In the face of turbulent macroeconomic headwinds and South Africa’s energy crisis, Dis-Chem (JSE: DCP) emerges as a shining example of resilience and adaptability, prescribing a healthy dose of success. With robust financial results for their year-end, the pharmacy chain has proven its mettle in navigating challenging times. However, the market has cold-shouldered the pharmaceutical giant’s resilience, dragging its share price down to a two-year low, with the road ahead remaining treacherous as load-shedding and soaring diesel costs cast a shadow on the horizon.
Dis-Chem’s Stock Struggles:
South Africa’s second-largest retail pharmacy chain, Dis-Chem, has struggled to deliver positive returns to shareholders, as seen in the five-year price chart below. Macroeconomic headwinds, explicitly concerning the country’s debilitating energy crisis, have made achieving success particularly difficult for local retailers, Clicks (JSE: CLS), Shoprite (JSE: SHP), Dis-Chem (JSE: DCP), Spar (JSE: SPP), and Pick ‘n Pay (JSE: PIK). Over the last five-year period, Clicks has outperformed its industry peers, returning around 15% to shareholders (orange line). Despite being Africa’s largest supermarket retailer, Shoprite has returned -12% to its shareholders (blue line), while Dis-Chem has returned a near-20%-negative return to shareholders (green line). Spar and Pick ‘n Pay have performed the worst among local retailers, losing 35% (purple line) and 55% (yellow line) to shareholders over the last five years.
The last twelve months have proven difficult for local retailers in South Africa amidst rolling blackouts and associated diesel costs that have eaten into companies’ bottom lines and depressed returns to shareholders. Aside from the country’s energy woes, inflation and rising interest rates have placed additional stress on consumers, diminishing their disposable incomes. Over the last year, Dis-Chem has returned close to -35% to shareholders (green line). Clicks, Spar and Pick ‘n Pay have also produced double-digit negative returns, reflecting the industry-wide struggles amidst the country’s ongoing energy crisis.
Fundamental Analysis:
Despite the challenging macroeconomic environment, Dis-Chem Pharmacies achieved notable financial results in the year ending February 28, 2023. Headline earnings per share (HEPS) increased by a robust 17.4% to 116.5 cents, while revenue grew by 7.4% to R32.7 billion. The final dividend decreased 8.7% to 18.45 cents, but the total dividend for 2023 rose by a healthy 17.3% to 46.57 cents.
Dis-Chem Pharmacies is set to acquire a substantial distribution centre spanning an impressive 63,000 square meters. This strategic move aims to bolster the company’s warehouse capacity, paving the way for expanding its market share. The impending acquisition, which is currently in its final stages, is expected to be in Gauteng. Despite the company’s positive announcement, the market cold-shouldered this initiative, dragging its share price down to a two-year low on Friday, May 19. This investment in a new distribution centre comes at a challenging time for the retail industry. Recent reports from Statistics South Africa revealed a decline in retail sales, with a 1.6% year-over-year decline in March, 0.3% in February, and 1.6% in January, with some economists warning of a possible recession.
Despite delivering robust financial results for the year-end, Dis-Chem acknowledges the headwinds it may face over the next financial year. The company anticipates that South African consumers will continue to experience financial difficulties, raising concerns over the impact of load-shedding-related costs on group earnings. With diesel expenses rising by 65% to R91 million over the period, it is no surprise that the company has expressed a cautious outlook for the year ahead amidst growing concerns that load-shedding is here to stay, at least for the time being.
Technical Analysis:
Analysing the weekly chart of Dis-Chem, it becomes apparent that its share price has been consistently declining over the course of the past year, indicating a prevailing downtrend, with the 50-day moving average positioned above the candlesticks.
Transitioning to the daily chart analysis of Dis-Chem, a notable event occurred on Friday, May 19, as the company’s share price breached the crucial R23.90 support level (horizontal black dotted line). The possibility does exist that the downtrend could continue to the major support level at R21.49 a share (solid red line).
However, if the fundamental picture improves, market participants could possibly anticipate a price action reversal. The R23.90 level assumes significance for the bulls as the initial resistance level to overcome, which could serve as a pivotal point where bullish momentum could potentially strengthen.
Summary:
The breach of the R23.90 support level on the daily chart hints at bearish prospects, which bullish investors are keenly observing the potential for a price reversal, eyeing the R23.90 level as the primary hurdle to overcome.
Sources: Business Live, Daily Maverick, IOL, Moneyweb, Trading View
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