Key message: We initiate on Cashbuild with an Overweight recommendation. With hardware
stores open again (only for tradespeople), the Covid impact will cause only a
short-term earnings impact, in our opinion.
- We initiate on Cashbuild with an Overweight recommendation and a Target Price of R221 (FY21 EBITDA). If we take a short-term view and use FY20 forecast EBITDA, our valuation falls to R151. We assume 1.5 months of revenue is lost on 2H FY20.
- Cashbuild has developed a simple business model that still has room for ongoing organic/acquisitive growth.
- The growth strategy is to open 10 new Cashbuild stores per year. Currently at 260, management believe that market saturation is at about 320 stores – allowing another 8 years of organic growth.
- Cashbuild is a low-cost supplier of low-to mid-tier building products (with a limited DIY range), with a small dedicated range of 3500 SKU’s per store. An average Build-It store would stock double that and a Builders Warehouse probably 10 times that.
- This provides purchasing power with suppliers and is one of the key differentiators of Cashbuild.
- P&L Hardware stores currently number 60 and management believe that the market can bear 200-250. P&L Hardware focuses on a lower LSM than Cashbuild, with a similar but more informal offering. A P&L store holds 2/3rds of Cashbuild SKU’s and generates about 2/3rds of the revenue.
- Cashbuild has an estimated 17-20% market share in cement, which averages 22% of sales. Cashbuild stocks only major integrated cement brands, with no independent/blended sales. The ability to benefit from new cement producers (Sephaku, Mamba) has helped grow cement volumes – Cashbuild did well to secure large volumes (and large rebates) from new cement players trying to break into the market.
- Support of the local integrated cement industry will pay off should cement import tariffs and/or tighter control of the blender market be instituted. This is probably the key medium-term growth factor as cement sales bring feet through the door.