Cashbuild key to success is in lower end
bdlive.co.za - Jan 20th 2017, 10:10
Cashbuild’s meteoric rise since 2009 came just as stock exchanges around the world imploded into the global financial crisis.
The JSE was no different, but Cashbuild held a steady course northwards. It has had a few tricks up its sleeve. Not least it has raised the wages of workers when other firms were shedding employees. It also charges the lowest prices possible but is firm on margins.
Since its listing in 1986, Cashbuild’s share price has risen from R1.10 to about R340. Since January 2009 the share has risen about six times from R56, or 607%.
CEO Werner de Jager puts this down to "focusing on our strategy, understanding our model and managing the business in detail."
"We are focused on a very specific market sector — the middle to lower LSM’s [Living Standards Measure] where a lot of housing delivery and housing improvement have happened over the years."
From 182 stores in January 2009, the group has added 57 Cashbuild stores, 10 Cashbuild do-it-yourself stores, and most recently 44 P&L hardware stores. It operates in several southern African countries.
One of its main competitors, Build it, a franchise division of the Spar Group, is a full-service builder’s merchant.
Massbuild, a part of Massmart, has Builders Warehouse, Builders Express and Builders Trade Depot. Both Cashbuild and Massbuild serve residential markets, although Massbuild sells to the bonded market while Cashbuild has more cash-in-hand sales, especially of bricks and cement.
Vunani Securities small and medium companies analyst Anthony Clark says much of Cashbuild’s business is for cash and is in rural areas. "Their customers [are] untracked and in the cash economy," he says. This comprises mainly building and renovation work that is not captured formally.
Other general retailers in the building space, such as Italtile, have also targeted lower-end business. Through its TopT stores, customers upgrade their homes or build them slowly over years in areas where planning permission is seldom recorded. Italtile owns the CTM tiles and Tivoli taps brands, among others. "Much the same is true for Cashbuild," Clark says. It is extending its reach into previously underserviced parts of the country, including urban areas.
But Clark says when former "whirlwind CEO Pat Goldrick stepped down" in 2012 his successor Werner de Jager pulled back the rapid pace of expansion that Cashbuild had undertaken. This slowed growth and let competitors move into its markets.
But shortly after that Cashbuild made some strategic acquisitions, including the R350m P&L Hardware buyout, effective from June 2016.
"Thus we have seen a dramatic rise in sales and earnings [which are] outstripping the struggling building and construction sector," Clark says.
It remains to be seen whether the informal building boom will continue. SA faces a possible downgrading of its sovereign credit ratings amid continuing volatility in global markets. The group says overall revenue, including from 44 P&L Hardware stores, showed growth of 15% for the first half of 2017 when compared with the same period previously.
Electus Fund Managers equity analyst Damon Buss says the drivers of Cashbuild’s growth over the past 10 years have been its low-to-middle-income customer base. Allied to the expansion of SA’s social grant system, which reaches 17-million people, he says an increase in state employment and above-inflation salary increases has enabled people to upgrade their homes, both in urban and rural areas.
Significant urbanisation combined with a lack of affordable housing in urban areas have also resulted in many people building rooms on their properties to rent out.
Meanwhile, competition in SA’s overtraded cement markets has allowed Cashbuild to limit inflation. "Cashbuild management have also done a very good job of controlling costs which has led to gross profit margin expansion [to 26% in June 2016], which has resulted in them delivering very strong cash-flow growth," Buss says. But most of the key drivers of growth have now run their course and Cashbuild is likely to find it a lot tougher to deliver results, he says.
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