Cashbuild results are not good, but the long term thesis remains intact

Cashbuild released their full year numbers yesterday, you can download the results from their website: AUDITED ANNUAL RESULTS AND DIVIDEND DECLARATION - JUNE 2013. Unfortunately some of the key metrics are not that appealing, but judging from the markets reaction (nothing really) it was all baked into the cake. I mean, baked into the bricks, seeing as that is a product that the company sells. And of course these results were telegraphed to us from a while back, the operational update in early August gave everyone a good idea that the company is in a tough operating environment.


The company is a little over 25 years old, and as a stand alone is the biggest retailer of building supplies and all the add ons. The market that Cashbuild operates in saw the upswing of the middle income earners in this country, building improvements are a part of life. Even though the building process is normally not that fun for the folks that do the upgrading of their fixed (and in many cases biggest) asset, the impact on value and the unmeasurable happiness thereafter (the French measure happiness in GDP) means that many people go ahead with the process from time to time. In South Africa we have experienced urbanization at a rapid rate, but for many South Africans home is not necessarily the major urban centers. As such Cashbuild operate in the regional parts of South Africa, relying on flows from the bread winners for home improvements.


Equally however, Cashbuild has positioned themselves to being good value for money in the urban areas and as such will not compete against the likes of a Builders Warehouse (the newer Massmart brand, which Massmart acquired a whole 5 stores back in 2003), but more likely to service the needs of the middle income earners. Cashbuild has 200 stores plus, but in recent years has slowed their roll out, which of course has coincided with a tougher macro environment. As per their sales mix, it certainly tells you a lot about the businesses core clients and their building activities, I obtained these from their 2012 annual report:

Cement: 22.6%

Plumbing: 7.2%

Roof covering: 9.0%

Timber: 9.0%

Bricks: 6.3%

Ceilings: 2.8%


That sounds like house building activity to me! Nearly 60 percent of this company is geared to the home building/home improvement market.


Revenue increased a mere one percent to 6.376 billion ZAR, whilst profits dropped 15 percent for the year to 248 million ZAR. That translates through to diluted earnings per share being lower by 17 percent to 1038.3 ZA cents. Capex increased significantly from 110 million ZAR in 2012 to 198 million ZAR in this last financial year to end June 2013.


The final dividend of 191 cents is way lower than the same time last year, where it clocked 273 cents. For the full year, this year, the dividend paid to shareholders is 487 cents before the dividend tax of 15 percent, or just less that 414 cents. So a simple valuation of the stock (at the opening price of 14159), the dividend yield POST tax is 2.92 percent. Their simple price to earnings multiple is 13.64 times. Essentially the multiple has expanded whilst the price has been volatile, currently above the middle of their yearly range, which has been as high as 158 ZAR and as low as just below 115 ZAR. In recent weeks, along with the rest of the retailers, the Cashbuild share price has made progress and has not really budged since these slightly disappointing results.


But the reasons why the stock has held up is two fold, firstly the perceptions that emerging markets are not finished (excuse that for a second) and secondly that the environment IS improving as per the outlook:

"Despite tough trading conditions, management is positive about the top line trading prospects for the next quarter. The first eight trading weeks since year-end have reported an increase in revenue of 10% on that of the comparable eight weeks, whilst the gross margin remained under pressure."

So why must you continue to hold this company against the backdrop of a tough environment. The founder (Pat Goldrick owns 9.65 percent as per the last annual report) and the employees (The Cashbuild Empowerment trust owns 7.8 percent of the business) are the biggest shareholders. Is this good or bad? I guess good, and including the Government Employees Pension Fund (6.28 percent), you would think that Cashbuild have some friendly partners on their side.


After all is said and done, the company is in only as good a shape as their customers, and their customers are mostly building houses or doing renovations and additions to existing dwellings. If you think, like me, that household formation has a bright future in a country where we have not solved housing as of yet, then this company still has a long road to travel. Equally someone could see this coming, and because the company is still small in size (3.567 billion ZAR as at this morning) it could be a great addition for someone like Shoprite. Without knowing anything specific of course myself, we just think it could be a good fit. For now, we continue to hold the stock.