DIY retailers struggle in sputtering economy

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SA’s DIY retail stores have mostly been immune to economic downturns.

When the going was good, people bought new homes, which they renovated later. In a sputtering economy, many prefer fixing things themselves.

Thanks to this kind of all-weather resilience, companies like Cashbuild and Italtile became JSE favourites.

But now, even they say this slowdown is the severest in a long time. Over the past year, retailers have had a lot to grumble about, as a rise in the VAT rate, increases in the fuel price and poor wage growth have drained consumers’ wallets.

The difficulty was evident in total retail sales growing only 1% for the three months to end-December. For hardware, paint and glass retailers, sales shrank 1.5% for the period, Stats SA data shows.

This could clearly be seen in the performance of Massmart’s Massbuild division, which had a rise in sales of 5.9% to R13.72bn but only a paltry 1.8% gain to R749.1m in trading profit in its results for the year to December.

At rival Cashbuild, revenue inched up 3% to R5.56bn and operating profit declined 12% to R284m for the half-year to December.

The situation is unlikely to change soon. The wider view is that consumer confidence will only really improve when the government sets out its economic strategy after the May 8 elections.

It’s not been totally bad for everyone, though. Spar’s Build it chain increased sales 10.3% for the 17 weeks to January 26.

Italtile is not waiting for the elections to see what happens. CEO Jan Potgieter says the group is employing various strategies to cope with the difficult economy. It plans to take more market share from its competitors.

Potgieter says that in an economy that’s slowing down, one of the ways the company can grow is by getting customers to buy all the material they need to renovate their home from one of its stores.

At its low-income-focused chain TopT, for example, people can buy an extensive range of products, obviating the need to go anywhere else.

Potgieter says the diversification of its product range has led to tile sales now making up only 50% of total sales. Italtile’s retail turnover rose 7% to R3.33bn and net profit 13% to R189m for the six months to end-December.

Despite the growth, Potgieter says middle-class customers are clearly taking strain.

Massbuild CEO Llewellyn Walters says the chain adapted to the slowdown by supplying materials to enterprises, larger landlords and building sites.

Essentially its strategy boils down to “looking for sectors unaffected by the recession”.

Massbuild has also been quick to adapt to the specific regional needs of consumers. During the drought in the Western Cape it bypassed its distribution centres and delivered JoJo rainwater tanks directly from the factory in Groblersdal in Limpopo to two of its stores in Cape Town.

Though the economy remains sluggish, Potgieter sees “huge” potential in the SA tile market. When compared to other middle-income countries, SA’s tile market is only about half the size.

“People want to invest in their homes. It’s usually their most expensive asset.”

At a share price of R13.50 and a p:e of 13.02, Italtile looks nicely priced and seems worth buying, but not everyone is sold on it, or the other DIY chains. “Italtile has good metrics, but we are avoiding the DIY sector,” says AlphaWealth fund manager Keith McLachlan.

He says that with credit extension on the decline, consumers are holding off on upgrading their homes.

This, along with increased competition, means DIY retailers are going to be under pressure for some time.

The sector’s prospects are changing at a “fundamental level”, McLachlan says. “The golden age of DIY retailers is more or less over.”

Source:https://www.businesslive.co.za/fm/money-and-investing/2019-03-07-diy-retailers-struggle-in-sputtering-economy/

Group Five collapse signals SA construction demise

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South Africa’s construction industry is being demolished.

After 45 years of trading on Johannesburg’s stock exchange, Group Five’s stock was suspended on Tuesday after the company filed for bankruptcy protection, making it the fifth local builder to enter business rescue in less than a year.

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From a peak market value of R8.2bn in 2007, it was worth less than R100m when the shares stopped trading.

While the construction industry is notoriously cyclical, the current mix of a depressed South African economy, high levels of national debt and low infrastructure spending is proving toxic as contracts dry up. At risk are thousands of jobs – including 8 000 at Group Five alone – in a country with an unemployment rate of above 27%.

“Those construction companies that are South Africa orientated have gone from bad to worse in the past 12 months,” Marc Ter Mors, the head of equity research at Johannesburg-based SBG Securities, said by phone. “In South Africa, volumes are low, pricing is under pressure and companies are taking on more risk to win contracts, so margins are thin and that hits cash flow. There are no real segments to hide in.”

Volatile markets

Group Five’s history demonstrates the group’s resilience in “several extremely volatile markets,” the company still says on its website. Even so, it has “for some time been experiencing cash flow difficulties,” it said on Tuesday.

Murray & Roberts saw the writing on the wall. Having built significant South African landmarks such as Johannesburg’s Carlton Centre, the continent’s tallest building, the company sold its building and infrastructure units in 2016 to focus on international businesses focused on projects such as underground mining and oil and gas.

While M&R’s market valuation is a fraction of what it once was, the stock has gained 44% in the past year amid takeover interest from 40% shareholder Aton GmbH.

READ: R4.5bn new development at O.R. Tambo Airport
The industry’s woes are a far cry from the build up to the FIFA Soccer World Cup in South Africa nine years ago, which required major national infrastructure spend, including on new stadiums.

However, that boom was cast in a dark light even before the tournament took place, when the Competition Commission started investigating collusion in the industry. The regulator settled with 15 firms in 2013, while Group Five was granted immunity for co-operation.

Government spending

While South African President Cyril Ramaphosa last month said government’s infrastructure spending had slowed, he also said the state will contribute R100bn into a fund over 10 years. The plan is to use this to get financing from both private and state-owned companies to reboot the industry.

In the meantime, the FTSE/JSE Africa Construction & Materials Index is down 27% in the past 12 months, compared to a 6% drop in the FTSE/JSE Africa All Shares Index. There is also risk that if South Africa’s local construction industry is wrecked, future building projects will become more expensive, Ter Mors said.

According to Ter Mors, as South Africa depletes its capacity to build its own infrastructure, when the cycle turns again, it will be forced to rely on international companies and their pricing.

Source:https://www.fin24.com/Opinion/group-five-collapse-signals-sa-construction-demise-20190312