Dis-Chem continues on its acquisition trail

CFO Rui Morais says Dis-Chem is investigating an acquisition of a community-based pharmacy group.

Following the Baby City acquisition, which is still pending Competition Commission approval, Dis-Chem has announced that it intends to continue its acquisition trail. CFO Rui Morais says the company is investigating the acquisition of a community-based pharmacy group that will expand its store base and ability to provide primary healthcare solutions.

According to Rui the acquisition will increase the existing store network with most locations being in convenience centres. He says that a non-binding indicative offer had been made on a primary healthcare asset, and due diligence has commenced.

“We are in the advanced stages of concluding the acquisition of a strategic interest in a healthcare asset, with specialisation in the design, administration, risk management and delivery of primary healthcare insurance, as well as gap cover and psychological wellbeing.”

The transaction will see Dis-Chem benefitting from vertical integration into the health value chain, with access to a unique set of assets in a sector of the healthcare market that is experiencing rapid and sustainable growth.

“This investment will significantly further entrench our primary healthcare mandate as it will provide us with access to segments of the population who have historically not been covered by the private healthcare sector. In so doing, Dis-Chem will assist in providing deeper access to healthcare, to a wider and underserved community. This transaction builds on other strategic infrastructure and asset investments made in prior periods,” Rui said.

Due to pending acquisitions and the uncertainty around Covid-19 recovery, Dis-Chem has announced that dividends will be retained for its six months ended 31 August 2020.

According to the results, the group continued to report revenue growth of 8.1 percent to R12.8 billion and a 16.1 percent increase in headline earnings per share to 36 cents per share, despite a challenging trading and economic environment, demonstrating the defensive nature of the business.

Dis-Chem CEO Ivan Saltzman says:

“The onset of the Covid-19 lockdown period coincided with the current six-month reporting period, which has been challenging for the group. During the early lockdown levels, the prohibited sale of non-essential categories, which equates to 20 percent of our business, saw us operating under extremely difficult circumstances, with a change in trading hours, significantly reduced weekend trading and a noticeable downturn in both impulse buying and footfall.”

Having said that, Ivan adds that Dis-Chem has adapted quickly to an unexpected trading environment resulting in total income improving by 9.4 percent to R3.6 billion as the company continues to focus on return on invested capital.

The company reported that retail revenue grew by six percent to R11.4 billion, underpinned by strong sales in personal care, FMCG and healthcare and nutrition categories. Dis-Chem’s wholesale revenue increased by 14.9 percent to R9.3 billion with wholesale total income benefitting from the combination of more favourable terms and an increase in external customers. For the first time, the wholesale business made an operating profit of R41 million. TLC franchises and independent pharmacies drove external sales growth of 28.1 percent.

Ivan says the online contribution to revenue growth grew by a remarkable 353% during the period under review. “This is the result of significant investment in the online store’s processes and systems over the past five years, with the application of much behind-the-scenes work to boost operational efficiencies.”

Across the group the current average online basket size is significantly higher than the in-store equivalent, but Ivan says that Dis-Chem anticipates online numbers to level out as the stay home economy shrinks and as consumers start to venture back into stores.

Looking forward, he says that while the group is under no illusions that the upcoming reporting period will not be challenging, since consumers remain under severe pressure, it believes that steps taken in recent months point to a positive six months ahead.

“While we return to pre-Covid trading hours, and category sales mix will put pressure on margins in the second half of the financial year, we are confident that our latest and intended acquisitions will be value-enhancing for all our stakeholders. Concurrent to that, the group’s swift adaptation to changes brought on by the pandemic has positioned us well to continue to deliver value to our shareholders,” he concludes.