Weak economy demolishes Cashbuild’s trading outlook
The building materials supplier has reported a double-digit drop in half-year profit
Building materials retailer Cashbuild expects weak trading conditions to persist in the remainder of its financial year due to low consumer and business confidence as well as a declining economy.
SA’s economy contracted 1.4% in the last three months of 2019, worse than the 0.2% fall expected in the Bloomberg forecast.
Cashbuild, which reported a 21% drop in half-year profit to R172m in the six months to December, says there have been fewer building projects and this has dragged down its earnings for the period.
“The protracted stressed economic conditions, continued pressure on the consumer, exacerbated by the high unemployment rate, will continue to place strain on the trading environment for the remainder of the financial year ending June 30 2020,” Cashbuild CEO Werner de Jager said.
Cashbuild, which opened its first store in December 1978 in King William’s Town and listed on the JSE in 1986, sells building materials to cash-paying customers through a network of 321 stores. Its customers include home-builders, contractors and farmers.
In the six months ended December 31, Cashbuild’s revenue fell 1% to R5.56bn. Revenue from 302 stores that have been operating before June 2018 declined 4% while 19 new stores opened since July 2018 contributed 3% to revenue.
Earnings per share decreased 13% to 878c from 1,003c and headline earnings per share were down 12%. The results saw Cashbuild’s shares rise 7.42% to R166.50, the largest one-day gain since December 19 2017.
Cashbuild said despite the fall in earnings, it had decided to keep the interim dividend unchanged at 435c per share, thanks largely to a strong cash position. The company increased its cash and deposits by 32% to R1.4bn from R1bn.
During the first half-year, Cashbuild opened eight new stores — seven Cashbuild stores and one P&L Hardware store — and refurbished nine stores. The company closed two Cashbuild outlets.
De Jager said the company would continue its strategy to expand through new stores. But he said the store expansion, relocation and refurbishment strategy would be implemented “in a controlled manner, applying an even more rigorous process than in the past”.
Anthony Clark, an independent analyst from Small Talk Daily, said on Tuesday Cashbuild’s market remained “incredibly” difficult.
“Underlying costs in the business continue to grow faster than underlying revenue growth, which means there is margin compression,” Clark said.
“Because Cashbuild generates about 25% of its revenue from cement and a large proportion of its business comes from basic building materials such as windows and doors, it is far more exposed to the current environment compared to a company such as Italtile, which has a broader range of products suitable for refurbishment,” he said.
While the building industry struggled in the low-growth environment, the refurbishment sector was more resilient.
Clark was complimentary of Cashbuild’s financial position, especially its R1.4bn cash pile and a falling inventory. In the six months under review, inventory fell from R1.84bn to R1.6bn.
“They are doing all the right things to manage the business and maintain their underlying operational cost base regarding inventory and cash, but the underlying market which they operate in remains challenging.”
However, he said Cashbuild was not a stock to buy “until there is a meaningful uplift in building plans passed or the underlying demand for cement”.