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For the year ending 31 August 2016 The Clicks Group has managed to produce another strong set of results, despite the currently weak consumer spending environment.
Some of the salient features of the results are as follows:
- Group Turnover +9.5%
- Operating profit +12.6%
- Headline earnings per share (HEPS) +15.8%
- Total Dividend +15.7%
- Return on equity (ROE) 49.2%
The company has continued to produce an exceptionally high ROE, operating on good margins and achieving double digit earnings growth in the low end of the current business cycle. The retail segment of the business, which remains the most meaningful contributor to profit (more than 80% thereof), has seen profit before tax (PBT) grow 13.47%. The distribution segment grew PBT by 6.7%.
The results build upon what has been consistent year on year earnings growth for the company, However, trading on a price to earnings ratio not far off of 30 times does suggest the Clicks Group to still be a little on the expensive side at the moment relative to the growth achieved.
Recent news that its unlisted competitor in the food and drug retail space, Dis-Chem, is looking to list on the Johannesburg Stock Exchange, in lieu of aiding its own expansion efforts could pose future headwind for Clicks. In the most recent financial year Dis-Chem achieved R15.5bn in revenue which compares to R25.5bn of revenue in 2016 from The Clicks Group. The Dis-Chem pharmacy chain currently has 101 stores in South Africa and another two partner stores in Namibia. The new public listing would look to help fund future growth in which Dis-Chem is looking to double the number of stores in operation over the next five to eight years. The Clicks store footprint currently sits at 511.
While the Clicks Group continues to grow revenue and offers a fair dividend yield of just over 2%, the current pricing of the share does seem a bit over extended at the moment. The uncertain future impact of the competitive landscape combined with a financially pressured consumer also provides a further caution for the share. But one cannot ignore the stellar results and massive ROE. It is with these considerations that the company is perhaps best considered a hold at present. We expect to see continued range bound trading activity as we wait for earnings to catch up with the current pricing of the share. In the short to medium term the range considered looks to be between levels 11880 and 13020.