Well-known for affordable health and beauty products, supplements, health food and its dispensary, Dis-Chem’s investment case is driven by strong earnings growth from the roll-out of new stores in key locations.

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STANLIB is an authorised financial service provider.
Stock Pick:
Dis-Chem
Dis-Chem is
an owner run
pharmacy retailer
operating in South
Africa since 1978.
Well known for affordable
health and beauty products,
supplements, health food
and its dispensary, Dis-
Chem’s investment case is
driven by strong earnings
growth from the roll-out of
new stores in key locations.
Dis-Chem is planning to
double its store count from
89 to 202 in the next five
to eight years.
The investment case is
supported by strong,
long-term thematic drivers,
including:
• A growing middle class
with increased access to
private medication and
medical aids
• An increased prevalence
of lifestyle and chronic
diseases
• Urbanisation and
an increase of time
strapped consumers
that are gravitating
towards a convenience
culture
Investment case
1. Double digit earnings
growth
It is estimated that
Dis-Chem will achieve
double digit earnings
growth over the next
83
owned Online
Stores
(95%)
Courier
(5%)
RETAIL
15 stores
with
minorities
(6 post
listing)
Corporate
Clinics (12)
and onsite
wellness
<1%
Dischem
(83%)
WHOLESALE
3rd Parties
560 indep.
pharmacies
(17%)
Franchisees
“The Local
Choice"
Independent
pharmacies
Group structure
By Jessica
Brownhill
STANLIB
Equity
Analyst

2. stanlib.comSTANLIB is an authorised financial service provider.
three to five years. This
is primarily driven by
strong top-line growth
and margin expansion.
2. Working capital
improvements
Free cash flow should
improve due to working
capital improvement
initiatives.
3. Defensive nature of
the Health Care sector
The Health Care sector
is considered to be a
defensive call relative
to other sectors as
consumers naturally
tend to prioritise
their health and well-
being from a budget
perspective.
Risks
1. Macroeconomic
The combination of an
extremely competitive
local retail envirnoment
and difficult short-term
economic conditions
may impede their
ability to execute their
growth strategy.
2. Regulation
Disc-Chem could
potentially face
regulatory headwinds
due to legislation like
Complementary and
Alternative Medicines
(CAM), Single Exit
Pricing (SEP) and the
possibility of statutory
caps on logistic fees.
3. Working capital
If working capital
initiatives result in
a rationalisation of
Dis-Chem's product
portfolio, it
could potentially
reduce the
customer experience
associated with a wide
range of products.
4. A lack of qualified
pharmacists
Access to enough
qualified pharmacists
may present a risk for
Dis-Chem’s aggressive
store roll-out
aspirations.
Business model
Why do we like the Sector?
Defensive due to drivers
• Population growth
• Growing middle class
• Urbanisation
• Access to private medication
and medical aids
• Lifestyle and chronic diseases
Space
Retail growth
Independent
conversion
Volume
Dispensary growth
TLC & wholesale
Loyalty
Price
Inflation
Exchange
Rates
Operating
Margin
Operating
Expenses
1
23
Revenue
Revenue
Revenue
We like
the sector
due to its
defensive
nature

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Market share Dispensary Personal care
and beauty
Healthcare and
nutrition Baby care
2013 16.5% 10.5% 36.5% 6.4%
2015 19.6% 12.4% 38.0% 7.4%
Source: Dis-Chem pre-listing statement
2010 2011 2012 2013 2014 2015
Pharmacy groups 1.4% 16% 18% 19% 20% 21%
Independent pharmacies 86% 84% 82% 81% 80% 79%
Source: Dis-Chem pre-listing statement
Industry information
Increased consolidation in
the South African pharmacy
market since the change
in legislation governing
corporate ownership of
Pharmacies in 2003.
Dis-Chem has improved
their market share in each
of these categories over the
last three years.
Dis-Chem Clicks
Market cap (R billion) R18.104 R29.293
Free float 27.50% 95.90%
Price (30 November 2016) R20.60 R120.61
Strategy
Pharmacy-led footfall to generate revenue from
non-dispensary products (i.e. health and beauty and
household goods) which has a large product range.
Retail-led health, beauty and wellness
offering. Customer’s first choice health
and beauty retailer.
Established 1978 1968
Employees 11990 14093
Customer offering Wide variety Convenience
Format Big box Smaller stores
Segments
90% Retail (stores, clinics, courier) 81% Retail: (Clicks, Musica, The Body
Shop)
10% Wholesale 19% Wholesale
Geographies RSA (89), Namibia (3) RSA (623), Namibia (22), Botswana (8),
Swaziland (3), Lesotho (1)
Financial information
Financial Year end
February 2016
Financial Year end
August 2016
Revenue (R billion) R15.061 R24.171
Gross margin 23% 21%
Operating margin 6.00% 6.50%
Retail 6.60% 7.80%
Wholesale 0.80% 2.50%
Dividend payout ratio 40% 60%
Working capital
Inventory days 88 66
Receivable days 19 31
Payable days 55 102
Source: STANLIB Research and Company Financials
Comparing Dis-Chem and Clicks
Dis-Chem’s market share
Market concentration

4. stanlib.comSTANLIB is an authorised financial service provider.
Dis-Chem’s
investment
case is driven
by strong
earnings
growth from
the roll-out of
new stores in
key locations.
Moat:
The ability to keep competitors at bay Narrow
Uncertainty:
Historical volatility of company's share price and returns Low
Stewardship:
The competency and track record of the management team Fair
Valuation:
The relationship between the current share price and the estimated intrinsic value of the stock Fairly valued
RECOMMENDATION BUY
Four pillar investment approach summary