Dischem listed on the JSE on 18th November 2016, raising R750m via a private placing. The company is well-known to South Africans as an alternative to the already-listed Clicks. One of the primary purposes of the listing was to enable Dischem to expand its store base aggressively. Clicks has about 600 stores, and common sense indicates that where ever there is a Clicks, there can be a Dischem. This means that there is considerable potential for Dischem to expand its business rapidly by simply adding stores. We made these points in our article on 3rd February 2017.
In their maiden results for the year to the end of February 2017, Dischem has surprised the market with a better-than-expected performance. Notably, headline earnings rose by 22.5% over the previous year. The company added 11 stores to bring it up to 108 stores in total. There is clearly potential to increase this far further in this financial year.
One of the key factors that you should consider as a private investor is a share’s vulnerability to local political/economic developments and to the state of the international markets – especially Wall Street. The Dischem share has shown a sensitivity to both in the short time that it has been on the market.
The firing of Pravin Gordhan and subsequent downgrades had a negative impact on the share taking it down from around 2400c to around 2150c. This turned out to be a buying opportunity for those who did not get in at the listing. More recently, the trouble that President Trump got into over the Comey letter, which took the S&P500 index down 1,82% in a single day (17-5-17), saw Dischem sell off sharply in sympathy. So this is a share that will respond to both local and international developments.
But it is also what is known as a “defensive share” because its progress is not tied directly to the prospects for the South African economy. Consumers have to buy medication when they are sick, even in a recession. This fact tends to protect Dischem in a way that other retailers are not. We believe that this share will continue to perform well as it opens more stores and widens its national and African footprint.
Consider the chart:
On this chart, we have shown the period of “stagging” which followed the listing as some investors off-loaded. Then the impact of the firing of Gordhan and the subsequent ratings downgrades in April. This was followed by a general recovery in the share and then on 17th May 2017 the Comey letter had a negative impact on Wall Street, dragging the S&P500 index down and Dischem fell in sympathy. Finally the better-than-expected results for the year to end-Feb 2017 boosted the share sharply.