Topps Tiles — Grout expectations

Topps Tiles (LSE: TPT)

Last close As at 17/07/2024

GBP0.44

1.20 (2.83%)

Market capitalisation

GBP84m

More on this equity

Research: Consumer

Topps Tiles — Grout expectations

Topps Tiles (TPT) has undergone a significant change in recent years by completing the rationalisation of an over-extended store format with the aim of improving profitability and returns. It has also entered new and complementary markets, which almost double its addressable market, where it hopes to leverage its competitive advantages of a leading product and service to new customer bases. As the new businesses scale and inflationary pressures ease, the group looks well placed to accelerate its growth in revenue and profits.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Topps Tiles

Grout expectations

Initiation of coverage

Retail

26 May 2023

Price

53p

Market cap

£105m

Net cash (£m) at 1 April 2023 (excluding IFRS 16 liabilities)

19.9

Shares in issue

195.9m

Free float

70.2%

Code

TPT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.0

9.8

1.5

Rel (local)

15.3

14.3

2.0

52-week high/low

54p

38p

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

Q323 trading statement

5 July 2023

FY23 trading statement

4 October 2023

FY23 results

28 November 2023

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

Topps Tiles (TPT) has undergone a significant change in recent years by completing the rationalisation of an over-extended store format with the aim of improving profitability and returns. It has also entered new and complementary markets, which almost double its addressable market, where it hopes to leverage its competitive advantages of a leading product and service to new customer bases. As the new businesses scale and inflationary pressures ease, the group looks well placed to accelerate its growth in revenue and profits.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/21

228.0

16.5

6.7

3.1

7.9

5.8

09/22

247.2

16.4

6.4

3.6

8.3

6.8

09/23e

261.3

13.2

4.8

3.6

11.1

6.8

09/24e

272.9

14.2

5.0

3.6

10.6

6.8

09/25e

286.4

15.6

5.7

3.6

9.4

6.8

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

Leader in core, challenger in new markets

The Topps Tiles omni-channel brand is the market leader in the residential tile market, which caters to homeowners and trade customers. Recent M&A has given the group exposure to segments of the untapped corporate market and niches within its existing markets that are currently less well-served, for example more specialist products for trade, and the online-only market where customers have more of a clear value focus. Management believes these new customers will benefit from its expertise, technical knowledge and stock availability.

Profit growth to accelerate

Continuing uplifts in same-store sales, the scaling of new businesses that are in investment mode and the moderating of recent cost inflation should lead to higher revenue growth and profit growth. Our forecast FY25 operating income of £17.8m, from £10.1m in FY23, includes conservative assumptions for the new Commercial vertical, for which a business improvement plan has been launched.

Valuation: Attractive upside

A DCF with a 9% WACC and medium-term operating margin of 9%, the low end of management’s anticipated 8–10% ‘adjusted net margin’, suggests a valuation of 104p/share. The valuation opportunity is also apparent in prospective multiples that are below their long-term averages. FY23 and FY24 EV/Sales multiples of 0.3x compare with a long-term (since FY05) average of 1.2x, and recent multiples of 0.7x and above when the company was delivering similar levels of profitability. The prospective P/E multiples of 11.1x and 10.6x compare with the long-term average, excluding COVID-affected FY20, of 12.3x. Delivery of revenue and profit from its newer verticals and recovery of the Omni-channel margin are key to realising incremental value. We forecast a stable dividend of 3.6p/share while cover builds to the target of 1.5x (1.1x estimated in FY23) and, with a net cash position (pre IFRS 16), the dividend yield of 6.8% looks attractive in isolation and relative to its peers.

Investment summary

Company description: Extending its reach

Management believes Topps Tiles’ competitive strengths of a market-leading omni-channel proposition (in a market with limited disruption from technology), nationwide coverage, specialist expertise in ranging and sourcing of products, world-class customer service and diverse market exposure should enable it to continue to take market share. It has an ambitious growth strategy, which includes further improving the productivity of the store base and leveraging its product expertise into new and complementary markets, ie online and commercial markets.

Financials: Revenue growth and margin recovery

We forecast revenue growth of 4–6% pa for FY23–25, taking FY25 revenue to £286m from £247m in FY22, with more than two-thirds of the growth generated by the newer verticals. We assume low growth in sales per store for Omni-channel and progress towards management’s aspirations for Online Pure Play, but our estimates are below management’s target for Commercial, which is undergoing a business improvement plan. We forecast lower operating profit in FY23 of £10.1m versus £14.8m in FY22 due to a lower gross profit (adverse forex) and inflationary pressures in H123, which are reducing, before growing to £14.8m in FY24 and £17.8m in FY25. In the H123 results, management expressed confidence in a sequential improvement in profit from H123 to H223. The new verticals are either generating operating losses or underearning compared to their long-term potential while entering or taking share in the new markets, and could therefore represent an important boost to profits in the medium term. Our FY23 estimate of adjusted PBT using TPT’s definition (see the Financials section) of £11.8m compares with the consensus market expectations at 22 May 2023 of £10.6m to £12.3m, which management is confident of performing in line with.

Valuation: Delivery on growth initiatives essential for driving value

Our DCF-based valuation, with a WACC of 9%, a terminal growth rate of 2% and the key assumption of an operating margin in the medium term of 9%, suggests a valuation of 104p/share. For each change in the margin assumption of one percentage point, the valuation changes by c 14p/share. Delivery against management’s aspirations would therefore provide upside to our valuation. A prospective FY23 EV/Sales multiple (excluding lease liabilities) of 0.3x looks attractive relative to the company’s history when it was delivering similar rates of revenue growth and profitability (see Exhibits 15 and 16). Management is committed to a stable dividend while earnings cover builds, which provides an attractive dividend yield of 7%.

Sensitivities: Macroeconomic, execution, M&A, shareholder, forex

Given the nature of its product and customer bases, TPT is clearly exposed to the macroeconomic cycle and trends in spend on housing and projects. It is also developing multiple new business verticals, with a good but not perfect track record so far. Aspirations to move into further niche but complementary markets via M&A present further execution risks and the potential risk of overpaying. An active majority (29.8%) shareholder that has been very vocal about potential change represents an overhang to the share price given it has not been successful at gaining representation on the board due to conflicts of interest with its trading businesses. The majority of TPT’s products are sourced overseas, therefore it is exposed to foreign currency changes versus sterling.

Company description: Market-leading specialist

Topps Tiles (TPT) is the market-leading specialist retailer and distributor of wall and floor (internal and external) tiles, and associated products such as tools, grouts and adhesives, to its retail, trade and commercial (architects, designers and contractors) customers in the UK.

Since its initial public offering (IPO) in June 1997, TPT has grown its store base, taken market share on a relatively consistent basis and more recently increased its addressable market so that it now services the needs of commercial companies in a number of sectors in addition its core customers, homeowners and tradespeople. Management aspires to grow its presence in other complementary verticals.

Its core product is exposed to the economic cycle and trends in the residential housing market and business confidence, as can be seen clearly below in Exhibit 1.

Exhibit 1: Revenue and profitability

Source: Topps Tiles, Edison Investment Research. Note: *53 weeks.

TPT’s head office and main warehouses are in Leicester, and it employed an average of 1,751 employees in FY22.

