Key message: We did some on the ground market research – until meaningful demand recovery occurs, margins are likely to stay low.

  • Cashbuild released 1H FY24 results. Diluted HEPS declined 22% to 550c and a final dividend of 325c was declared. P&L goodwill and trademark was impaired by 137m. Customer transactions were flat (existing stores down 1% and new stores +2%) and product inflation was 3.2%. Revenue increased by 2% for the six months with Cashbuild SA stores up 4% and P&L Hardware down 7%. Revenue for existing stores increased by 1%, while the 9 new stores contributed 1% growth.
  • The gross margin declined to 24.7% (from 25.3%) with management having to use margin to remain competitive. Operating expenses increased 7% (existing stores 5% and new stores 2%) and the negative operational gearing reduced the operating margin (excluding impairments) to 3.3% (from 4.8%). Operating profit declined by 81% (down 30% adjusting for impairments).
  • To better understand the dynamic in the hardware market, we did some on the ground research in Polokwane. Cashbuild is under pressure from well-established stores stocking equivalent products and stores stocking cheaper non-compliant products. Until government (SABS) intervenes or economic growth substantially improves, margins are likely to remain low to combat market share pressure.
  • Cashbuild does not have a high cost base and cost reduction is difficult without reducing employee costs (headcount was reduced by 10%). With expense growth outpacing revenue, margins have declined, and a meaningful recovery will probably only occur when demand recovers.
  • While the operating environment remains tough, continued work on P&L (one P&L has been converted to a Cashbuild store with a positive outcome) should bear fruit. FY24 will have a 53rd week which will provide an approximate 2% revenue boost.
  • While the core business model remains (low-cost store stocking the basics, low number of SKU’s from preferred suppliers, ability to extract cost benefits or rebates), the weak external environment and uneven playing fields (non-compliant products) is having a negative ST impact. Declining cement GP’s to increase footfall will be a drag on margins.
  • On this back of our market study we reduce our FY24 and FY25 HEPS forecasts by 33% and 26% respectively – largely on lower operating margins. Our Target price is reduced to R154 (from R204).

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