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Dis-chem (DCP) delivers solid interim results
​​Date: 17 October 2018
Category: Stock Market
​Share price at time of writing: R27.60

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We take a look at the interim result of listed pharmaceutical and personal goods retailer Dis-chem (DCP)  for the 6 months ended 31 August 2018. Dis-chem is one of the JSE's newer listings and is in direct competition with bigger rival Clicks (CLS).

They both operate in a space for which there will always be a demand, as consumers will continue to by personal care items as well as medication.

• Clicks (CLS)

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Background on Dis-chem

The following regarding Dis-chem was obtained from the website and their latest annual report
"We are a leading pharmacy group in South Africa. Our “Pharmacy First” approach, means that our customers can always depend on there being a pharmacist to serve their pharmaceutical needs whenever they enter a Dis-Chem store."

The Group employs more than 13 500 full-time and part-time employees. In November 2016, the Group listed 27.5% of its issued share capital on the Johannesburg Stock Exchange (JSE). This was the second largest initial public offering (IPO) on the exchange.

RetailThe Group’s “Pharmacy First” approach guarantees that its customers can always depend on there being a pharmacist to assist with their pharmaceutical needs whenever they enter a Dis-Chem store. In addition to the Group’s pharmaceutical products and services offering i.e. its Dispensary category, its retail front shop has Personal Care and Beauty, Healthcare and Nutrition, Baby Care and other offerings. Other offerings include confectionary, household goods and ancillary services such as clinics, and hair and beauty salons. As at 3 June 2017, the group traded from 115 stores, including 3 in Namibia, and more than 200 clinics. It has a wide range and assortment of front shop products with over 60 000 SKUs creating a competitive advantage for the group.

E-Commerce

The group launched its online platform in 2013 and even though online shopping is still a very small part of Dis-Chem’s operations, it is growing rapidly. The Click and Collect service has proven to be a success and is being provided in all stores.


WholesaleDis-Chem entered the wholesale market in 2013 when it acquired a controlling stake in CJ Distribution to service its own stores as well as third parties.Over time, Dis-Chem intends to expand its wholesale business into the distribution business whereby it would service both the wholesalers and retailers.

The interactive graphic below shows the share price history of Dis-chem since its listing in November 2016.

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Percent change:

Some of the high level results published by Dis-chem:

• Revenue: R10.464 billion, up 9.4% 
• Profit before tax: R628 million, up 11.1%
• Earnings per share: 51.7c, up 10.4%
• Interim dividend: 20.69c per share (placing DCP on a dividend yield of  1.5%, which is pretty low). Guess they keeping cash for expansion and organic growth
  
• ​Cash and equivalents: R30.11 million up from R24.13 million
• Cash generated per share: 44c a share

Commentary on the financial results by Dis-chem:

Overview
Despite a tough economic environment, the Dis-Chem Group reports positive results with improved market shares across all its core categories and continues to produce attractive returns to shareholders. Earnings attributable to shareholders and headline earnings both grew by 10.5% over the corresponding period in the prior year ("corresponding period"). Earnings per share and headline earnings per share are both 51.7 cents per share, an increase of 10.5%.

Chief executive, Ivan Saltzman: "The continuing increase in the fuel price along with the 1% increase in the VAT rate continues to put pressure on consumers. After tough trading conditions in April, we experienced another extremely tough trading month in July. Subsequently we have seen trading improvements in August and then again in September suggesting consumer confidence is improving slightly. It is pleasing to note that in each of the last six months we have made market share gains in all of our core categories confirming the success and importance of our everyday low price strategy and the availability of choice for our customers. Our superior trading densities, high average basket size and spend by our Benefits Programme members further points to the loyalty that our brand enjoys in this market."


Trading performance
Retail
Retail revenue grew by 9.8% to R9.6 billion and was negatively impacted by the 1.26% SEP increase. The SEP is prescribed by the Department of Health and impacts approximately a third of the Group's retail revenue. Total dispensary revenue growth was 8.2% lagging the average front shop revenue growth of 10.8%. In the absence of an additional SEP increase during the remainder of the financial period, we expect dispensary revenue to continue to lag our front shop categories; Personal Care and Beauty, Healthcare and Nutrition and Baby Care. In the current period, the Group has opened seven new stores, including flagship stores in Sandton and Gateway, resulting in 136 stores at August 2018. The addition of new space together with maturing space is the most prominent driver of retail growth. In FY2018, the Group added 21 new stores which contributed R667 million to revenue in the six-month period under review. At August 2018, the Group added seven new stores adding R155 million to revenue.

Wholesale
Wholesale revenue grew by 15.1% to R7.4 billion. Revenue to our own retail stores, still the biggest contributor to wholesale sales grew by 16.5% as we achieved over 80% of internal supply. The Local Choice revenue growth continues to be very positive coming in at 15.6% and now contributing 5% to overall wholesale revenue. We expect to increase external sales with the acquisition of Quenets Proprietary Limited, a wholesaler in the Western Cape, once final approval is received from the Competition Commission. Directorate No changes have been made to the board since year-end or the prior corresponding period. Outlook For the six weeks to 14 October 2018, Group revenue grew by 10.3% with comparable store revenue by 3.3%. The Group expects that the consumer will continue to remain constrained due to the continuing increase in the fuel price and overall cost of living. As was the case previously, the resilient markets in which the Group operates will offer protection against the weak environment; the Group is well positioned to benefit from additional consumer disposable income.

Outlook
For the six weeks to 14 October 2018, Group revenue grew by 10.3% with comparable store revenue by 3.3%. The Group expects that the consumer will continue to remain constrained due to the continuing increase in the fuel price and overall cost of living. As was the case previously, the resilient markets in which the Group operates will offer protection against the weak environment; the Group is well positioned to benefit from additional consumer disposable income. The Group remains focused on adding retail stores. Two stores have been added since the reporting period and an additional 13 store openings are planned through to February 2019. We reiterate our guidance to end the full year with a minimum of 151 stores.

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We do believe that either Dis-chem or Clicks is a must have in any long term portfolio. Clicks is the more diversified group, with them owning The BodyShop and Musica, while Dis-chem is the smaller more pharmacy focused entity. Investors will have to decide which one of the two they like more, but we dont recommend holding both in a long term portfolio due to the large overlap in the businesses.

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