A history of growth and evolution…

The original trading company, Topps Tiles, was founded in 1963 in Manchester and gradually expanded across the North West and Midlands before merging in 1990 with Tile Kingdom, which had simultaneously built a presence across London and the South.

Following the company’s IPO, the store portfolio grew rapidly from 54 stores at the end of May 1997 to a peak of 372 stores in 2017. The store expansion came against a backdrop of strong growth in demand for tiles, which was helped by the increasing usage of tiles in more rooms in a house, the health and hygiene benefits of tiles versus soft floorings, more use of under floor heating systems in houses, and increasing consumer interest in home improvement. According to the Department for Levelling Up, Housing and Communities, the UK’s average housing stock is aged 70 years, and therefore management believes there is a significant and growing need for repair, maintenance and improvement (RMI) spend.

These structural drivers and the store growth produced significant growth in revenue and operating profits before the global financial crisis, with CAGRs for revenue and operating profit of 23% and 31%, respectively, from FY97 through FY07. The company’s increasing scale and improving efficiency brought significant improvements in gross margin, from 48.7% in FY97 to 62.8% in FY07, which when coupled with a tight focus on operating costs, produced a significant improvement in operating margin, from 11.1% in FY97 to 21.3% in FY07.

TPT has been mostly focused on the UK except for 2002–09 when it gained exposure to the Dutch tiling market. A joint venture with the local management began in 2002, and was subsequently bought out in 2006, before TPT ultimately closed it down in December 2009. We are not aware that management has any ambitions to expand the business internationally.

In addition to the Topps Tiles format, TPT also used to operate a discount format, Tile Clearing House, which was focused on jobbing builders and small contractors (ie a different customer base to the core business). The stores were ultimately all converted to the more profitable Topps Tiles format by the end of FY13, having peaked at 57 stores in FY08, from which it could serve the important trade customer base.

…to increase addressable markets…

Since 2017 the Topps Tiles store portfolio has been right-sized as it became clear that it had over-expanded and management believed a high proportion of its revenue could be serviced from a smaller store base, which would help to improve profitability. The rationalisation was completed in FY22, by which time the store base had reduced to 304 stores.

The right-sizing of the Topps Tiles store portfolio has been coincident with the group diversifying into complementary and new markets, which have significantly increased its addressable markets. First was the move into the commercial market in 2017, a market that was largely untapped by Topps Tiles and worth more than 80% of the retail market. This was followed by a move into the online-only space, which provided the group with better access to customers previously unserved or underserved by Topps Tiles, and extended the existing product ranges that would help to drive spend per customer.

The group currently has three verticals for which it reports revenue, with potential to add further verticals via M&A:

Omni-channel (88.9% of H123 revenue) – the core Topps Tiles brand, the market-leading omni-channel retailer of tiles and associated products.

Online Pure Play (7.6% of H123 revenue) – targets online customers in niche and complementary markets, established in 2022.

Commercial (3.5% of H123 revenue) – addresses the untapped corporate or B2B market.

…with the goal of 20% market share by 2025…

TPT has one stated goal: to grow its share of the UK tile and associated products market to 20% by 2025. The new goal, ‘1 in 5 by 2025’, was announced at the time of the FY20 results (ie in the midst of the outbreak of the COVID-19 pandemic) and compares with management’s estimate of TPT’s market share of 17% in FY19, which was slightly lower than FY18’s 18% share. In the company’s most recent Annual Report, management estimated the size of the market at about approximately £1.3bn. Its scale is at least 3-4 times bigger than the next largest specialist tile competitor.

When the new goal was set and after adjusting for the negative effects of COVID-19 from the FY20 base, management’s projections for FY25 revenue and adjusted net (ie adjusted profit before tax) margin were £250m and 7–10% (ie £17.5–25m), respectively.

There has been good progress on the new goal, with TPT achieving a market share of 19% in FY22. Achieving the target has been made easier by the addition of Online Pure Play, which added 0.5% in that year. Management is now confident of hitting the goal ahead of schedule.

…by serving more products to a broader customer base

The strategy to achieve the market share goal was built on the belief that TPT’s ‘Leading Product’ with a high level of customer service from ‘Leading People’ would enable it to sell more products to more customers. The Environmental Leadership ambition, to be carbon balanced by 2030, was established at FY21’s results.

Exhibit 2: Strategy to achieve the 2025 goal

Source: Topps Tiles FY22 results presentation

We discuss TPT’s ‘Leading Product’ in the following section.

Management believes its success in gaining market share has been underpinned by ‘industry-leading’ levels of customer service. The core product is both a building material, that requires technical knowledge, and a decorative item, so a key focus of the staff in stores is to provide inspiration to customers with the use of in-store design tools (also available online) that help customers visualise how their rooms and exteriors might look.

Topps Tiles has two distinct but related customer groups that have different needs, although they are both served in a common space. The homeowner is a less frequent visitor given the nature of the products, but is likely to visit a store three or four times before making a purchase, while tradespeople visit more frequently, multiple times a week by the most loyal traders.

In the video below, chief executive officer Rob Parker provides an overview of the company’s growth strategy and the progress made.

Exhibit 3: Overview from TPT’s CEO, Rob Parker

Source: Edison Investment Research

Leading product: Sourcing and range

Management believes TPT’s market leadership derives from it having the most extensive range of tiles (c 2,000 stock-keeping units (SKUs) in Topps Tiles stores), which are mostly exclusive to the company, and are refreshed more regularly than its competitors.

Management aims to offer high-quality products that are innovative and exclusive to the group. In FY22, just over three-quarters of the ranges sold within the shops were either own-brand products or exclusive to the company. Management believes that TPT refreshes its ranges more frequently than its competitors, which enables it to adapt to changes in customer tastes.

The strength of TPT’s product innovation credentials stem from its strong relationships with its suppliers. The relationship with suppliers is more than just one of purchasing what the manufacturer produces. TPT works collaboratively with the producers in developing its own brand and exclusive products, providing insight into new customer trends and ideas for product innovation, while the suppliers provide the technical knowledge and production capability. The company has been proactive in leading many manufacturing and design innovations in the tile market.

There is a core of around 20 long-term strategic partners, from which it sources just under two-thirds of its tiles every year, and it also has live relationships with more than 100 other tile suppliers, of the more than 3,000 tile manufacturers around the world.

TPT currently sources from 17 countries globally. Historically the most significant countries have included Spain, Italy, Turkey and Brazil, but sourcing naturally moves to take advantage of the suppliers’ abilities and regional changes in costs. In recent years, supply from countries such as Egypt and India has increased as management increased sourcing from countries less exposed to input cost pressures, for example gas, which is a significant cost in the manufacture of tiles.

As the majority of tiles sold in the UK are imported, TPT and all of the other retailers are exposed to changes in foreign exchange rates relative to sterling. TPT manages its euro and US dollar exposure by purchasing forward foreign exchange contracts for its anticipated purchases in six months’ time.

Omni-channel

Omni-channel is the divisional name (since FY22) for the group’s core and largest trading business, Topps Tiles. For Topps Tiles, the online and physical presences are equally important, as 98% of sales involve a store, but many customer journeys begin online.

As highlighted above, the Topps Tile business has been right-sized since FY17 to a current store base of 304 stores. Simplistically, the rationalisation involved a reduction or elimination of stores in towns and cities where there were too many locations, with the aim of migrating a good proportion of sales to the remaining store(s). At 304 stores, management believes the number of locations is about right. 80% of the population are within a 20-minute drive of a Topps Tiles store, which is more important for trade customers than for retail customers, as the latter are more likely to travel further when considering the investment in upgrading their houses.

