Dis-Chem Pharmacies | Wellness does not come cheap

DisChem (DCP) released a satisfactory H1 ‘19 result with diluted HEPS up 11% yoy to 51.7cps. Like-for-like retail sales growth slowed by 310bps yoy to 3.5% yoy due to 280bps lower inflation yoy at 1.2%. The acceleration of the Group's store rollout is affecting like-for-like sales. New store trading densities are ramping up and there is some cannibalisation of the existing footprint. Group total income margins were 110bps higher yoy at 29.4% due to improved term from suppliers as the company gains market share. The Group improved price points on inelastic items, as management understands customer purchasing patterns. In our view, the DCP investment case remains strong. DCP opened 46 new stores (c.36% of total stores) over the past three years and continues to expand organically through small acquisitions. The store rollout and DCP's maturing trading densities will continue to contribute to the Group's earnings growth ahead of peers. We forecast adjusted diluted HEPS CAGR of 18% over the next three years to c.136cps in FY ‘21. Unfortunately, the growth is priced in by the market, with the share price expensive in our view.