We initiate coverage on the retail home improvement and building materials sector in South Africa, with a focus on the two listed retailers, Cashbuild (CSB) and Italtile (ITE).
We observe that retailers of hardware and related products are strategically expanding into underserviced regions to tap into South Africa’s cash-based informal economy, which offers significant growth opportunities. However, top-line growth may be hard to achieve given the high interest rates dampening consumer discretionary spending and loadshedding increasing input costs.
While a reduction in consumer disposable income may pose a threat to CSB’s cash-based business model, we believe its position as a price leader in key-value item categories will help mitigate this pressure. Our main concern for CSB is the continued underperformance of the P&L Hardware business. We believe the turnaround strategy for P&L was introduced too late, leading to its impairment in FY23, and any further adverse performance of this segment would continue to negatively affect the group as a whole.
ITE’s market share growth is driven by its role as a retailer and specialised product manufacturer, leveraging its integrated supply chain advantage. However, its attempt to expand into the lighting solutions market with the U-Light brand has been underwhelming, leading to more store closures in FY23. This venture doesn’t align well with the company’s primary focus on tiles. Furthermore, ITE’s LNG supply is at risk as it consumes c. 10% of the 40 PJ that Sasol supplies to third parties. Sasol has signalled the potential halt of imports from Mozambique by 2026, giving ITE little time to find alternatives.