The success of the rationalisation portfolio can be seen in the ongoing improvement in sales per average store of £762k annualised in H123, 30% higher than FY19’s (pre-COVID) £585k, an all-time high despite the challenging external environment. The company saw some benefit through COVID-19 of people spending more on their houses as they were forced to spend more time at home.

Exhibit 4: Omni-channel’s store productivity

FY13

FY14

FY15*

FY16

FY17

FY18

FY19

FY20

FY21*

H122

FY22

H123

Omni-channel revenue (£m)

177.8

195.2

212.2

215.0

211.8

215.6

214.2

185.3

219.4

113.1

227.0

115.8

Stores at period end

328

335

346

351

372

368

362

342

313

312

304

304

Average stores in period

321

329

341

344

361

372

366

357

331

314

310

304

Sales per average store (£k)

554

593

622

625

587

580

585

519

663

360

732

381

Growth y-o-y

(0.2%)

7.1%

4.9%

0.4%

(6.1%)

(1.2%)

1.0%

(11.3%)

27.7%

23.2%

10.5%

5.8%

Source: Topps Tiles, Edison Investment Research. Note: *53 weeks.

With a relatively stable store base, management anticipates that future revenue growth will come from increasing customer numbers, leading customer service and ongoing management of the estate to maximise sales. The ongoing management includes a combination of refurbishments (store is right location but sales performance below where should be); relocations (wrong location and therefore underperforming); and regearing (extension of lease where it is the right location and sales performance is good). Category extensions and continued innovation should be assumed as a consistent driver of increasing its customer appeal.

While most may think of Topps Tiles as a consumer-facing retail brand, it should really be thought of more as a building merchant, as trade customers have represented the greatest proportion of group revenue since 2015 and reached 60% of sales in Q422. Trade customers are important as they provide more frequent and repeat custom and are an influential link to homeowners with respect to product recommendations and purchasing via the trade customer. As trade customers enjoy volume-related discounts to retail price, there is a natural dilution to gross margin as their importance to the group grows.

Online Pure Play

TPT’s Online Pure Play vertical was created in FY22 following the March 2022 acquisition of a majority 60% stake in Pro Tiler Tools (PTT) and the May 2022 launch of the internally developed brand Tile Warehouse (TW).

The vertical was created to enable the group to access complementary markets to the core Omni-channel vertical (ie different customer bases that operate solely online and are not already customers of Topps Tiles).

Pro Tiler Tools: Specialist offer

PTT is a highly entrepreneurial online specialist retailer of tiling-related consumables and equipment to trade customers via three different brands: protilertools.co.uk, northantstools.co.uk and premiumtiletrim.co.uk. The new brands provided TPT with a significant expansion of its existing product categories including new proprietary brands and extended it into new categories, and the platform will enable it to grow into other areas of online trading, an underfloor heating brand, warmfloorstore.co.uk has been subsequently launched. TPT provides PTT with buying scale, a flexible supply chain (including delivery to Topps Tiles stores for its trade customers) and financial resources and know-how to support growth.

PTT has been kept at a relative arm’s length from the rest of the group to retain the entrepreneurial spirit of the business.

PTT was established by a family of tilers in 2010. On the acquisition of the 60% stake, the founding parents retired, since when the two sons have continued to run the business. The stake was acquired for £5.3m on a cash-free, debt-free basis and there are put and call options for the remaining 40% of PTT that are exercisable from March 2024 based on an agreed multiple of profits for the 12 months to March 2024. As required by IFRS 3 due to the continuing employment of the two sons, the estimated present value of the remaining stake is being expensed over the accounting periods to March 2024; in H222 the expense was £1.6m implying £6.4m for the remaining 40% stake, which TPT management discloses as an adjusting item.

PTT has continued to grow quickly following acquisition, with revenue in the 12 months to March 2021 of £9.3m, and then to September 2022 of £14.7m. In H123 it delivered year-on-year growth of over 40%, and management upgraded its expectations for the medium-term opportunity from £25m to £30m.

Tile Warehouse: Taking on the online value retailers

The new digital brand was launched with a narrow range (c 400 SKUs) of competitively priced (ie ‘everyday low price’) quality products to appeal to a new customer base, the value-conscious consumer, which is currently served by numerous other online tile suppliers. Management believes that the Topps Tiles store format has less exposure to value-conscious customers than its competitors and has greater exposure to more affluent customers.

Management anticipates that TW represents a revenue opportunity of £15m for the group within five years (ie in FY27), from a market currently estimated to be worth £100m pa. The brand naturally benefits from leveraging the group’s supply chain and infrastructure, but incremental investment in online marketing to support the development of the brand will lead to small operating losses in the first few years. In FY22 it contributed £0.1m revenue in the first four or so months of trading.

Commercial

The commercial market includes both new builds and refurbishment of commercial properties such as education, leisure, office, retail and transport buildings and new build residential housing.

The appeal of the commercial market to TPT is apparent given it is worth more than 80% of the residential market, and the quality of product is important to its customers given likely more extensive wear.

The core customer focus is on selling to architects, designers and contractors via a travelling sales team whose role is to develop corporate relationships, and via three showrooms in London and Leicester.

The strategy has been to disrupt the existing competitive landscape and construct a new leader in a market that is fragmented and regionalised. While the Commercial vertical has provided mostly good revenue growth, management admits progress has been more challenging than originally anticipated, not helped by the external macroeconomic challenges. Nonetheless, by the end of FY22, Commercial had established itself as a top-five brand. Its success is demonstrated by its list of clients, which have included Berkeley Group, Burger King, Greene King, Heathrow, Hyatt, M&S and Radisson.

The commercial market operates in a very different way to retail (relationships with corporates and their multiple suppliers are key; lead times are longer, up to 24 months; and decision makers at every stage of a project’s delivery have to be managed), and is vulnerable to changes in different macroeconomic drivers (eg business confidence, corporate profitability and capital expenditure plans).

The foundations for the new division were laid with the August 2017 acquisition of Parkside Ceramics, a Leicester-based retailer and wholesaler of ceramic tiles, wood flooring and related products for an initial consideration of £1.1m, and a maximum contingent consideration of £0.3m. This was followed by the April 2019 acquisition of an initial stake in Strata Tiles for £3.9m. The businesses have been integrated, but the two brands are clearly differentiated: Parkside focuses on design-led tiles in leisure, hospitality and housebuilding; Strata is a technical tile specialist with a focus on retail and transport. Prior to these acquisitions, TPT had a small representation to the commercial market via the Topps Tiles stores.

Since entering the commercial market, revenue growth has mostly been strong, growing to £10.9m in FY22, albeit lower than management anticipated. Since H220 it has been negatively affected by the COVID-19 pandemic and more recently in H123 due to macroeconomic weakness, which has affected business confidence and therefore caused delays to projects. When TPT entered the market, management anticipated two years of investment before profit break-even in FY20. However, as can be seen below, generation of an operating profit has been elusive due to these external pressures. Management has launched a business improvement plan.

Exhibit 5: Commercial’s financial history

Source: Topps Tiles

Management believes Commercial represents a revenue opportunity of £20m+ in the medium term, which would be more than double FY22’s revenue, but below original estimates of £25m.

