Business News 23.10.2017 07:53 am

Dis-Chem earnings soar on new stores

Strong earnings growth to continue but high P/E makes stock vulnerable to disappointment, says analyst.

The sale of non-discretionary items combined with the opening of new stores saw Dis-Chem deliver double-digit growth in its first interim results as a listed company.

The pharmaceutical and cosmetics group reported a 38.1% increase in headline earnings per share to 46.8 cents, despite an 8% increase in its shares in issue since listing in November 2016.

Turnover increased 14% to R9.95 billion. “Turnover growth for the group was a result of maturing store base and the addition of 19 stores since the prior comparative period, resulting in 118 stores at August 2017,” Disc-Chem chief executive Ivan Saltzman said in a Sens announcement.

Renier de Bruyn, an investment analyst at Sanlam Private Wealth, explained that a consolidation in the domestic pharmacy market away from independent pharmacies, after legislation passed in the early 2000s allowed corporations to own pharmacy licences, is also playing in Dis-Chem’s favour. “The industry is also benefitting from structural growth drivers, including an ageing population, a higher chronic disease burden and the shifting demands of the middle class,” he added.

The group’s retail division was the main driver of growth with its turnover increasing 15% to R8.78 billion and by 8.6% on a like-for-like basis. Excluding product inflation of around 4%, real growth in retail turnover held up relatively strongly amid a weak consumer environment, largely due to the group’s product offering comprising necessities. The group’s retail division posted a pre-tax profit of R629 million.

Despite an almost 21% in wholesale turnover to R6.46 billion, the wholesale unit posted a pre-tax loss of R52 841. It increased its wholesale space to 80 123m² during the period. “Management believes that the wholesale space is fully invested and will be able to accommodate the retail and wholesale growth strategies over the next three to five years,” the group said. The unit is to use the increased retail space to increase its market share by continuing to serve Dis-Chem, increasing supply to The Local Choice franchises and serving more independent pharmacies.

According to the group, expenses increased by 21% to R2 billion due to the costs associated with increasing its retail and warehouse space.

Operating profit increased by a similar margin to R700 million, with the operating margin improving from 6.3% to 6.8%.

The group posted an after-tax profit of R409 million, 37.4% year-on-year and declared an interim dividend of just over 18.73 cents per share.

Saltzman said the group expects the weak consumer spending environment to continue into the second half of its financial year and flagged low economic growth and an increase in taxes as constraints to consumer spending but that the resilient markets in which the group operates would offer some protection.

De Bruyn said attractive industry dynamics, a compelling offering and aggressive store rollout is likely to drive strong earnings growth in Dis-Chem for the foreseeable future. But he warned that high expectations have resulted in a high P/E ratio of 39, which is likely to weigh on its share price performance and make the group vulnerable to disappointment. “Unfortunately, the healthy prospects for the company is no secret, which has resulted in a high share price valuation which reduces the prospective future investment returns for Dis-Chem shares,” he said.

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