Ghost Bites (Clicks | Nampak | Nedbank | Nu-World | Steinhoff)

Clicks continues winning market share (JSE: CLS)

But the earnings growth continues to look too low for the current valuation

Clicks remains an anomaly in the market. Not only does the share price trade at a huge multiple, but there’s a heavy tilt towards foreign ownership in the shareholder base. One would assume that the South African risk premium should hurt the share price here, yet the share price is only down 17% in the past year. That doesn’t seem like enough of a correction when viewed against earnings growth and the state of affairs in this country.

For the six months ended February, group turnover increased by 6.8% if we exclude vaccinations in the current and prior period. Another adjustment is made for insurance proceeds in the comparable period, without which adjusted HEPS is up 10.2%. To be honest, I’m comfortable with both of those adjustments.

The dividend is only up by 2.8% though, which is still higher than unadjusted HEPS which increased by just 0.9%. If you were hoping that the Clicks dividend would help your investments keep pace with inflation, you can officially feel disappointed.

In terms of underlying performance, Clicks surpassed 10 million Clicks ClubCard loyalty members and reported market share gains in all product categories. The wholesale picture is less favourable, with UPD continuing to face pressures on pricing. Operating costs are growing at a rate well above inflation at the moment, thanks to the likes of fuel and security costs.

In acquisition news, you may recall the November 2022 announcement of the R105 million acquisition of Sorbet Holdings. The group is also acquiring 24-hour pharmacy M-Kem, giving you the opportunity to wait in a long and frustrating queue at any time of day now.

Despite the tough consumer environment, Clicks is investing heavily in growth. 50 new stores and 40 pharmacies are planned to be opened this financial year, with record capital investment of R958 million planned. R477 million is earmarked for new stores and refurbishments, while R481 million will be invested in supply chain, technology and infrastructure.

The full year outlook is growth in adjusted diluted HEPS of between 8% and 13%. On an unadjusted basis, diluted HEPS is expected to differ by -2% and 3% year-on-year.

Disappointingly, there is no mention that I could find in the earnings of the recent Constitutional Court judgement against Clicks. The future of Clicks’ ownership of a manufacturing pharmacy division is in doubt, along with any potential penalties for breaching legislation.

Nampak brings in a war time CEO (JSE: NPK)

Erik Smuts has resigned from the CEO role

There are peace time and war time CEOs in this world. Based on the narrative on Twitter, the new interim CEO of Nampak is firmly the latter. Phil Roux has loads of experience in the FMCG industry and in corporate turnarounds as well, a skill that Nampak needs more than ever before.

He will replace Erik Smuts in the top job after Smuts “opted to step down” – with immediate effect. Read into that what you will. The official line is that the restructuring process means that the CEO’s role has changed materially.

After 25 years of service to Nampak, Smuts will hopefully make a better decision than ruining his life by going to run Eskom. That is a path that I suspect won’t be repeated.

Nedbank wants to take out the odd-lots (JSE: NED)

Get ready for another arbitrage opportunity in June

Odd-lot offers have been popular recently on the JSE. Companies use them to remove the administrative burden associated with having a long tail of shareholders with small stakes. I hope that by now, companies are doing the maths properly around what it will actually cost. Inevitably, there’s an arbitrage opportunity that attracts many new shareholders who buy fewer than 100 shares.

Nedbank is likely to be another example, with the odd-lot offer price set to be a 5% premium to the 10-day volume-weighted average price (VWAP) calculated as at 19 June 2023. If shareholders keep a close eye on the pricing, they might be able to generate a modest profit.

At the current price, 99 shares would cost R20.4k and so a 5% profit would be just over R1k. If it works out that way, it’s a useful boost to anyone’s bank account.

Nu-World releases detailed interim results (JSE: NWL)

HEPS has halved and now investors can understand why

It starts right at the top of Nu-World’s income statement, with revenue down by 15.7% for the six months ended February 2023.

South Africa was worse than the international business, with sales down by 26.3%. One of the hardest-hit categories is new TVs, which the company blames on load shedding. That seems sensible to me – nobody wants a decorative TV. That’s not a great read-through for MultiChoice, either.

Offshore, revenue was up 31.5%. This was thanks to new markets being opened up, although profitability suffered due to trading conditions.

I suppose the good news is that inventory fell by 43.5%, so it seems as though a lot of inventory was cleared out and not necessarily replenished. That’s good for working capital.

Pepco is the irrelevant gem inside Steinhoff (JSE: SNH)

These results are a wonderful example of putting perfume on a pig

I see that Steinhoff is now changing hands at around 21 cents per share. So, only 21 cents to go until it reaches fair value.

It’s such a pity that the holding company is essentially worthless, because an underlying business like Pepco is doing good things in Europe. The company has released its second quarter trading update and growth at Pepco’s European business is sky high, up 30.7% in constant currency. The Poundland business in the UK is moving at a far more sedentary pace, up 6.7% in constant currency.

On a combined basis, Q2 revenue growth is 19.7% in constant currency. Importantly, the rollout of stores is a huge part of the story. To get a sense of how existing stores have been performing, we need to look at “like-for-like” growth. On that metric, group revenue is up 8.5% for the quarter.

This means that things have slowed down a bit, with the growth for H1 (the six-month period of Q1 + Q2) coming in at 22.8% including new stores and 11.1% on a like-for-like basis.

Against a backdrop of inflationary pressures on consumers, the company is pushing forward with a growth strategy focused on new stores. For the first time, new store growth in Western Europe exceeded Central Europe.

At some point, when Steinhoff is owned by its creditors, I’m sure they will be happy with Pepco.

Little Bites:

• Director dealings:
  • As a reminder of how much richer Des de Beer is than basically all of us, he received almost R95 million worth of shares in Lighthouse Properties (JSE: LTE) just as a scrip dividend.

• Impala Platinum (JSE: IMP) has bought more shares in Royal Bafokeng Platinum (JSE: RBP), taking its stake to 45.09%.

• An independent expert has determined that the terms of Exemplar REITail’s (JSE: EXP) small related party transaction with McCormick Property Development Company are fair to shareholders.

INVEST IN SHARES