Market overview and macroeconomic drivers

As already highlighted, TPT is exposed to two key different groups of customers – homeowners and corporates – whose spend is influenced by different external drivers.

Consumers: Confidence and trigger points

Changes in consumer confidence and the health of the housing market are important indicators for the outlook of spend on residential repairs, maintenance and improvement (RMI). From a volume perspective, the purchase of a house is an important trigger point that make consumers consider refreshing the kitchens and bathrooms they inherit. Demand is also supported by the natural upgrade cycle of a room, which management estimates at c seven years, and which tends to trigger the refurbishment of another room as its relative freshness/attractiveness is made apparent. Changes in house prices can make homeowners feel or less affluent and therefore influence their willingness to spend on their house. High house prices and the frictional costs of moving are likely to stimulate refurbishment of an existing property.

In Exhibits 6 and 7 we show the close long-term (FY05 onwards) relationship between Topps Tiles’ revenue and the number of property transactions and average house prices.

Exhibit 6: Topps Tiles revenue versus number of property transactions, from FY05

Exhibit 7: Topps Tiles revenue versus average house prices, from FY05

Source: Topps Tiles, HM Customs & Excise (Refinitiv)

Source: Topps Tiles, Nationwide (Refinitiv)

Exhibit 6: Topps Tiles revenue versus number of property transactions, from FY05

Source: Topps Tiles, HM Customs & Excise (Refinitiv)

Exhibit 7: Topps Tiles revenue versus average house prices, from FY05

Source: Topps Tiles, Nationwide (Refinitiv)

The number of property transactions in the UK was adversely affected in the early stages of the COVID-19 pandemic (FY20) and has fallen more recently as inflationary pressures and higher interest rates have affected disposable incomes and consumer confidence. Broadly similar trends were seen in average house prices.

With respect to consumer confidence, there was a significant deterioration in consumer confidence through 2022, reaching an all-time (since the early 1970s) low in September and October, which was coincident with the two changes in prime minister and the poorly received fiscal event. While consumer confidence remains low, it is on an improving trajectory, providing some hope that the worst outlook for demand is behind consumer-facing companies.

Moving to the outlook for the property market, the overall message from the Royal Institute of Chartered Surveyors (RICS) in its most recent monthly survey was downbeat, but we note the recent relative improvement in the net balance of those expecting a reduction or increase in sales expectations over the next three months and 12 months.

Exhibit 8: GfK UK consumer confidence

Exhibit 9: RICS net balance of sales expectations

Source: Refinitiv

Source: RICS (Refinitiv)

Exhibit 8: GfK UK consumer confidence

Source: Refinitiv

Exhibit 9: RICS net balance of sales expectations

Source: RICS (Refinitiv)

Commercial: Corporate profitably and capex

TPT’s Commercial business has a limited trading history and is very small in terms of the overall commercial construction market. Exhibit 10 below shows the trends in its revenue versus private commercial new work. Both were affected by the COVID-19 pandemic in 2020, while the wider construction market appears to have been more resilient than TPT’s Commercial revenue in H123.

Exhibit 10: TPT’s Commercial revenue

Source: Topps Tiles, Office for National Statistics

As a proxy for the outlook for the sector, below we show how consensus 2023 profit estimates for the key sectors to which TPT’s Commercial business is exposed have progressed, rebased to the start of 2022. There was a gentle decline in estimates for some sectors through 2022 but the trend has improved of late.

Exhibit 11: Consensus CY23 profit estimates

Source: Refinitiv, Edison Investment Research

Management

Chief executive: Rob Parker. Rob joined the board in 2007, serving as chief financial officer until 2019, when he was appointed as chief executive. His previous roles before joining TPT included senior finance roles with the Boots Group and Savers Health & Beauty.

Chief financial officer: Stephen Hopson. Stephen joined the board in November 2020 from Molson Coors Beverage Company, where he was director of central finance for Western Europe. Before this, he spent five years at Travis Perkins, including three years as finance director for BSS, and also held senior finance roles at Mitchells & Butlers, where he was responsible for investor relations among other functions. Stephen is a CIMA-qualified management accountant and holds an MBA.

Sensitivities

We see the main sensitivities as follows:

The tile market is clearly exposed to the outlook for consumer spending on housing-related products in its retail businesses, which are affected by consumer confidence and trends in the housing market. In its Commercial vertical, TPT is also exposed to the expansion and maintenance capital plans of corporate customers, specifically in the retail, leisure and travel sectors, which are also affected by changes in consumer spending. The Office for Budget Responsibility’s March 2023 Economic and fiscal outlook report predicted a cumulative decline in real household disposable income per person of 5.7% over the two financial years 2023–24, albeit slightly lower than the decline predicted in its November 2022 report. These would represent the largest two-year falls since records began in the mid-1950s.

The tile market is highly competitive and demand is sensitive to changes in customer preferences. TPT’s market leadership has been earned through constant innovation and range refreshment, which has been helped by its relationships with long-term strategic partners.

The company is exposed to staff and input cost pressures, which currently remain elevated due to the opening of economies around the world post the COVID-19 pandemic and the war in Ukraine. Gas is an important cost in the production of tiles. The company has good relationships with its core strategic partners, and both sides have to give sufficient notice to change terms.

The company’s growth strategy is partly dependent on its success in developing its new verticals, Online Pure Play and Commercial, which take it into complementary and new niches of supply within the overall market for tiles and associated products. The businesses have different growth prospects and levels of profitability than the core vertical, Omni-channel.

Management has a clear strategy to grow its existing three verticals and will consider entering new verticals as opportunities arise. This presents the risk of entering new areas of business where management has less expertise, and the potential for value destruction from M&A.

Like all consumer-facing companies, TPT is exposed to potential disruption to trading in its stores and sourcing of products from overseas markets from new strains of COVID-19 that may emerge.

The majority of tiles that TPT sources are from outside the UK, and therefore it is exposed to significant changes in foreign currency exchange rates relative to sterling, which would affect its cost of goods sold and working capital investment.

Following the UK’s exit from the EU, there remains potential for changes to regulations and supply chain disruption, including delays to the import of goods.

With an increasing reliance on online, TPT is reliant on the performance of its technology platforms and regulations with respect to protecting the data of its customers.

Austria-based private equity business MS Galleon (MSG), the owner of Cersanit, a supplier of ceramic tools, and Nexterio, a tile retailer in Poland that is rumoured to be opening in the UK, is TPT’s largest shareholder with a stake of 29.8%, which it has built since 2020. With very public exchanges ahead of the AGM in January 2023, MSG sought the election of two of its representatives to the board of TPT and called for the removal of the non-executive chairman, Darren Shapland. MSG argued that Mr Shapland should be removed because TPT’s financial performance has declined significantly under his leadership and is ill-prepared to deal with an increasingly competitive UK market. MSG was not successful in its requests at the AGM. Mr Shapland stated ‘MSG’s proposals exposed shareholders to a number of serious conflicts of interest between MSG’s role as a significant shareholder, supplier and potential competitors to Topps’. There is no clarity on MSG’s plans for its shareholding in TPT, which represents a negative overhang in the event of MSG wishing to sell or reduce its stake, or a significant positive driver if it wishes to take control of the company. In May 2023, the appointment of Paul Forman as chair designate was announced, as Mr Shapland nears the end of his maximum term under the UK Corporate Governance Code.

