Stock Pick Series #3 – Clicks Group

Company Description

Clicks Group Limited operates as a health and beauty retailer, and pharmaceutical distributor, and wholesaler primarily in South Africa. The company operates in two segments, Retail, and Distribution. It retails pharmacy, health, and beauty through approximately 740 stores, and 580 in-store pharmacies for the middle to upper-income markets under the Clicks name. The company also retails specialty health and wellness products, including vitamins, mineral, and herbal supplements, sports nutrition, and slimming products under the General Nutrition Corporation (GNC) name; luxury toiletries, cosmetics, gifting, and grooming products under The Body Shop name; and fashionable jewelry and accessories for young women and girls under the Claire’s name. In addition, it retails music and related entertainment merchandise, such as music and movie DVDs; computer games; and technology and accessories comprising headphones, portable speakers, phone and tablet covers, docking stations, and tablets under the Musica name. Further, the company is involved in the wholesale and supply of pharmaceutical products to retail pharmacies, private hospitals, dispensing doctors, and retail health stores under the UPD name. Clicks Group Limited was founded in 1968 and is based in Cape Town, South Africa.

Investment Thesis (Business)

Clicks Group offers sustainable long-term growth prospects for investors seeking non-cyclical exposure to the retail and healthcare sectors in South Africa. The company will benefit from a number of tailwinds in the coming years. First of all, the overall healthcare market is defensive but growing at a large scale in South Africa, and Improving living standards, increasing urbanization and longer life expectancy are contributing to a growing market. Through its market leadership as the largest retail pharmacy chain in South Africa (Clicks) and the largest pharmaceutical wholesaler (UPD), the group will leverage this market opportunity by opening 25-30 new retail stores annually to expand the current footprint of 740 stores to over 900 in the long run. Further growth will come from setting up a pharmacy in every Clicks store (currently: 585), which will help to expand the pharmacy market share from 23% to 30% in the long term.

A unique pillar of the business is the combination of private label (currently: 23%) and exclusive brands (such as The Body Shop, GNC, Claire’s) offering in the health and beauty segment. By implementing a loyalty program, clicks has gained a very devoted group of customers. The 8.6 million active members represent almost 80% of sales. In addition, investments in e-commerce have been further strengthened and the full range of products is available online for in-store collection or home delivery. in addition, the company operates on a very healthy (and incredible stable) operating margin of 8%, has hardly any debt, a good dividend policy, and has a capable management that knows how to build a robust supply chain and makes a good capital allocation through store reinvestments and share buybacks.

Investment Thesis (ESG Management)

Clicks follows sound Environmental, Social and Governance Practices and hence was included within the FTSE4Good and the FTSE/JSE Responsible Investment Top 30 Index. While having a diverse, well-balanced and independent management board, one focus of the activities is the education and training of staff. The Group’s strategy recognizes the importance of corporate citizenship as a key enabler in creating long-term value. Responsible environmental and social practices support business resilience, enhance the reputation of the brand and benefit all stakeholders including employees, customers, shareholders, suppliers, and the local communities.

On the environmental front, Clicks has developed strategies to reduce the carbon footprint through more efficient energy and water usage, waste management, distribution network optimization, and recycling activities across the supply chain.

Social sustainability is focused mainly on the employees and the upliftment of communities. The company funds the cost of primary health insurance for over 9 000 employees not covered by medical aid cover.

Governance practices are entrenched across the group and are constantly reviewed and enhanced where necessary. In the evaluation for the FTSE4Good Index Series, the group again attained the maximum score for the governance component, confirming that the governance standards are in line with international best practices.

Investment Thesis (SDG)

Clicks Group has made a specific commitment to seven of the UN's sustainability goals. These are 1 (no poverty), 3 (good health), 4 (education), 7 (clean energy), 8 (economic growth), 12 (sustainable consumption), and 13 (climate action). Clicks Group aligns to legislate minimum living wages and pursues equity in pay and empowerment of women through socio-economic development programs. Also, the company offers a comprehensive employee wellness program by providing free clinic tests and family planning through the Helping Hand Trust. The goal of quality education is targeted by offering equal opportunities for education to employees, including young employees through internships and permanent employment. The group also offers pharmacy bursaries that assist in developing capacity for the pharmacy sector in South Africa. Regarding sustainable consumption and production, the company is committed to reducing pollution, waste, and resource usage by setting targets to continuously improve and implement solutions beyond regulatory requirements. Finally, the group has been setting greenhouse gas emission reduction targets since 2008.

Conclusion

Given the company's market-leading positions in South Africa and the existing growth runway, the portfolio management of CBS SFC is convinced that Clicks is an interesting investment for the fund even if it trades currently at a high valuation of 20x EBIT (21e) and 15x EBITDA (21e). However, despite its Emerging Market location, the group has shown a long track record of “doing good” for all stakeholders, including their employees and their communities. The premium multiple is justified, given the impressive track-record in top-line and earnings growth, dividend payouts, and intelligent CapEx into the business. If the company can execute effectively on the strategic plans described above, CBS SFC sees Clicks earning superior returns over the next years and hence recommend the stock for the fund.