Flash Note: Cautious on Cashbuild

Flash Note: Cautious on Cashbuild

Despite the South African economy experiencing severe pressure over the last number of years, Cashbuild Ltd, South Africa’s largest retailer of building materials and associated products has had a very strong performance – capitalizing on the need of homeowners looking to renovate and improve instead of relocating altogether.

While the business has had strong momentum over the last number of years, growth now appears to be slowing:

Revenue has over the last decade has grown from R4bn (FY June 2008) to R9.7bn (FY June 2017), while the interim results to December 2017 showed growth (including new stores) of 5% to R5.4bn however the growth excluding new stores increased by only 2%

Headline Earnings Per Share has over the last decade has grown from 709c (FY June 2008) to 2047c (FY June 2017), while the interim results to December 2017 showed a decline of 8% to 1098c.

In it’s latest prospect statement, management stated that they believe trading conditions will remain extremely challenging.

Over the last 5 years, interim and full year results show headline earnings per share as follows:

Technical View:

The share price has performed exceptionally well, reflecting the strong fundamental growth of prior years. On a 5-year view, the price has increased from R125 to an all-time high of R526 in March of this year while over 10 years has increased from just under R60.

At current levels and using a monthly chart view, the price action is starting to reflect long term sellers becoming active. During September 2016, the RSI made a lower high versus the price – the first sign of bearish divergence while the new highs in March 2018 also refused to be confirmed on the Relative Strength Indicator.

At current levels, the RSI is starting to break below support with a print of 55 which may reflect the start of long term weakness.

Takeaway: With a price-to-earnings ratio of 20 times, a price to book of 4.8, a price-to-cash flow ratio of 16, full year growth of +3% (to June 2017) and a decline in HEPS of 8% over the last six months, investors are most likely be discounting “rear view mirror growth” and should take caution as a further de-rating of the company’s shares is likely near these all time highs.

 

Leave a Reply

Your email address will not be published. Required fields are marked *