Financials

Income statement: More consistent profit growth forecast

We forecast revenue growth of 4–6% pa for FY23–25, taking FY25 revenue to £286m from £247m in FY22, with more than two-thirds of the growth generated by the newer verticals. We forecast lower operating profit in FY23 of £10.1m versus £14.8m in FY22 due to a lower gross profit and inflationary pressures in H123, before growing to £14.8m in FY24 and £17.8m in FY25. Our FY23 estimate of adjusted PBT using TPT’s definition (see below) of £11.8m compares with the consensus market expectations at 22 May 2023 of £10.6m to £12.3m, which management is confident of performing in line with.

Exhibit 12: Summary income statement

£m

FY13

FY14

FY15*

FY16

FY17

FY18

FY19

FY20

FY21*

H122

FY22

H123

FY23e

FY24e

FY25e

Revenue

177.8

195.2

212.2

215.0

211.8

216.9

219.2

192.8

228.0

119.2

247.2

130.3

261.3

272.9

286.4

Growth y-o-y

0.1%

9.8%

8.7%

1.3%

(1.5%)

2.4%

1.1%

(12.0%)

18.2%

15.5%

8.4%

9.3%

5.7%

4.4%

4.9%

- Omni-channel

177.8

195.2

212.2

215.0

211.8

215.6

214.2

185.3

219.4

113.1

227.0

115.8

229.3

233.9

238.5

- Commercial

1.3

5.0

7.5

8.6

5.0

10.9

4.6

10.0

12.0

13.8

- Online Pure Play

1.1

9.3

9.9

22.0

27.0

34.0

Gross profit

107.0

118.9

129.9

133.2

129.4

132.4

135.0

112.8

130.7

66.9

135.4

68.7

139.1

146.2

152.6

Gross margin

60.2%

60.9%

61.2%

61.9%

61.1%

61.1%

61.6%

58.5%

57.3%

56.1%

54.8%

52.8%

53.2%

53.6%

53.3%

Operating costs

(93.2)

(100.7)

(111.0)

(112.1)

(111.5)

(118.7)

(121.6)

(118.8)

(112.7)

(59.3)

(120.6)

(64.9)

(129.0)

(131.4)

(134.8)

% of sales

52.4%

51.6%

52.3%

52.1%

52.6%

54.7%

55.5%

61.6%

49.4%

49.8%

48.8%

49.8%

49.4%

48.2%

47.1%

Normalised operating profit (Edison)

16.4

20.3

24.3

24.1

18.7

17.2

15.2

8.6

20.6

9.4

20.3

7.1

16.8

17.7

19.1

Operating profit (reported)

13.8

18.2

18.9

21.1

17.9

13.7

13.3

(6.0)

18.0

7.5

14.8

3.9

10.1

14.8

17.8

Margin

7.8%

9.3%

8.9%

9.8%

8.4%

6.3%

6.1%

(3.1%)

7.9%

6.3%

6.0%

3.0%

3.9%

5.4%

6.2%

Adjusted PBT (TPT)

13.0

17.1

20.4

22.0

18.6

16.0

16.0

3.6

15.0

7.1

15.6

4.4

11.8

12.8

14.3

Normalised PBT (Edison)

12.8

18.4

22.5

23.0

17.8

16.1

14.4

4.8

16.5

7.5

16.4

4.9

13.2

14.2

15.6

Effective tax rate

13.7%

25.0%

23.2%

22.3%

21.0%

23.9%

19.2%

18.4%

23.5%

25.4%

16.0%

58.1%

37.7%

31.7%

27.5%

Adjusted EPS (TPT definition) (p)

5.4

6.6

8.2

8.9

7.6

6.6

6.6

1.6

6.0

2.8

6.1

1.6

3.9

4.3

5.2

DPS (p)

1.5

2.3

3.0

3.3

3.4

3.4

3.4

0.0

3.1

1.0

3.6

1.2

3.6

3.6

3.6

Source: Topps Tiles, Edison Investment Research. Note: *53 weeks.

Sales: Growth driven by new verticals

Our FY23–25 forecasts for Omni-channel’s revenue include a stable store base and growth in sales per store of 2–3% pa, a slowing versus more recent growth given the strong recovery post COVID-19. For Commercial, we assume a strong recovery from FY24 on the expectation that business confidence improves and management’s business improvement plan enhances its performance. Despite assuming strong growth rates of 15–20% in our forecasts, the absolute revenue (£13.8m in FY25) remains well below management’s (undated) medium-term target of £20m+ sales for the vertical, and therefore represents a potential source of future upgrades if management’s strategy takes hold. We assume continued strong growth for both businesses in Online Pure Play, although TW’s trajectory to management’s aspiration of £15m sales within five years (ie in FY27) is weighted towards the outer years.

Gross margin: Mix effects of lower-margin businesses

TPT produced relatively consistent and modest improvements in gross margin from the trough in the global financial crisis, 58.7% in FY10 to 61.9% in FY16. In FY17, sterling weakness post the referendum reduced the gross margin by 2pps, and since then the gross margin dilution has been due to a combination of business mix changes (ie entering the lower gross margin Commercial and Online Pure Play business), as well as changes in the underlying margins of these businesses. With respect to the former, business mix changes have predominantly led to gross margin reductions of 2.1ppin H123 and 1.3pp in FY22.

Omi-channel’s gross margin has been under pressure by inflationary pressures, products and customer mix movements and the introduction of new product categories. Specifically, in FY22, management was successful in passing on shipping and input cost inflation on a pound for pound basis, which reduces the profit percentage but sustained the cash profit. Management is confident that the pressures are reducing as the costs of shipping and production fall and that Omni-channel’s gross margin will increase sequentially in H223. We assume a modest improvement in Omni-channel’s gross margin through FY25, an increase in Commercial’s gross margin towards 40% beyond our forecast period, and a relatively steady 30% gross margin for Online Pure Play through the period. These produce a relatively steady gross margin for the group of c 53% in FY23–25, with ongoing dilution in reported margin due to the greater contribution of the lower-margin businesses.

Profitability: Margin improvement, strong shareholders returns

We can see from Exhibit 12 that management has kept a tight control on operating costs, which have typically declined relative to revenue over the long term. We assume this continues through FY23–25. In FY23 management has highlighted that H123 profits were negatively affected by a non-cash holiday pay accrual of £0.9m and higher gas prices, which will reverse in H2. In addition, in recent years the company’s gas expense increased to an estimated £2.4m for FY23, versus £1.7m in H123, and from £0.4m historically, therefore there will be a meaningful swing in profitability between H123 and H223.

The group’s operating profit has also been diluted in recent years by the early-stage losses of the newer verticals. As these scale, management believes the adjusted PBT of the individual businesses can move towards 8–10%.

The company’s definition of adjusted PBT differs slightly to our own. At present, the only difference is we exclude share-based payments while the company does not. Historically, the company adjusted for other items, such as the early trading losses on Commercial, to give a clearer representation of underlying trading, while we do not exclude such losses. As the business has been rationalised, adjusting items have been a persistent feature of the income statement, but these should be lower in future. The most significant ‘exceptional’ item is the cost relating to the 40% purchase of shares of PTT, of c £3.2m in FY23, and half that sum in FY24.

With no financial debt the net financial charges mainly relate to the IFRS 16 liabilities.

