Topps Tiles — Grout expectations

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.

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.

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%.

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.

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.

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

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.

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:

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.

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.

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.

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 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.

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.

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).

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

We see the main sensitivities as follows:

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.