Hardware retail sector shines in tough conditions

MOMENTUM SP Reid Securities recently cited the building materials and associated hardware retail sector that Cashbuild and Italtile operate in as a “standout industry in a lacklustre economy”.

Cashbuild recently reported a 35% rise in profit for the year to June of R363m, despite “difficult trading conditions”.

The performance is “once again above expectations”, Momentum SP Reid Securities says. But the pan-African brokerage also says “more details are needed to determine where the growth comes from”.

Cashbuild is typically coy on this question. It says employees in SA’s mining sector have driven growth. Trade unions have seen to it that individual miners have made significant income gains in recent years. But Cashbuild worries this may not last in an industry that is now bleeding jobs.

Revenue of R7.7bn was up a healthy 13% in the year.

The group has a “ready for business” initiative of better customer service through a well-stocked and “constantly expanding” chain of about 222 stores — some in Malawi, Botswana, Swaziland, Namibia and Lesotho. About 25% of shops are in rural areas.

CEO Werner de Jager dismisses any notion that it is only the rural stores that are bringing in the cash.

“The majority of revenue is from Gauteng — the rural stores have done well, but the best turnover performance is not out of rural stores.”

He says Gauteng stores brought in 23% of group turnover in the year. Sales in the province leapt 14% year on year. Meanwhile stores in the Eastern Cape, Limpopo and Mpumalanga each brought in an average 13% of overall revenues in the period.

“I think there is a bigger informal economy than we all realise,” Mr de Jager says.

“Cashbuild carries an in-depth, quality product range tailored to the specific needs of the communities we serve. Our customers are typically home-builders and improvers, contractors, farmers and traders, as well as all other customers requiring quality building materials at the lowest prices,” the group says.

These clients include large construction firms and government-related infrastructure developers. But since the end of SA’s 2010 Soccer World Cup, large state-led infrastructure projects have been in short supply. This has left many JSE-listed construction and engineering firms chasing thin margins at home while taking on riskier projects elsewhere in Africa.

In the interim, though, “bakkie and bucket brigade” builders appear to have been faring quite well. This has likely been boosting not only Cashbuild, but also tile retailer and franchisor Italtile, whose brands include CTM and TopT, sold through 126 stores across SA and in southern and eastern Africa.

In the year to June, Italtile recorded double-digit growth in both turnover and trading profit. It sells “premium quality” porcelain and ceramic tiles, and also sanitaryware, taps, bathroom furniture, accessories and laminated flooring.

It says the renovations segment is continuing to grow, but there has been little recovery in SA’s new home-building market because of “constraints in energy, water and sanitation infrastructure that has restricted new housing projects”.

Anthony Clark, a small and medium market cap analyst at Vunani Securities, says Italtile’s 17% rise in revenue and 21% increase in trading profit to R905m for the year to June is an “eye-wateringly good performance for an economy ‘supposedly’ in recession”.

He recently tweeted: “Recession, what recession. Stonking update from Cashbuild — and Italtile shows 22% rise in headline earnings per share. Building materials (are) obviously having a spending spree”.

But Mr Clark says Cashbuild and Italtile’s low-cost TopT trading unit both posted “superior industry growth”. With low-cost government housing in the doldrums, he reckons the “masses must be taking matters into their own hands and building for themselves”.

Massmart’s Massbuild division, made up of 99 stores including the Builders Warehouse brand, has also been a star performer. In the six months to June, the division grew sales by 16.3%, while trading profit before interest and tax shot up by 31%. Stores are mostly in SA, but also in Botswana and Mozambique.

The slew of great results comes as the FNB/BER building confidence index for the second quarter of this year shows that the biggest fall in industry confidence is among retailers of building materials.

Confidence fell from 91 index points in the first quarter to 66 points in the second quarter, even as robust sales growth and profitability continued.

John Loos, FNB property economist, says retailers of building materials have been the best performing sub-segment of the building industry for more than a year and they should continue to perform well this quarter.

But Investec economist Annabel Bishop warns that a recovery in the residential property market may be short-lived as higher interest rates and costlier personal taxes bite, along with rising administered prices for such items as electricity and water.

Meanwhile, the banking group says nonresidential property development remains in a slump, while the weakness of the commercial property sector shows the “parlous state of the economy in certain areas” — such as manufacturing.



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