Key message: The impacts of looting and a high base (post Covid lockdown DIY boom) impacted earnings. Operating margins remain at elevated levels and should decline over the next 2-3 years, despite forecast revenue growth.

  • Cashbuild released 1H FY22 results. Diluted HEPS declined 27% to 1129c on a 12% and 14.5% decline in revenue and operating profit respectively. The results were impacted from the looting in July and a high base from the post-Covid DIY boom. Stores not affected by looting declined by 5%.
  • Inflation was high with selling price inflation at 8.8% (purchase price inflation 9.6%).
  • Gross margins increased to 26.6% (1H FY21: 26.4%) mainly due to insurance proceeds received for stock losses. A further R100m is anticipated by YE for the business interruption claim. The gross margin was below 25% adjusting for these proceeds. We expect gross margin pressure in FY23 as a result of cost and energy inflation.
  • The operating margin declined to 8.4% (1H FY21: 8.6%), although this remains elevated with sustainable margins 5.5-6.0%, according to management.
  • The looting in July resulted with 36 stores looted and damaged. 28 stores have reopened, 5 are part of shopping centre rebuilds with 3 permanently closed. Insurance claims include R143m for inventory, R71 for PPE (both received and accounted for in cost of sales) and R65m for business interruption (expected YE). In the period 2 new Cashbuild stores were opened with 5 refurbishments and 1 relocation.
  • Stock levels increased by 10% to try and counter supply chain issues. Cashbuild has benefitted from stock availability relative to peers, with elevated market share in FY21.
  • Revenue for the first 6 weeks of 2H was 10% down with Covid and heavy rains impacting trade. Sales of key products are running at levels at or above pre-Covid levels, although price inflation has boosted revenue.
  • FY21 created a high base, and we do forecast operating margins to move back to historical levels, creating pressure on HEPS despite forecast revenue growth. We reduce our Target Price to R313 (from R333) and retain our Overweight recommendation.

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