.9% to retail sales".

Last year the second wave drove higher sales of preventative health-care products including supplements, immunity-building vitamins, masks and sanitisers, while the impact of Omicron this year "was less severe and resulted in lower purchases of medication and immune support products".

The group said both Clicks and UPD have continued to gain market share.