Topps Tiles — Acquisition of well-respected competitor

Topps Tiles (LSE: TPT)

Last close As at 10/10/2024

GBP0.45

1.00 (2.27%)

Market capitalisation

GBP87m

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Research: Consumer

Topps Tiles — Acquisition of well-respected competitor

The acquisition of certain assets of CTD Tiles (CTD) brings complementary activities to Topps Tiles’ (TPT’s) existing Omnichannel and Commercial businesses. Management believes these will enable faster progress in some current markets (with architects and designers) and provide a meaningful entry into new addressable markets, such as the volume housebuilder segment. The acquired revenue and profit will accelerate TPT towards its Mission 365 financial goals. We upgrade our FY25–26 profit estimates by 11–13%.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Topps Tiles

Acquisition of a well-respected competitor

Acquisition

Retail

22 August 2024

Price

47.5p

Market cap

£93m

Net cash at 31 March 2024 (excluding IFRS 16 liabilities of £89.4m)

£19.3m

Shares in issue

196.7

Free float

70.2%

Code

TPT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.5

9.2

(4.0)

Rel (local)

8.9

10.4

(16.4)

52-week high/low

53.6p

39.0p

Business description

Topps Tiles is the market-leading specialist retailer/distributor of wall and floor tiles, and associated products, such as tools, grouts and adhesives, to its retail, trade and commercial customers in the UK.

Next events

FY24 trading update

2 October 2024

FY24 results

26 November 2024

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Topps Tiles is a research client of Edison Investment Research Limited

The acquisition of certain assets of CTD Tiles (CTD) brings complementary activities to Topps Tiles’ (TPT’s) existing Omnichannel and Commercial businesses. Management believes these will enable faster progress in some current markets (with architects and designers) and provide a meaningful entry into new addressable markets, such as the volume housebuilder segment. The acquired revenue and profit will accelerate TPT towards its Mission 365 financial goals. We upgrade our FY25–26 profit estimates by 11–13%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/22

247.2

16.1

6.2

3.6

7.6

7.6

09/23

262.7

13.4

4.5

3.6

10.6

7.6

09/24e

247.3

6.5

2.1

1.4

22.4

3.0

09/25e

294.4

11.0

4.0

3.7

11.8

7.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

CTD helpful to retail and B2B aspirations

TPT has acquired the brands, 30 stores (from a total of 86), selected stock and all related intellectual property of CTD Tiles from its administrators for a £9m consideration paid in cash. The acquired stores generated c £20m in revenue in the year to June 2024, from total store-based revenue of c £50m and total revenue of c £74m, which included c £16m to housebuilders and c £8m to architects and designers. We believe TPT has acquired the best and most profitable CTD stores. CTD has a higher concentration of trade customers (more than 70%) than Topps Tiles (c 60%). Its stores are formatted differently to Topps Tiles stores (separate entrances for trade and retail) and it offers different products and brands. The closure of CTD’s remaining stores provides potential upside as its customers will shop elsewhere. Management believes the non-store assets provide an important platform to better leverage its brands in the commercial/B2B world, a key focus of Mission 365. However, the initial focus will be to steady the ship as revenue has been declining due to a lack of investment from the previous private equity owners.

Double-digit profit upgrades

Ahead of management providing further insight into the future strategy, likely at the FY24 results, we incorporate £30m (£20m store and £10m non-store) revenue into our FY25 estimates with a gross margin of 50% and an operating margin of 5%, lower than TPT’s core business. Management has indicated that the acquisition will be accretive to FY25 earnings.

Valuation: Attractive re-rating opportunity

The recent increase in the share price has taken the prospective FY25 EV/sales multiple (excluding leases) to 0.3x. Our recent outlook note highlighted the valuation discrepancy versus TPT’s historical multiples when comparing expected profitability and the potential for a re-rating if the Mission 365 financial goals are achieved.

Exhibit 1: Financial summary

£m

2022

2023

2024e

2025e

2026e

30-September

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

247.2

262.7

247.3

294.4

315.9

Cost of Sales

(111.8)

(123.5)

(114.3)

(138.2)

(149.2)

Gross Profit

135.4

139.2

133.0

156.2

166.7

EBITDA

 

44.3

41.6

33.0

37.1

40.6

Operating profit (before amort. and excepts.)

