07/09/2006 00:00
By: Lucas de Lange  
 
MASSMART'S share price is one of those that suffered badly during the market downturn earlier in the year. It tumbled by 26% to a low of 4 185c. However, there's been a steady improvement since July. That this was justified is confirmed by the figures of the large group - which owns 10 shopping chains - for the year to June.

For example, turnover increased by 15% to R30,3bn and its operating profit and headline earnings per share went up by 37% to R1,3bn and 28% to 419,3c respectively. Operating cash flow increased by 45% to R1,8bn and the dividend by 15% to 210c.

An interesting aspect of the results is the rise of the Massbuild chain, which focuses on building materials and the DIY market. It has tackled that market seriously since 2003 with a number of takeovers and it now has 65 outlets (Massmart's total is 228) trading under the names of Builders Warehouse, Tile Warehouse, Federated Timbers, Servistar and De La Rey. Massmart's largest chain, Game, has 70 outlets.

Massbuild boosted its turnover in the year by no less than 158% to R3,9bn - equal to just more than 10% of the total market, which is estimated at R35bn. And CEO Mark Lamberti, who was clearly excited about this latest offshoot of the group during a presentation, expects further strong growth.

The aim is to be the dominant player in this market and with almost R500m being invested in existing and new shops in the current financial year, Massbuild, in particular, will be expanded. Lamberti wants at least 100 Massbuild outlets by 2009 and a turnover of R7bn.

The Home Depot group in the US, the largest player for similar products there, is Lamberti's model. Home Depot's technique is to use massive warehouses to offer everything that a homeowner could possibly need, including sections with DIY bathrooms and swimming pools.

Lamberti admits that existing retailers could suffer as a result of Massbuild's aggressive expansion plans and its massive buying power, as well as its policy of offering discount prices, similar to the Game, Dion and Makro chains.

Lamberti believes that Massbuild will become a highly profitable entity following its R300m operating profit over the past financial year, the second-largest contribution by the chains.

That he's on a promising trail with Massbuild is confirmed by one of its competitors, Iliad, which recently announced its results. Illiad CEO Ralph Patmore said that though there was a slowdown - as expected - in the new homes market, it's expected that other sectors, such as alterations and improvements to existing homes, will continue to show "solid" growth.

Cashbuild, the other large building materials retail chain, also expects continued above-average growth and it's busily involved in opening new outlets. A total of 17 were opened over the past financial year and at end-June it had 150 outlets. The group was one of the big winners on the stock market over the past few years. Since the beginning of 2001 its price had increased by 5 600% to R57 before a correction to R39/share. It has improved steadily since to R42/share at the time of writing.

It's against that background that Massmart sees its most promising growth for the foreseeable future. As for the retail market in general, Lamberti is positive. Business remains lively and indications are that a promising festive season lies ahead. That will include the sales from 12 new shops to be opened in the coming months.

Massmart is currently trading at a price:earnings ratio of 14 and a dividend yield of 3,8%. Given the quality of the group, its high return on capital employed and its good prospects as a mainly cash retailer, it remains worthwhile to have this giant in your portfolio.