Established in 1978 by qualified pharmacists Ivan Saltzman and his wife Lynette, Dis-Chem currently has just over 100 stores. The pharmacy group is in an aggressive roll-out phase – over the past year, 14 stores were added nationwide, of which eight were opened over a 10-day period in November last year. A further 21 new stores are due to open in the 2018 financial year.
We believe the potential for Dis-Chem is attractive, given the likelihood of further market consolidation at the expense of independent pharmacies – corporates such as Dis-Chem and Clicks have only 26% market share in South Africa, compared to almost 50% in markets like the US and the UK.
The industry is also benefiting from structural growth drivers, including an ageing population, a higher chronic disease burden and the shifting demands of a rising middle class. Pharmacy dispensaries in South Africa are highly regulated and selling prices capped. New legislation – currently in draft form – may also have further consequences for the industry. The pharmacies will, however, remain essential in terms of footfall for Dis-Chem, enabling the group to profitably cross-sell front-shop merchandise.
Compared to its listing price of R18.50 on 18 November last year, the Dis-Chem share is currently trading at around R23.80 (after an all-time high of R25.27 in mid-February). This is nearly 25% above our estimate of its fair value at R19.19 per share.
Our fair value translates into an historic price earnings ratio of 27.8 times and an enterprise value/ EBITDA multiple of 16.8 times. This might seem elevated, but investors should bear in mind that a third of the Dis-Chem store base has been trading for fewer than four years – the usual time frame to reach profitability levels. Some head office and support service costs to increase capacity for growth are in the base. The group has also identified 100 potential new store locations, which could theoretically double its store footprint over the next seven years at a rate of 15 per year.
In summary, although Dis-Chem undoubtedly has compelling prospects for good growth over the next few years, from a valuation perspective it would, in our view, be advisable to hold off for a better entry point before buying the group’s stock.
