Patience required

This morning we received interim results from Cashbuild for the 6 month period ending December 2013. Revenues were up 7% as they expanded their network by 16 more stores (they now operate 207 stores). They experienced price inflation of 4%. Cost of sales, selling and marketing expenses and admin expenses all increased more than the revenue growth which resulted in headline earnings decreasing 8%.


The number came in at just above R6 a share for the half year. They have also stated that sales for the year so far (6 weeks) have been up 10%. Lets use an annualised number of around R12 a share. Trading at R136 a share that puts the stock on a 1 year forward multiple of 11.3 which I think is more than fair for the stock. Based on last years dividend, I would expect around R5 for the full year which puts the stock on a yield of 3.7% which is a nice underpin while you wait.


So where to now for the company? I think considering the circumstances this is still a solid set of numbers with strong cash flows coming in. I have harped on about the lower end consumer struggling in South Africa many times before. And I have also mentioned that the lower end consumer is Cashbuild's target market because of the locations of their stores. They were first movers and have the best positions in many of the big rural areas.


When you are investing in a diversified portfolio you cannot just select the stocks which are flying at the time. That is called momentum trading and although it may work in the short run, history shows us that these portfolios often fall short in the long run because they chase bubbles. Cashbuild is a very well run business in a sector that has a lot of potential.


The potential of the sector is easy to explain, we still have a massive informal housing sector and as formal housing grows, the need to upgrade and maintain those homes will grow, Even informal houses need improvement. It is a luxury spend for many but it is money well spent as it improves an asset. As our middle class and population grows, Cashbuild will benefit. The slump of the South African consumer will turn.


That is why you need to be patient with this stock and add during tough times like this, when we are reaching the bottom of the cycle. Although you will need to be patient I am confident this one will turn. Buy and hold.