Illustrative image: (From left) Like many other companies in the building and DIY sector, Cashbuild is playing a game of inches while short-term insurers such as Discovery and Santam are making the most of the business cycle’s tailwinds. (Photos: Luba Lesolle / Gallo Images | Alet Pretorius / Gallo Images | Misha Jordaan / Gallo Images)
Every dog seems to have its day when it comes to sector exposures. Artificial intelligence is all the rage at the moment, with data centre and large language model development taking place at an eyewatering pace. Companies involved in that space are having no difficulty in getting investors to support their efforts with many billions of dollars. But in other sectors, in fact in many other sectors at the moment, the going is much tougher.
This is how things work in economics. Business cycles are powerful things, and it’s very important to realise where you are in the cycle for each sector that you invest in. Traders and investors with shorter time horizons will actively try and time these cycles, while long-term investors will rather focus on how companies execute their through-the-cycle strategies i.e. the steps that management takes to grow regardless of what’s going on out there.
The local market has dished up a few useful examples of companies that are trying to sprint into a headwind – and a few that are enjoying a powerful tailwind for that matter. We begin with the former – Cashbuild and its battle to keep grinding away despite a difficult economy.
A game of inches
Al Pacino’s iconic speech in Any Given Sunday in his role as a football coach finds perfect application in the building and DIY sector. He motivates his team by telling them that life is a game of inches with a small margin for error. You just have to focus on what is directly in front of you and do the best you can in each situation. It’s a huge battle to make progress, one inch at a time.
Cashbuild can certainly attest to that, as the Government of National Unity exuberance turned out to be little more than a sparkler, rather than a full fireworks show. Interest rates have remained stubbornly high and economic growth has been disappointing to say the least. Shocker: it takes more than 12 months to fix the last 15 years.
For Cashbuild, all it can really do is continue playing its game of inches, which means 5% revenue growth on a 52-week adjusted basis (the prior period had an extra week, so this adjustment is critical). Expense growth was also contained at 5%. By the time you reach the bottom of the income statement, headline earnings per share (Heps) was up 10%. It may be bruised and covered in dirt, but Cashbuild has gained ground in the past year.
Cashbuild customer transactions
Source: Cashbuild
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The momentum is encouraging, with the first seven weeks of the new financial year reflecting sales growth of 6%. That may not sound like much, but it’s a lot better than 5%– provided they can keep expense growth under control. It only takes a small amount of outperformance on the revenue line for margins to increase.
I have a modest long position in Cashbuild as part of a play on a recovery in that sector. It’s taking longer than I had hoped, but the signs are there.
Short-term insurance is cleaning up
One of the clear recent themes on the JSE is that the short-term insurance sector is making a fortune. Last week I dealt with OUTsurance and its impressive growth, including in its Australian business – a region that has claimed so many South African scalps in other sectors. Since then, we’ve had two more rerleases from financial services companies that have confirmed the trend.
The first was Santam with the release of results for the six months to June. Group insurance revenue was up 12% and Heps increased by 19%, so there’s clearly a great story here around margins. Sure enough, the insurance net underwriting margin achieved a spectacular jump from 6.5% to 11.3%. This tells you that Santam was on the right side of actual vs expected losses, a theme that has played out across the sector. Or, put differently, short-term insurance was actually too expensive for everyone in the past year! But before you reach for the torches and pitchforks, remember that there are also years where net underwriting margin goes the wrong way, usually when there are large loss events like natural disasters. By its very nature, insurance is a gamble for all involved – a game of probabilities.
Source: Santam results for the six months to June
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Insurance also boosted the story at Discovery, where the financial services group is having a fantastic year. The share price is up 48% over 12 months, with a trading statement for the year ended June 2025 confirming why: Heps is expected to be between 27% and 32% higher for the year.
The more mature parts of the business certainly aren’t growing at anywhere near these rates, so you have to look at the more exciting growth engines in the group to figure out how this happened. As you’ve probably guessed by now, Discovery Insure was one of the absolute winners in this period, with profits more than tripling!
Although not directly short-term insurance related (but certainly contributing to the overall moat around Discovery’s client base), special mention must go to Discovery Bank. That operation generated a profit in the second half of the year, which suggests profitability in the upcoming year on a 12-month basis. It’s taken quite a while and plenty of money to reach this point, with the big focus now being on just how quickly they can get up the J-curve of profitability.
The benefit of a banking business is that it helps diversify the group. If there’s one thing that the past few years has taught us, it’s that short-term insurance is rarely a linear journey. DM