Health, beauty and home retailer Clicks has long been viewed as a high-quality business and has typically traded at a premium. Yet over the past year its share price has largely tracked sideways.
This might reflect market concerns about the likelihood of the group maintaining its long record of strong performance. CEO Bertina Engelbrecht, however, believes it has more to do with sentiment towards South Africa as an investment destination than anything happening inside the business.
“It’s not our performance — it’s South Africa Inc,” she says. “International investors need to see prospects of growth in the country. What they’re looking for are signs that the economy is turning around.”
Clicks has historically had one of the highest proportions of offshore shareholders among JSE-listed companies. But foreign ownership slipped to 55.4% at financial year-end, from 60.7% the previous year.
“If your GDP growth outlook is about 1%, that’s not compelling,” Engelbrecht says. “We compete with other developing markets. In Brazil, unemployment is about 6%. Here it’s over 33%, depending on how you measure it. Investors also need to see stability.”
She argues that structural constraints in the economy continue to weigh on sentiment. “The fiscus is limited — the government can’t invest enough in infrastructure or development, which means it can’t stimulate growth or reduce unemployment. And that in turn increases the burden on the state through grants.”
While inflation is easing and the rand has firmed, “we still need to see real GDP growth”, she says.
Another uncertainty is the National Health Insurance Act, which faces a series of court challenges. Engelbrecht says concerns centre on whether the fiscus can realistically support the proposed rollout. “The worry is a ‘gung-ho’ approach without the capacity to back it.”
Fundamentally, Clicks still looks robust. Analysts praised the retailer’s recently released results. Margins continued to strengthen, supported by rising private-label penetration and supply chain efficiencies. The group is on track to open its 1,000th store by year-end and added 60 net new pharmacies in the period, taking its national pharmacy network to 780. The medium-term target is to have 1,200 stores.
It has earmarked R1.3bn in expansion capital for the year ahead, with 53% allocated to the opening of new stores and pharmacies as well as store improvements.
If your GDP growth outlook is about 1%, that’s not compelling
— Bertina Engelbrecht
Engelbrecht has also taken a more active industry role. Clicks has rejoined the Consumer Goods Council of South Africa and is part of an industry initiative to reduce plastic and electronic waste. “As a large top 40 company, we can’t only look inward. There’s value in speaking as an industry when engaging the government.”
With the US President’s Emergency Plan for Aids Relief having scaled back its provision of antiretrovirals (ARVs), Clicks is assessing how it can support broader access. The group helped deliver Covid vaccinations, many of them to public sector patients.
“HIV is now a chronic condition,” Engelbrecht says. “We believe a national retail pharmacy network such as ours can help make ARV access more convenient.” Clicks is developing a broader response, building on an existing corporate social investment programme that already supplies ARVs. “We are well positioned to support people living with HIV/Aids.”
In the investor presentation, she said the group was in a good position to compete successfully despite the expansion of other companies in the pharmacy category.
Alec Abraham, senior equity analyst at Sasfin Bank, says diluted headline earnings growth was in line with consensus, and the margin expansion was “impressive”. However, there may be some muted impact: total retail sales growth slowed in the second half (up 8.3% in the first half and just 3.7% in the second) and comparable sales were up 5.4% in the first half and 4% in the second.
The retail top line was about 6%, slightly below Stats SA’s retail sales of pharma, cosmetics and toiletries retailers of about 6.4%. “This stands out because in prior periods, Clicks’s top-line growth always exceeded the segment by as much as seven to eight percentage points,” Abraham says. This slowed to just over one percentage point excess in the first half and turned negative in the second half.
Abraham wonders if this could be the result of cumulative competition. Dis-Chem has stepped up store openings, and supermarket chains, notably Shoprite and Spar, are entering the health space.
Clicks raised its dividend by a confident 14% to 886c a share. It reported that it had returned R2.7bn to shareholders when including R751m in share buybacks. Return on equity reached 49.2%, which the group describes as “industry leading”.
Despite these enviable returns, the share price is down 0.62% over the past year at R371.91 (for a market value of R88bn).
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