Key message: We update our earnings to remove the impact of the TBC deal (turned down by Competition Commission) and recent trading conditions, including the impact of the recent unrest on Cashbuild and the 4Q Operational Update.
- On 28 May 2021, the Competition Commission announced it recommended that the TBC acquisition be prohibited due to the lessening of competition in the building materials and hardware market.
- We had previously built in the impact of the TBC acquisition in our forecasts – we strip it out now based on the Competitions Commissions findings. While the ruling will probably be appealed at the Competition Tribunal, the probability of the deal proceeding in its current form is low.
- Cashbuild has also been impacted by the protests and looting in South Africa, with 36 (32 Cashbuild and 4 P&L Hardware) stores damaged and looted and over 30 closed temporarily as a precautionary measure.
- Cashbuild does have insurance to minimise losses but will probably feel an impact in 1H FY22 to rebuild and restock the stores.
- According to the Cashbuild website, 31 stores remain temporarily closed (the damaged and looted stores). This means approx. 10% of total stores have been damaged and will probably take 3 months to get back to operation but all others are now open. We therefore assume a 5% revenue impact in 1H FY22, but the lost profitability should be largely regained in 2H FY22 due to insurance claims. We do believe that any impact in 1H FY22 will be largely temporary.
- We had built in a 4% decline in revenue for FY22 due to an anticipated slowdown after the post-Covid boost in FY21 due to home improvements and home construction.
- Trading conditions have been strong in FY21, with the 4Q operational update stating a 38% increase in revenue over the Covid-impacted 4Q FY20. The revenue increase for FY21 is 25% (23% existing stores and 2% new stores) as construction material and hardware demand has remained strong. Selling inflation for FY21 was 7.4%, driven mainly by steel related price increases.
- Our HEPS forecasts have been reduced due to the removal of the anticipated TBC impact. We reduce our Target Price to R330 (from R339) and upgrade to an Overweight recommendation (from Neutral).