The Finance Ghost: Dis-Chem motors ahead, Standard Bank reaps rate hike rewards

The Finance Ghost: Dis-Chem motors ahead, Standard Bank reaps rate hike rewards
(Photo: Gallo Images / Luba Lesolle)

The market just loves defensive retailers. Dis-Chem and Clicks both trade on huge multiples, yet there are signs that the companies are on different growth paths.

Anecdotally, service levels have dropped at Clicks, with multiple complaints online (and in my personal experience) about the lengths of queues at the dispensary. The company is trying to cut costs and I can see why in the latest numbers (six months to February 2022).

Retail sales grew by 13.6% and costs grew by 12.2%, so that’s a positive margin story at least. The numbers are high because of new store growth, as costs on a like-for-like basis grew by 6.5%.

The retail revenue line was assisted greatly by the vaccine roll-out, though it must be noted that this is a low-margin source of income. I also think that demand for vaccines is going to drop significantly.

The troubles at Clicks are visible in UPD, the wholesale business. Distribution costs increased by a substantial 8.4%, bearing the brunt of higher fuel and other costs. Revenue grew by a tepid 0.6%, so margins went firmly in the wrong direction.

The net result was a 20 basis point knock to group adjusted operating margin, dropping to 7.8%.

On the same day, Dis-Chem released a trading statement for the latest year, reflecting an increase in headline earnings per share (HEPS) of between 24.5% and 29.5%. There have been acquisitions, so I’ll wait for all the details before having a strong view on the performance relative to Clicks. At this stage, though, it looks like Dis-Chem is pulling ahead, as adjusted diluted HEPS from continuing operations grew by just 10.2% at Clicks.

Using the latest numbers, Dis-Chem is on a trailing price/earnings multiple of about 39x and Clicks is on a six-month forward price/earnings multiple of about 35x (earnings guidance was given for the full year). Although this is high in both cases, I would feel more comfortable owning Dis-Chem if I had to pick one. Year-to-date share price performance reflects 9.6% growth in Dis-Chem and just 0.2% growth in Clicks. The gap is much larger over 12 months: 64.5% vs 30.5% in favour of Dis-Chem.

Another way to play healthcare

Netcare released a voluntary update for the six months to March 2022. Revenue growth was between 2% and 2.5%, yet group earnings before interest, tax, depreciation and amortisation (EBITDA) increased by between 8.5% and 9%. The EBITDA margin improved by 100 basis points to 15.8%.

Like airlines and hotel groups, hospital groups have high levels of operating leverage. This means that the cost structure is heavily weighted towards fixed costs, as the hospitals need to keep the lights on (literally) even if the wards are empty.

As utilisation rates fell during the pandemic (elective surgeries were cancelled, etc.), EBITDA collapsed. On the way back up, modest revenue growth can still drive improvements in EBITDA. In primary care (operations such as medical and dental clinics), revenue increased by between 5.2% and 5.7%, and EBITDA shot up by between 30% and 32%. This is a perfect example of operating leverage.

The Netcare share price is down 3% this year and is up 2.7% in the past year. There’s been more than enough volatility to keep traders interested, though, with a 52-week range of R13.21 to R17.38.

Banking on the up

There are good reasons why banking should be doing well. Higher interest rates drive better margins – have you noticed how your mortgage immediately goes up when there’s a rate hike, but what you get paid on deposits doesn’t? That’s not by accident. An additional impact is the so-called endowment effect, which relates to banks lending out the equity on their balance sheets as well as funds from depositors. As no interest is paid on the equity, a rise in rates drops straight down to the net margin.

When coupled with strong growth in loans and advances, the banks effectively enjoy a volume and pricing double-whammy of financial awesomeness, rewarding shareholders along the way. Consumer demand drove the loan books during the pandemic, with corporate borrowing now starting to come through.

As supply chain pressures continue and inflation picks up, corporate balance sheets will need to grow to keep supporting operations. Even if the debt:equity mix is maintained rather than increased, that’s great for banks.

In the latest quarterly update by Standard Bank, group earnings increased 28% year-on-year. The factors mentioned above came through in these numbers, along with the benefit of lower impairment charges (as the credit environment has improved) and a useful contribution from trading revenue thanks to volatile markets and higher commodity prices.

The results of Liberty are being 100% consolidated as of 1 February 2022. If that acquisition is successfully integrated, this could be a big year for Standard Bank and its shareholders. The share price is up 18% in 2022. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.


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