 

20.0

17.7

10.5

15.1

17.8

Amortisation of acquired intangibles

0.0

0.0

(0.5)

(0.5)

(0.5)

Exceptionals

(4.7)

(5.7)

(6.0)

0.0

0.0

Share-based payments

(0.5)

(0.9)

(0.2)

(0.5)

(0.9)

Reported operating profit

14.8

11.1

3.8

14.2

16.4

Net Interest

(3.9)

(4.3)

(4.0)

(4.1)

(4.0)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Adjusted Profit Before Tax (company)

 

15.6

12.5

5.8

10.1

12.4

Profit Before Tax (norm)

 

16.1

13.4

6.5

11.0

13.8

Profit Before Tax (reported)

 

10.9

6.8

(0.2)

10.1

12.4

Reported tax

(1.8)

(2.9)

(0.9)

(2.8)

(3.4)

Profit After Tax (norm)

12.5

9.7

4.6

8.0

10.0

Profit After Tax (reported)

9.2

3.9

(1.1)

7.3

9.0

Minority interests

(0.2)

(0.7)

(0.4)

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

12.3

9.0

4.2

8.0

10.0

Net income (reported)

9.0

3.2

(1.5)

7.3

9.0

Average Number of Shares Outstanding (m)

196

196

197

197

197

EPS - normalised (p)

 

6.31

4.57

2.15

4.07

5.09

EPS - normalised fully diluted (p)

 

6.24

4.50

2.12

4.02

5.02

EPS - basic reported (p)

 

4.60

1.63

(0.74)

3.72

4.58

EPS - adjusted (company) (p)

 

6.14

4.49

1.42

3.72

4.58

Dividend (p)

3.60

3.60

1.42

3.72

3.60

Revenue growth (%)

8.4

6.3

(5.9)

19.1

7.3

Gross Margin (%)

54.8

53.0

53.8

53.1

52.8

Normalised Operating Margin

8.1

6.7

4.2

5.1

5.6

BALANCE SHEET

Fixed Assets

 

119.0

109.0

114.1

117.5

116.0

Intangible Assets

7.5

6.9

15.4

14.6

13.4

Tangible Assets

109.4

100.2

96.8

100.9

100.7

Investments & other

2.1

1.9

1.9

1.9

1.9

Current Assets

 

61.8

65.4

47.8

53.8

58.6

Stocks

38.6

36.4

34.2

40.7

43.7

Debtors

6.4

5.3

5.0

5.9

6.4

Cash & cash equivalents

16.2

23.4

4.6

3.2

4.6

Other

0.5

0.4

3.9

3.9

3.9

Current Liabilities

 

(63.3)

(66.9)

(65.8)

(78.4)

(82.5)

Creditors

(43.7)

(45.1)

(49.8)

(59.3)

(63.7)

Tax and social security

(1.2)

(0.4)

(0.4)

(0.4)

(0.4)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(18.2)

(15.6)

(15.6)

(15.6)

(15.6)

Other

(0.4)

(5.9)

0.0

(3.0)

(2.9)

Long Term Liabilities

 

(88.4)

(81.1)

(73.8)

(70.2)

(66.5)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(84.7)

(78.9)

(71.5)

(68.0)

(64.3)

Other long term liabilities

(3.7)

(2.2)

(2.2)

(2.2)

(2.2)

Net Assets

 

29.0

26.4

22.3

22.7

25.5

Minority interests

2.5

3.2

(0.0)

(0.0)

(0.0)

Shareholders' equity

 

31.5

29.6

22.3

22.7

25.5

CASH FLOW

Operating Cash Flow

44.3

41.6

33.0

37.1

40.6

Working capital

(11.0)

3.4

7.2

2.0

0.9

Exceptional & other

(3.1)

(0.4)

(3.1)

(0.5)

(0.5)

Tax

(3.5)

(3.3)

(0.9)

(2.8)

(3.4)

Net operating cash flow

 

26.8

41.3

36.2

35.9

37.7

Capex

(3.0)

(4.2)

(8.0)

(10.0)

(6.0)

Acquisitions/disposals

(4.0)

0.0

(18.8)

0.0

0.0

Net interest

(3.9)

(4.0)

(4.0)

(4.1)

(4.0)

Equity financing

0.1

0.0

0.0

0.0

0.0

Dividends

(8.0)

(7.5)

(5.6)

(4.3)

(7.2)

Other

(19.6)

(18.5)

(18.5)

(18.9)

(19.1)

Net Cash Flow

(11.5)

7.1

(18.7)

(1.4)

1.4

Opening net debt/(cash)

 

(27.8)

(16.2)

(23.4)

(4.6)

(3.2)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

(0.1)

0.1

0.0

0.0

0.0

Closing net debt/(cash)

 

(16.2)

(23.4)

(4.6)

(3.2)

(4.6)

Closing net debt/(cash) including leases

 

86.7

71.1

82.6

80.4

75.3

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Topps Tiles and prepared and issued by Edison, in consideration of a fee payable by Topps Tiles. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Topps Tiles and prepared and issued by Edison, in consideration of a fee payable by Topps Tiles. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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