Dis-Chem Pharmacies | Watch this space

Dis-chem (DCP) aggressive store rollout (8% new space in FY'19) dilutes trading densities short-term but increases the longer-term opportunity set and in turn the value of the group. While CLS has a more established business model, DCP's valuation discount (c.20%) and investment in its footprint, provides investors with an attractive opportunity in the medium-term. Key to both counters, is that they are well placed to gain market share from independents and grocery chains in the drug and personal care market segments through convenience and lower selling prices.

Both CLS and DCP currently under-index in their presence within existing mall space. New stores mature over four-years and can increase their initial trading density by as much as four times. The robust high growth of the drug and personal care categories (c.7% pa) should drive this trading density evolution. DCP is most geared to this effect, since c.35% of its total store base has yet to fully mature. We model DCP trading densities rising by 6% pa to c.R120k/sqm in FY '23, which in turn drives margins improving to c.6% from 5% currently.

The drug price increase in 2019 of c.4% y/y is supportive to wholesale and retail dispensary margins in FY ‘20. We estimate 13% y/y group sales growth to drive earnings growth of c.21% y/y to c.104cps in FY '20.

Consecutive strikes over the past two years were a significant hindrance to DCP, reducing earnings growth to c.7% pa. A wage agreement and stricter rules surrounding strike action are now in place with unions. We believe unofficial strikes are therefore less likely to occur and DCP will realise its strong earnings growth potential over the next four years.

Accordingly, we have an OUTPERFORM rating on DCP. We calculate a 12m TP on DCP of R31/share.