Dis-Chem Pharmacies | Adjusting for anomalies

Dis-Chem (DCP) were recently hosts to sell-side analysts on a site visit to its three stores in the Greenstone node in Gauteng, to explain its store co-location strategies. Management also gave detail on sizable once-off items and rebate timing issues from the last 12 months, which will unwind in FY '20 and optically skew the company's underlying earnings growth trajectory.

DCP's store rollout strategy over the last two years identifies greenfield locations and regions with existing mature stores (co-location). The co-location roll-out strategy is also a pre-emptive offense against peers also seeking good locations. Approximately 35% of DCP's stores are yet to fully mature. New stores mature over four-years and can increase their initial trading density by four times. The strong growth of the drug and personal care categories (c.7% pa) supports this trading density evolution and reduces the impact from cannibalisation in co-location nodes.

After normalising for one-off items in the base, we estimate adjusted diluted HEPS to show +18% y/y growth to c.53cps in H1 ‘20f. Our adjusted estimates will contrast against reported diluted HEPS in H1 '20f of c.39cps (-24% y/y). With inflation doubling to 2.5% y/y and improving trading densities, we forecast H2 '20f adjusted diluted HEPS to grow by 50% y/y to c.48cps, yielding +31% y/y growth to c.101cps for FY '20f. With strong top-line momentum of c.16% pa thereafter, we forecast 19% earnings CAGR to c.169cps in FY '23 which we believe reflects the company's potential. DCP trades at a c.30% PE discount to Clicks (CLS). We believe the DCP offers investors an attractive entry point. We calculate a one-year TP on DCP of R29/share, implying a total return of 30%. The total return is 14% greater than our estimated market return of 15.7%. Accordingly, we have an OUTPERFORM rating.