Cashbuild sales update is very sluggish

Coincidentally and very much connected to what Abil had to say, Cashbuild also released an operational update for the second quarter of their fiscal year. It was disappointing and the market has been ruthless, the share has dropped 7% so far today and is down 18% from the highs in August last year of R167.80.


"Revenue for the company was up by 1% on the second quarter of the prior financial year. Stores opened since 1 July 2011 (new stores - 7 stores) contributed 2% of the increase, whilst existing stores (187 stores) decreased by 1%. This, together with the growth reported in quarter one, equates to an increase in revenue for the half year of 2%."


For a retailer this is disappointing. Not as disappointing as it would be for a Shoprite or a Mr Price who are priced at 18 times next year's earnings but still disappointing for a company trading on 14 times forward earnings.


But why the slow growth? The housing market is picking up and home improvement is one of the first things people spend on when they have extra disposable income. On top of that competitors like Massbuild showed 10% growth in this quarter and Spar's Build It reported 17% growth for the year last year (they haven't released an operational update for this quarter yet).


I do have a few insights into why. Firstly Cashbuild are more situated in the rural areas whereas the competition who are experiencing good growth are focused on affluent areas. The rural areas are the ones who got hit by the strikes. But more significantly, what we have just heard from Abil, unsecured lending has been pulled back. Cashbuild rely on cash sales. Clients will go to Abil, lend R10 000 and build a wall using Cashbuild goods.


I think it is a good thing that Cashbuild do not rely on credit for sales, they do not have that extra risk on their books. Plus Abil still stated that their book is poised to grow 23% this year. This quarter has been a hiccup thanks to sentiment due to the strikes. This is hopefully a once off. And again I will repeat what African Bank had to say. Strikes result in higher wages which means more spending at Cashbuild. For their size we still see Cashbuild as great takeover target for the likes of a Shoprite, Pick n Pay or even an African Bank. We will buy into this weakness.