The tax rate is typically a couple of percentage points about the UK standard corporate tax rate due to non-deductibility of certain expenses. This is amplified in FY22–24 due to the non-deductibility of the expense for the purchase of the remaining stake in PTT.

TPT’s historical dividend policy was to distribute 50% of post-tax adjusted earnings, but this changed to a target to increase the payout ratio to 67% over the period from FY21–23. In H123 the dividend was increased handsomely to 1.2p/share from 1p in H122, albeit only a reweighting so that interim dividends are set at one-third of the annual dividend. While profitability rebuilds, we assume a flat annual dividend of 3.6p/share in FY23–25, above the targeted payout ratio but covered by adjusted EPS. TPT has paid a dividend in every year since its IPO, except for FY09 (during the global financial crisis), and payments were disrupted during the outbreak of the COVID-19 pandemic (no final dividend in FY20 and no interim dividend in FY21).

Cash flow and balance sheet

Exhibit 13: Summary cash flow

£m

FY13

FY14

FY15*

FY16

FY17

FY18

FY19

FY20

FY21*

H122

FY22

H123

FY23e

FY24e

FY25e

Operating cash flow

25.5

22.3

20.3

25.3

17.1

23.0

22.8

54.9

30.6

8.5

26.8

22.7

35.6

39.5

40.3

Free cash flow pre-interest

20.3

11.6

8.8

14.7

7.3

21.9

15.1

66.7

28.3

7.6

23.8

20.7

29.6

33.2

33.7

Cash at end

18.4

19.5

16.6

10.2

7.5

13.8

18.7

31.0

27.8

13.4

16.2

19.9

15.1

11.6

14.9

Net debt/ (cash) excl. leases

36.4

30.0

28.1

24.6

27.4

16.0

11.1

(26.0)

(27.8)

(13.4)

(16.2)

(19.9)

(15.1)

(11.6)

(14.9)

Net debt/ (cash) incl. leases

36.4

30.0

28.1

24.6

27.4

16.0

11.1

98.1

83.5

93.2

86.7

79.6

85.9

87.4

82.1

As % of sales:

Operating cash flow

14.4%

11.4%

9.6%

11.8%

8.1%

10.6%

10.4%

28.5%

13.4%

7.1%

10.8%

17.4%

13.6%

14.5%

14.1%

Net income

5.1%

6.4%

6.2%

7.2%

6.3%

4.5%

4.6%

(4.2%)

4.7%

3.5%

3.7%

0.5%

1.4%

2.7%

3.6%

Depreciation, amortisation and impairments

2.7%

2.5%

2.7%

2.7%

3.3%

3.7%

3.4%

20.8%

12.6%

12.0%

10.5%

9.3%

9.2%

8.9%

8.7%

Working capital

5.3%

0.3%

(2.1%)

0.5%

(1.2%)

1.2%

2.1%

10.8%

(6.4%)

(8.5%)

(4.5%)

3.2%

(0.0%)

0.4%

0.1%

Tax paid

(1.5%)

(1.3%)

(1.8%)

(2.2%)

(2.4%)

(1.2%)

(1.5%)

(0.5%)

(0.7%)

(1.7%)

(1.4%)

(1.5%)

(0.9%)

(1.3%)

(1.4%)

Net capex and intangibles

(2.9%)

(5.5%)

(5.4%)

(4.9%)

(4.7%)

(0.5%)

(3.5%)

6.1%

(1.0%)

(0.8%)

(1.2%)

(1.5%)

(2.3%)

(2.3%)

(2.3%)

Free cash flow pre-interest

11.4%

5.9%

4.1%

6.8%

3.4%

10.1%

6.9%

34.6%

12.4%

6.3%

9.6%

15.9%

11.3%

12.2%

11.8%

Source: Topps Tiles, Edison Investment Research. Note: *53 weeks.

In absolute terms, and relative to revenue, TPT’s free cash flow has been variable, mainly due to the changes in working and fixed capital intensity, beyond the changes to its profitability discussed above. Our assumptions (below) lead to more consistent operating and free cash flow generation in FY23–25.

The variability in TPT’s working capital cash flows has been due to rationalisation of the store portfolio (now completed), the effects of slowing and growing revenue during COVID-19 (building inventory etc) and the changes in business mix with the move into the commercial market. The most significant items in working capital are inventory (H123: £38.9m), which should be considered non-perishable versus other retailers, and therefore does not present a significant risk to gross profit, and trade and other payables (H123: £50m). Trade debtors (H123: £6m) are relatively insignificant. Inventory days (relative to cost of sales) have been in a relatively consistent range of 114–135 days over the last 10 years, and creditors days have varied between c 60 and 80 days over the same period when we exclude the distortions during the COVID-19 pandemic. In our estimates we assume no significant changes in working capital intensity, that is the individual items should grow consistently with revenue and total costs.

The store rationalisation programme has led to a good reduction in TPT’s fixed capital intensity. Our forecasts include capital investment of £6m in FY23, c 2% of revenue, and then we assume it grows in line with revenue thereafter.

Prior to the sale and leaseback of the company’s head office and central warehouse in June 2020 TPP had typically operated with a net debt position, but since then it has been in a net cash position before considering the effects of IFRS 16. The company has no debt except its IFRS 16 liabilities of c £100m at the end of H123.

In addition to the net cash position excluding leases, TPT has access to a £30m revolving credit facility until October 2025, which is currently undrawn, with options to extend for a further two years.

Valuation

In this section we show our DCF-based valuation and look at how its multiples compare with its peers and relative to its own history.

DCF-based valuation

To capture the growth opportunity from the new verticals we value TPT using a discounted cash flow. The key assumptions beyond our explicit forecast period are a fade down in revenue growth rate to 2% pa by our terminal year, FY32, and we keep a flat operating margin of 9% from FY28. The operating margin assumption is at the low end of management’s aspiration of 8-10%, when we adjust for the annual interest expense of £3m+, which is roughly equivalent to one margin point at that stage. In addition to consistent fixed asset and working capital intensity, we include an imputed outflow for right-of-use assets of 6% of sales.

We use a cost of capital WACC of 9% (risk free rate of 4%, market risk premium of 5%, beta of 1.8 (source: Refinitiv)) and a terminal growth rate of 2% to derive a valuation of 104p/share. The sensitivity of the valuation to changes in the WACC and terminal growth rate are shown below. We remind readers that our forecasts include a conservative estimate for Commercial growth relative to management’s expectations.

Exhibit 14: DCF sensitivity (p/share)

Terminal growth rate

1.0%

2.0%

3.0%

4.0%

5.0%

WACC

11.0%

77

84

93

105

120

10.5%

80

88

98

111

129

10.0%

84

93

104

119

140

9.5%

88

97

110

128

154

9.0%

92

103

118

139

170

8.5%

97

110

127

152

192

8.0%

102

117

138

169

221

7.5%

109

126

151

190

261

7.0%

116

137

168

219

322

6.5%

125

150

189

259

423

Source: Edison Investment Research

The model enables us to test the sensitivity of the valuation to changes in margin assumptions, with all other assumptions kept constant. If we increase the medium-term operating margin assumptions to 10% and 11%, the DCF valuation increases to 118p/share and 132p/share, respectively.

In addition, we can determine that the current share price is discounting a long-term operating margin of 5%, while keeping all other assumptions the same.

