There’s life in South African retail yet. Witness Clicks, which managed to deliver higher sales volumes and market share, helping reignite some interest in the once bulletproof stock.
“We didn’t just survive, we thrived,” says CEO Bertina Engelbrecht of the company’s year ended August.
Adjusted headline earnings rose 11.1% to R2.5bn as sales exceeded R41bn (overall turnover was 8.1% up, retail sales 12.2% higher), and the dividend was lifted 6.6% to R6.79 a share. On the day the results were released, the share price bounced 6.1%. Last week’s gains mean Clicks has now moved to a positive return since January, though over one year the stock is still 11% down.
The conundrum for investors, however, remains Clicks’s highly priced share, owing in large part to the defensive products it sells and its own performance over the past 15 years.
Consider that over the past decade, Clicks has returned more than R12bn to shareholders in the form of dividends and share buybacks. The total compound annual shareholder return for the same period was 19.8% a year, driven by organic growth especially in health and beauty, supported by an efficient supply chain. Strong cash returns have been reinvested in the business and allowed the group to increase its dividend cover.
Notwithstanding a wobble over the past year, Clicks still trades on a p:e of 23.8 (and a market cap of R62.7bn), compared with Dis-Chem which is now on a p:e of 19.5 (and a market cap of R19.5bn)
It means that, notwithstanding a wobble over the past year, Clicks still trades on a p:e of 23.78 (and a market cap of R62.7bn), compared with Dis-Chem, which is now on a p:e of 19.48 (and a market cap of R19.5bn).
But Gryphon Asset management portfolio manager Casparus Treurnicht warns that at this p:e, the market needs to be careful of overpaying.
He says that at first glance, it seems that Clicks continues to create great value for shareholders. While he’s not disputing this trend over the past few years, he says there was zero value created by its existing store base.
“Existing stores had sales growth of 3.5% when selling price inflation was 7%. So if there is growth, then this must be coming from new stores. You have to ignore the once-offs in previous years to get a clearer picture and it does point to a company running, but [one that’s] only lukewarm.”
Certainly, Clicks has maintained an aggressive store rollout in South Africa. Over the past year it added 45 new stores and 38 pharmacies. It shelled out R320m for Sorbet (a beauty salon franchise chain of 194 outlets), M-Kem (the 24-hour pharmacy in Bellville in the Western Cape) and 180 Degrees (a pharmacy software development company).
Capital expenditure hit a record R930m and the group notched up market share gains in all its core product categories (health, beauty, general merchandise and baby).
Its aim this year is to open 40 to 50 new stores, with a longer-term target of 1,200 Clicks stores in its network (from 881 now). And it’s doing all of this with cash generated by its operations (up 37% to R5.9bn over the year). Cash on hand sits at R2.5bn.
Clicks’s legendary cash performance is one reason, Engelbrecht argues, that foreign investors have been such stalwart owners of the share.
“They don’t want a roller-coaster performance. It’s highly cash generative and it’s important for them. They appreciate the share buybacks because the long-term shareholder always benefits from that.”
The retailer has one of the highest proportions of foreign ownership among local companies. “We’re probably the retailer with the largest offshore shareholding,” says Engelbrecht. “Foreign investors understand our business model, and they really do extensive research and the numbers always stack up.”
Clicks’s share register is, in fact, entirely global. South African ownership now sits at 31.7%. The US and Canada own 31.8%, the UK and Ireland 14.3% and Europe 11.7%, while investors from the Far East and Middle East own about 10.5%. The Public Investment Corp is Clicks’s single largest shareholder with 16.8%.
There’s a further irony given international investor interest: while many of its retail peers here have headed beyond South African borders, Clicks has mostly stuck to its local business, which has (so far) held ample expansion opportunities.
The dissonance at this point is both Clicks’s warning that trading conditions will remain “extremely constrained” and Engelbrecht’s argument that there are still good growth opportunities. For example, in the developed world corporate pharmacy ownership is between 70% and 75%, while in South Africa this sits at just over 50%.
There’s the rise and rise of the private label too, which Clicks says drives consumer loyalty — and higher margins. Private-label sales grew 15.4%, with one in every four products sold now a Clicks-branded product. And the Clicks ClubCard — probably the country’s oldest loyalty programme — now has 10.4-million active members.
Clicks’s only real blot was the performance of its distribution division, United Pharmaceutical Distributors, where sales rose just 1.5% for the year. It blamed “lost sales opportunities” on its “systems implementation” in the first half, as well as lower demand from independent pharmacies.
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