Cashbuild tanks in second half; wouldn’t know it from results, share price

Werner de Jager
Cashbuild CEO Werner de Jager: Finding it a struggle right now to fill Pat Goldrick’s big shoes.

One of the things that really irritates me about financial reports is the way companies always try to put the very best face on things. Too few follow Warren Buffett’s advice of trumpeting the bad news and playing down the good news. We saw another example of this today with Cashbuild, the building materials retailer. On the surface, the results for FY2013 aren’t too bad with revenues up 1% and headline earnings off a worrying but not exactly devastating 17%. But go back to the first half of the year – as with Aveng’s recent results – and it’s clear the trading fell off a cliff. First half profit of R651m tanked to R377m in the second six months, a drop of 42%. Although total dividends paid in the year were a modest 14% lower at 487c a share (569c),  the final dividend was dropped by a third to 191c (273c). I challenged CEO Werner de Jager on these and other issues in our CNBC Africa Power Lunch interview today. Somebody thinks he handled the questions well, with the share price closing the day 0.4% higher. He didn’t convince me. Make up your own mind. – AH

To see the video of my full interview with Werner de Jager on CNBC Power Lunch, click here.

ALEC HOGG: Cashbuild saw its full headline earnings per share fall by 18% while diluted headline earnings fell 20%. Company CEO Werner De Jager joins us to unpack the numbers. Good to see you, Werner, although I don’t know that you should be so happy to come here with these kinds of numbers. They’re awful – the second half. From the first half to the second half down 42%. What happened?

WERNER DE JAGER: Alec, yes it was a real tough second half for us. We always knew that it was going to be a tough second half. We were also up against a very good half on the first half, so margins came under pressure, our revenue growth was not where it was supposed to be and we opened a number of new stores which added cost to the business and hence we’ve had some pressure on the numbers.

 ALEC HOGG: Dividend down. Final from R2.73 to R1.91 (30%). That’s a big cut in your dividend. Was it excessive in the past? With a company like yours; when you’ve got such a high dividend cover shareholders would hope that in tough times you can cut that cover a little bit and keep the dividend at the same level.

WERNER DE JAGER: Alec, we did cover last year to two times cover. The second half or the final dividend last year was slightly inflated. It was or 53rd week of trading that we had so it added to the dividend and that’s why we as a Board had a discussion about it yesterday and we felt that we were going to stick to our policy – our cover, seeing that we brought it down recently to the two times cover and we just stuck to that cover policy.

ALEC HOGG: So you considered keeping the dividend at last year’s cover?

 WERNER DE JAGER:  Yes, it was a discussion, but Cashbuild being a company that’s very policy orientated decided not to break the rules and keep to our cover that we set for ourselves.

ALEC HOGG: But help us out here. You’re down 42% in the second half. The first half of the year looking ahead, things are not terribly bright?

 WERNER DE JAGER: Alec, no. First off, one needs to understand that there’s always a learning towards the first half of Cashbuild because of Christmas trading that happens during that time. We see quite substantial increases in revenue over that period, but certainly not the 42%. Now when we look at the year ahead we’ve managed to turn around some of the volumes. Trading is up 10% – margins still being under pressure and we’re managing to do business. So it’s certainly not going to be growth figures that we’re expecting but we certainly are going to be under pressure for the second half or the first half coming.

ALEC HOGG: It’s tough for you. You’ve come into very big shoes. Pat Goldrick, one of the great entrepreneurs of South Africa. Have things changed much at the business since his departure?

WERNER DE JAGER: Alec, no. He’s not around and obviously he’s not been around for quite a while. We’ve been on very much the same strategy we set for ourselves. We were all part of the strategy when Pat was around. We made the strategy so there was no need, especially for me, to make major changes in terms of the business. My management style is obviously different to his but in terms of running the business it’s the same process as we’ve always done.

ALEC HOGG: How different is your management style?