TPT’s valuation relative to its own history

Since its IPO, TPT has a good record of revenue growth, but profitability has been more variable. The exhibits below attempt to put TPT’s current valuation and growth prospects in perspective relative to its own history.

In Exhibits 15 and 16 we show TPT’s prospective EV/Sales multiples relative to its historical high, average (figure quoted) and low multiples in each year. To make the comparison over the long term more valid, we exclude IFRS 16 liabilities from net debt. While we recognise the different drivers of valuations at different stages of TPT’s development and economic cycle, we can see from both charts that it has typically traded at a higher multiple than its prospective multiples when it has historically reported similar rates of revenue growth and profitability according to our forecasts.

Exhibit 15: EV/Sales versus revenue growth

Exhibit 16: EV/Sales versus EBIT margin

Source: Topps Tiles, Edison Investment Research, Refinitiv. Note: Priced 25 May 2023.

Source: Topps Tiles, Edison Investment Research, Refinitiv. Note: Priced 25 May 2023.

Exhibit 15: EV/Sales versus revenue growth

Source: Topps Tiles, Edison Investment Research, Refinitiv. Note: Priced 25 May 2023.

Exhibit 16: EV/Sales versus EBIT margin

Source: Topps Tiles, Edison Investment Research, Refinitiv. Note: Priced 25 May 2023.

Peer comparison

Recognising that there is no pure direct comparator, below we show how TPT’s growth rates, profitability and multiples compare with two set of peers: manufacturers and distributors of products that are exposed to the same end-markets, and retailers thar are exposed to changes in consumer spending on housewares. All figures are annualised to TPT’s September year-end, using a simple average for those with different year ends.

The majority of companies are forecast to experience a challenging FY23 before growth resumes in FY24. TPT’s profitability is comparable with the median for the retailers, but lower than the other companies. From a multiple perspective, it trades at a discount to the medians on all measures except P/E multiples of the other companies. Its dividend yield of 6.8% is the highest of the highlighted peers.

Exhibit 17: Peer valuations

Share price (p)

Market value (£m)

Sales growth
(%)

EBIT growth
(%)

EBIT margin
(%)

EV/sales (excl. leases) (x)

P/E
(x)

Dividend yield
(%)

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

Forterra

188

425

2

3

(11)

1

13.8

13.5

0.9

0.9

9.1

9.2

6.2

6.1

Grafton Group

832

1,790

2

2

(24)

(6)

9.5

8.8

0.6

0.6

10.7

11.2

3.8

3.9

Ibstock

164

725

2

4

(11)

1

15.9

15.4

1.4

1.3

10.2

10.9

5.1

5.1

Marshalls

299

993

5

3

(2)

4

12.8

13.0

1.3

1.3

12.1

12.2

4.2

4.1

Norcros

175

241

6

1

3

(1)

10.2

10.0

0.5

0.5

5.1

5.4

5.5

5.5

Travis Perkins

890

2,711

1

2

(11)

4

5.5

5.6

0.4

0.4

10.6

10.2

4.1

4.1

Tyman

271

708

0

2

(15)

0

11.4

11.2

0.9

0.9

9.1

8.9

4.9

5.1

Victoria

483

579

20

3

31

15

6.1

6.8

0.4

0.4

10.2

9.1

N/A

N/A

Median - other

2

2

(11)

1

10.8

10.6

0.8

0.7

10.2

9.7

4.9

5.1

AO World

66

482

(9)

3

(561)

51

2.0

2.9

0.3

0.3

27.0

16.7

N/A

N/A

Currys

52

1,931

(5)

(0)

(21)

30

1.9

2.4

0.1

0.1

6.7

5.8

5.4

6.3

CMO Group

18

13

2

8

N/A

49

1.0

1.4

0.1

0.1

43.1

23.0

N/A

N/A

DFS Furniture

118

819

(2)

3

(4)

17

7.3

8.3

0.4

0.3

10.9

8.2

4.2

4.9

Dunelm Group

1,119

2,508

4

5

(7)

7

11.9

12.2

1.4

1.3

15.2

14.9

5.8

5.4

Howden Joinery Group

666

4,027

4

5

(9)

2

15.9

15.5

1.4

1.4

12.5

12.7

3.0

3.0

Kingfisher

233

6,788

(0)

2

(17)

(1)

5.9

5.8

0.3

0.3

8.9

8.8

5.2

5.2

Marks Electrical Group

87

92

19

16

9

22

6.4

6.8

0.8

0.7

17.4

14.7

1.2

1.4

Victorian Plumbing Group

79

258

7

9

17

26

6.5

7.5

0.8

0.7

17.4

14.7

1.8

3.0

Wickes Group

126

408

(1)

3

(19)

(3)

5.6

5.3

0.1

0.1

6.8

7.1

6.9

6.6

Median - retailers

1

4

(9)

20

6.2

6.3

0.4

0.3

13.9

13.7

4.7

5.0

Topps Tiles

53

105

6

4

(17)

6

6.4

6.5

0.3

0.3

11.1

10.6

6.8

6.8

Source: Edison Investment Research, Refinitiv. Note: Prices as at 25 May 2023.

Exhibit 18: Financial summary

£m

2019

2020

2021

2022

2023e

2024e

2025e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

219.2

192.8

228.0

247.2

261.3

272.9

286.4

Cost of Sales

(84.2)

(80.0)

(97.3)

(111.8)

(122.2)

(126.7)

(133.8)

Gross Profit

135.0

112.8

130.7

135.4

139.1

146.2

152.6

EBITDA

 

 

22.6

37.3

47.6

44.6

40.8

42.1

43.9

Normalised operating profit

 

 

15.2

8.6

20.6

20.3

16.8

17.7

19.1

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(1.9)

(14.6)

(1.9)

(5.0)

(5.4)

(1.6)

0.0

Share-based payments

(0.0)

(0.0)

(0.7)

(0.5)

(1.4)

(1.4)

(1.4)

Reported operating profit

13.3

(6.0)

18.0

14.8

10.1

14.8

17.8

Net Interest

(0.9)

(3.8)

(4.1)

(3.9)

(3.6)

(3.6)

(3.5)

Adjusted Profit Before Tax (company)

 

 

16.0

3.6

15.0

15.6

11.8

12.8

14.3

Profit Before Tax (norm)

 

 

14.4

4.8

16.5

16.4

13.2

14.2

15.6

Profit Before Tax (reported)

 

 

12.5

(9.8)

14.0

10.9

6.4

11.2

14.3

Reported tax

(2.4)

1.8

(3.3)

(1.8)

(2.4)

(3.6)

(3.9)

Profit After Tax (norm)

11.3

4.3

13.3

12.8

9.9

10.3

11.3

Profit After Tax (reported)

10.1

(8.0)

10.7

9.2

4.0

7.7

10.4

Minority interests

0.0

0.0

(0.0)

(0.2)

(0.4)

(0.2)

0.0

Net income (normalised)

11.3

4.3

13.3

12.6

9.5

10.0

11.3

Net income (reported)

10.1

(8.0)

10.6

9.0

3.6

7.4

10.4

Basic average number of shares outstanding (m)

195

195

195

196

197

198

199

EPS - basic normalised (p)

 

 

5.78

2.19

6.81

6.44

4.80

5.07

5.69

EPS - diluted normalised (p)

 

 

