Growth of high-flying retailer and expansion by new listing Dis-Chem may saturate lucrative market

The entry of Clicks into the pharmaceutical retail market in January 2003 has paid dividends for the group, whose stock has soared more than 2,000% since then.

It began with the health and beauty retailer’s acquisition of New United Pharmaceutical Distributors for R281m. By April 2003, legislation was passed enabling dispensaries to be introduced into Clicks stores.

Since January 23 2003, the stock has gained 2,163.60%.

The pharmaceutical retail sector has been a boon for Clicks over the years. Even in a more constrained economic environment, the investment has proved to be resilient, with Clicks performing well ahead of its peers. In the 20 weeks to the middle of January 2017, the retailer reported volume growth of 4.2%.

In the past year alone, while the food and drug retailers index increased about 6.55%, the Clicks share price rose about 37.64% in the same period.

But some industry pundits think the stock is overvalued at current price levels. "It’s expensive at the moment … investors want the company to trip up to create a buying opportunity.... They [Clicks] don’t seem to do that," said one industry analyst, who did not want to be named.

The current 12-month price: earnings ratio is 23.99 times.

Peter Takaendesa, portfolio manager at Mergence Investment Managers, said Clicks was expensive when compared with other stocks.

"It’s been like that for quite a while now.

"It’ s more like a Capitec or a Naspers to some extent, where the ratings look quite high, but those who like it will argue that the growth that is due to come has justified such a premium rating," said Takaendesa.

With the arrival of its competitor, Dis-Chem, on the JSE’s main board in November, investors now have more options. In the three months since the Dis-Chem listing, the Clicks share price has gained 3.17%, while Dis-Chem has seen its share price soar 30.43%.

Like Clicks, Dis-Chem has expansion aspirations. It made it clear that it would continue to roll out stores aggressively.

But Takaendesa said that, between the two of them, this might lead to saturation of the market. Dis-Chem, with 101 stores, plans to open another eight stores early in 2017 and at least 18 stores during 2018.

"Between Dis-Chem and Clicks, there is going to be a point where it is going to be difficult to keep rolling out new stores ," said Takaendesa.

"That’s the balancing factor one has to think of."

Victor Dima, a Dubai-based equity analyst at Arqaam Capital, said: "Clicks is trading at a higher multiple. If you look at the retail stock growth, it is the most expensive retail stock currently in South African retail."

Dima said the stock was preferred by international investors, who might be a bit less value-focused and more growth orientated.

"The kind of multiples that Clicks is trading [at], they are not necessarily unusual for the high-quality companies," he said. "Sometimes retailers in high-quality markets do trade over 20 times earnings specifically," said Dima.

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