Home Downloads Sitemap Proxy (PDF)

AGM Annexure 1 Analysis of Shareholders Shareholders' Diary Definitions

 

Chairman's Statement

Introduction

It gives me great pleasure to report to shareholders on another year of strong growth as the Clicks Group confirmed its leadership status in the dynamic healthcare market. The group has again met and exceeded its financial targets for the year, a notable achievement in the face of the severe downturn in the South African economy. The key performance indicator of diluted headline earnings per share increased by 26.2% through improved trading and efficient cash and capital management across the business.

Our financial performance has resulted in a strong increase in returns to shareholders. A final distribution of 59.5 cents was declared, bringing the total distribution for the year to 84.0 cents, an increase of 37.5% on last year. Distributions per share have grown by a compounded growth of almost 30% per annum over the past four years.

The sustained improvement in performance in recent years is also reflected in the 96% growth in the share price over the past three years, outperforming the Food and Drug Retailers Index (up 89.7%), the All Share Index (up 13.6%) and the General Retailers Index (up 3.2%).

The group’s trading and financial performance is detailed in the Chief Executive’s Report and the Chief Financial Officer’s Report which follow.

Name and sector change

The name of the holding company was changed in June 2009 as we reverted to our heritage and adopted the original name of the business, Clicks Group Limited. This coincided with the transfer of the listing on the JSE Limited from the General Retailers sector to the Food and Drug Retailers sector, reflecting the increasing contribution of healthcare to the group’s turnover and earnings.

Investment case

We believe our strong presence in the healthcare sector provides a compelling investment proposition and the results of the past financial year highlight the organic growth potential of the group.

We operate in a growth sector of the economy. The healthcare market in our country is expected to show sustainable growth as an increasing proportion of the population gain access to private healthcare. At the same time South Africans are also living longer, with the number of people over the age of 65 expected to double by 2030. This ageing population will have a greater need for healthcare services and beauty products.

Pharmacy will be a major driver of organic growth for the group and we remain committed to opening a dispensary in every Clicks store. As the Clicks store base expands from its current base of around 350 stores to 500 in the medium term, this provides the opportunity to more than double the current base of 207 pharmacies.

Our pharmacy model is based on attracting customer foot traffic into stores, and currently seven out of ten dispensary customers also make purchases in the front shop. It has been our experience that front shop sales generally increase by around 7% per annum for at least the first two years when a dispensary is opened in a store. Dispensaries take at least three years to reach maturity and more than 40% of Clicks pharmacies have been operating for less than two years, providing further potential for growth.

As a market leader the group is favourably positioned to capitalise on the long-anticipated consolidation in retail pharmacy as independent pharmacy contracts, as well as the pharmaceutical wholesale sector where there has been a proliferation of quasi-wholesalers in recent years.

While organic growth is our preferred strategy, the group also identifies small-scale, tactical acquisitions of complementary businesses to accelerate entry into new markets. The recent acquisition of Direct Medicines has enabled Clicks to enter the courier pharmacy market for the first time.

The impact of the protracted downturn in consumer spending is also expected to lead to rationalisation among music and entertainment retailers. Musica is the market leader in this sector and is well positioned to take advantage of the opportunities which are likely to arise when the economy improves.

A summary of the group’s investment case appears here.

Board and governance

Governance processes are frequently reviewed to align with the rapidly changing legislative and regulatory landscape and to reflect developments in the business environment.

Changes in governance structures over the past year included extending the mandate of the risk committee to include responsibility for governance and environmental sustainability. Risk management is embedded in the business planning process and a risk methodology has been developed to determine a risk rating for the major group and business unit risks. In response to increasing regulatory compliance requirements, the group has created in-house legal capacity with the appointment of a head of group legal counsel and a legal compliance officer.

Following the publication of the King lll Report shortly after year-end, management is reviewing governance practices relative to the code. This will include a review of the board to ensure an appropriate range of skills and expertise among the directors, and a balance between non-executive and executive directors.

During the year Rob Lumb and Professor Peter Eagles resigned as non-executive directors and we thank them for their contribution to the board. John Bester was appointed as an independent non-executive director in October 2008 and has also been appointed as chairman of the audit committee.

Sustainability

Sustainability is synonymous with good governance and is key to enhancing shareholder value in the longer term. The group is committed to integrating sustainability management practices across the business and has made pleasing progress.

Transformation continues to be enhanced and the group’s externally verified empowerment rating improved to level 5 compliance, with notable progress in skills development and preferential procurement. During the year over 4 500 employees participated in learning and development programmes. An environmental management framework has been implemented which will enable the group to measure, manage and reduce environmental impact.

Outlook

While the group is not expecting any real increase in consumer spending in the short term, the business is well positioned for growth in the medium term.

Good organic growth prospects in health and beauty should lead to market share increases through the expansion of the Clicks store base and the roll-out of in-store pharmacies. UPD is expected to continue to benefit from sales growth in Clicks and the Link banner group, as well as capitalising on new revenue opportunities in third party agency distribution and export sales.

Acknowledgements

The management team is to be commended for the group’s outstanding performance and I thank David Kneale and his fellow executive directors Keith Warburton, Michael Harvey and Bertina Engelbrecht for their leadership and commitment. My thanks also go to my non-executive board colleagues for their active participation in the group.

Once again I thank the 7 500 staff at stores across the country, the distribution centres and at head office for their contribution to the group’s improving fortunes.

In closing I recognise the support of our external stakeholders, including local and international shareholders, analysts, industry regulators, professional advisers, suppliers and the media.