 WERNER DE JAGER: Mine is slightly more participative in terms of that and I’m expecting the guys to take on that responsibility at lower levels and not to manage the business from the top.

ALEC HOGG: It’s been a bit volatile though if you look at your headline earnings. Going back to 2009 you had a good year; down in 2010; down again in 2011; you shot the lights out in 2012 and now the second half of the year – down. Is that just a sense of the kind of market that you’re operating in?

WERNER DE JAGER: Ja, Alec. We often say that we do make mistakes at Cashbuild and we do have tough times, but we act fast to correct those mistakes and correct the things that we’ve seen happening in the market. So our reaction time we believe is always very good. And that’s why you’ll see we’ve been through tough times and we’ve traded through them and we’ve bounced back every time and made sure that we – over a long term – keep the graph in a positive trend.

ALEC HOGG: But you used to be spectacular. This was the top company, the best-performing company on the stock market. It’s not that anymore.

WERNER DE JAGER:  No, we’ve certainly stepped into a different league in terms of size and our revenues and in the economy one can’t…obviously we start internally and look at these things when things aren’t going well. But you have to look at the broader economy and you have to look at consumers with unsecured lending – as far as last year – you can see it in the results. That’s gone and it has an affect on the business; competition in our industry – everybody is climbing into that industry. We can’t stop them from coming in. We certainly have our own strategies to and so we need to face the circumstances that we’re in.

ALEC HOGG:  Competition: are you seeing much from Walmart (Massmart) or from Builder’s Warehouse?

WERNER DE JAGER:  Alec, at this stage we understand that there are some changes in terms of models that they’re bringing out that will compete directly with us like during the year so we are aware of those changes that’s happening. In terms of transactions and specific deals that they do at a point in time – ja – they are a competitor in our market and so we need to be aware of them.

ALEC HOGG:  I say that because when Grant Pattison, the Chief Executive who was sitting in the chair you’re occupying now: when he first came back from America he said ‘we’re about five years behind’. This time he says we’re about 15 years behind which would suggest that he’s got a lot of improving to do, so your competitors are going to get smarter. How do you actually shield yourself against that?

 WERNER DE JAGER:  We’ve certainly over the years also built up our own core competencies and things that we’re good at and we’re good at focusing on our business. We’ve got a core business and we don’t get distracted to other things and for us it’s now honing that strategy, making sure that we stick to what we do well but also, the Board has approved that we look at one or two alternative models to enter into markets that we haven’t been able to go into. So we are working on those and hopefully that will give us the edge that we need to stay ahead of the game.

ALEC HOGG:  You mentioned unsecured lending. How did that impact you?

WERNER DE JAGER:  Alec, it’s very difficult to say how much we benefited from it, but unsecured lending was definitely…we benefited from it in terms of…

ALEC HOGG:  It went crazy last year.

WERNER DE JAGER:  Ja, and people had cash in their pockets and they spent it at all retailers for that matter and Cashbuild certainly got there. But this year we can see that our own internal credit through Nedbank is down. You can see the lending rates, the applications are much higher because everybody is indebted and they’re looking for credit but the grant rates or the approval rates are down and overall the loans extended are down and therefore you can see there’s a crunch on the consumers and they don’t have that much disposable income.

ALEC HOGG:  But it’s an interesting point. What percentage of your turnover – being Cashbuild (people coming in with cash) – would have been funded by unsecured lending?

WERNER DE JAGER:  That a difficult question.

ALEC HOGG:  Take a flier.

WERNER DE JAGER:  I think that’s very difficult for me to say. It could be…our own internal one is about 5% that we grant on credit. When I see people walking into the stores, probably 10/15% could have been by unsecured lending.

ALEC HOGG:  Is the margin very significant?

WERNER DE JAGER:  Ja.

ALEC HOGG:  Werner De Jager, let’s hope next time we’ve got some better news. I look forward to seeing you again..

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