5.74

2.16

6.73

6.37

4.77

5.04

5.66

EPS - basic reported (p)

 

 

5.18

(4.11)

5.46

4.60

1.81

3.76

5.20

EPS - adjusted (company) (p)

 

 

6.62

1.57

6.02

6.14

3.86

4.34

5.20

Dividend (p)

3.40

0.00

3.10

3.60

3.60

3.60

3.60

Revenue growth (%)

1.1

(12.0)

18.2

8.4

5.7

4.4

4.9

Gross Margin (%)

61.6

58.5

57.3

54.8

53.2

53.6

53.3

Normalised Operating Margin

6.9

4.5

9.0

8.2

6.4

6.5

6.7

BALANCE SHEET

Fixed Assets

 

 

54.0

138.5

122.5

119.0

118.7

118.4

117.9

Intangible Assets

5.8

0.9

0.5

7.5

7.0

6.5

6.0

Tangible Assets

47.0

133.4

119.1

109.4

109.6

109.8

109.8

Investments & other

1.2

4.2

2.9

2.1

2.1

2.1

2.1

Current Assets

 

 

57.8

66.6

65.6

61.8

64.5

62.6

68.5

Stocks

30.9

29.3

32.8

38.6

42.2

43.7

46.2

Debtors

8.1

3.6

4.5

6.4

6.6

6.7

6.9

Cash & cash equivalents

18.7

31.0

27.8

16.2

15.1

11.6

14.9

Other

0.0

2.7

0.5

0.5

0.5

0.5

0.5

Current Liabilities

 

 

(46.6)

(90.5)

(69.3)

(63.3)

(66.7)

(69.6)

(72.5)

Creditors

(43.3)

(58.4)

(47.4)

(43.7)

(47.3)

(50.2)

(53.1)

Tax and social security

(2.0)

(1.1)

(2.0)

(1.2)

(1.2)

(1.2)

(1.2)

Short term borrowings

0.0

(5.0)

0.0

0.0

0.0

0.0

0.0

Leases

0.0

(25.5)

(19.5)

(18.2)

(18.2)

(18.2)

(18.2)

Other

(1.2)

(0.5)

(0.4)

(0.4)

(0.0)

(0.0)

(0.1)

Long Term Liabilities

 

 

(34.9)

(100.5)

(93.8)

(88.4)

(89.7)

(82.9)

(80.9)

Long term borrowings

(29.9)

0.0

0.0

0.0

0.0

0.0

0.0

Leases

0.0

(98.6)

(91.8)

(84.7)

(82.8)

(80.8)

(78.8)

Other long term liabilities

(5.1)

(1.9)

(2.0)

(3.7)

(6.9)

(2.1)

(2.1)

Net Assets

 

 

30.2

14.1

25.0

29.0

26.8

28.5

33.0

Minority interests

(0.0)

(0.0)

0.0

2.5

2.9

0.0

0.0

Shareholders' equity

 

 

30.2

14.0

25.0

31.5

29.8

28.5

33.0

CASH FLOW

Op Cash Flow before WC and tax

22.6

37.3

47.6

44.6

40.8

42.1

43.9

Working capital

4.6

20.8

(14.6)

(11.0)

(0.1)

1.2

0.3

Exceptional & other

(1.0)

(2.2)

(0.8)

(3.4)

(2.6)

(0.2)

0.0

Tax

(3.4)

(1.0)

(1.5)

(3.5)

(2.4)

(3.6)

(3.9)

Net operating cash flow

 

 

22.8

54.9

30.6

26.8

35.6

39.5

40.3

Capex

(7.6)

11.8

(2.3)

(3.0)

(6.0)

(6.3)

(6.6)

Acquisitions/disposals

(2.7)

(0.1)

(0.2)

(4.0)

0.0

(6.3)

0.0

Net interest

(0.8)

(3.8)

(4.1)

(3.9)

(3.6)

(3.6)

(3.5)

Equity financing

0.0

0.0

0.1

0.1

0.0

0.0

0.0

Dividends

(6.6)

(4.5)

0.0

(8.0)

(7.5)

(7.1)

(7.2)

Other

0.0

(46.1)

(27.4)

(19.6)

(19.6)

(19.7)

(19.8)

Net Cash Flow

4.9

12.3

(3.2)

(11.5)

(1.1)

(3.5)

3.3

Opening net debt/(cash)

 

 

16.0

11.1

(26.0)

(27.8)

(16.2)

(15.1)

(11.6)

FX

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

24.8

5.1

(0.1)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

11.1

(26.0)

(27.8)

(16.2)

(15.1)

(11.6)

(14.8)

Closing net debt/(cash) including leases

 

 

11.1

98.1

83.5

86.7

85.9

87.4

82.1

Source: Topps Tiles accounts, Edison Investment Research

Contact details

Revenue by geography

Thorpe Way
Grove Park, Enderby
Leicestershire
LE19 1SU
United Kingdom
+44 (0)1162 828000
www.toppstilesplc.com/

Contact details

Thorpe Way
Grove Park, Enderby
Leicestershire
LE19 1SU
United Kingdom
+44 (0)1162 828000
www.toppstilesplc.com/

Revenue by geography

Management team

Chief executive: Rob Parker

Chief financial officer: Stephen Hopson

Rob joined the board in 2007, serving as chief financial officer until 2019 when he was appointed as chief executive. His previous roles before joining TPT included senior finance roles with the Boots Group and Savers Health & Beauty.

Stephen joined the board in November 2020 from Molson Coors Beverage Company, where he was director of central finance for Western Europe. Before that, he spent five years at Travis Perkins, including three years as finance director for BSS, and held senior finance roles at Mitchells & Butlers where he was responsible for investor relations among other functions. Stephen is a CIMA-qualified management accountant and holds an MBA.

Management team

Chief executive: Rob Parker

Rob joined the board in 2007, serving as chief financial officer until 2019 when he was appointed as chief executive. His previous roles before joining TPT included senior finance roles with the Boots Group and Savers Health & Beauty.

Chief financial officer: Stephen Hopson

Stephen joined the board in November 2020 from Molson Coors Beverage Company, where he was director of central finance for Western Europe. Before that, he spent five years at Travis Perkins, including three years as finance director for BSS, and held senior finance roles at Mitchells & Butlers where he was responsible for investor relations among other functions. Stephen is a CIMA-qualified management accountant and holds an MBA.

Principal shareholders

(%)

MS Galleon

29.8

Aberforth Partners

14.7

Stuart Williams

11.0

Invesco Asset Management

5.0

Chelverton Asset Management

4.8

AXA Investment Managers

4.3

Courtiers Investment Services

1.8


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 2023 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 2023 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

More on Topps Tiles

View All

Latest from the Consumer sector

View All Consumer content

Research: Investment Companies

Vietnam Enterprise Investments — Many opportunities at attractive valuations

Vietnam Enterprise Investments (VEIL) is the UK’s largest and oldest listed Vietnamese equities closed-end fund. It offers investors exposure to the stocks set to benefit most from Vietnam’s very favourable economic prospects. These stocks are otherwise difficult for foreign investors to access. VEIL’s managers believe the Vietnamese equity market offers many compelling investment opportunities, and stocks look oversold at current levels (see our recent VEIL update note), so valuations appear attractive. With VEIL’s discount on the high side of its long-term average, now may be a good time for investors to consider this market.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free