Topps Tiles — Market tough through H124

Topps Tiles (LSE: TPT)

Last close As at 12/07/2024

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1.10 (2.82%)

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Research: Consumer

Topps Tiles — Market tough through H124

Topps Tiles’ (TPT’s) H124 update shows that trading deteriorated further in Q224, following the weakness that began in Q124. Management attributes the decline to the soft external environment as noted by others in the repairs, maintenance and improvement market, other home improvement/DIY retailers and data from the Office for National Statistics. For the individual businesses, the trends remain consistent with previous updates: strong revenue growth for Online Pure Play offset by weakness in Topps Tiles stores, and Parkside continues to see a significant improvement in its financial performance. The company is well positioned for the upturn when it comes given its leading brand, breadth of product and customer service. The share price looks extremely undervalued with a prospective EV/sales multiple of 0.25x versus historical multiples of 0.7x and above in years when TPT reported operating margins that are consistent with current estimates.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Topps Tiles

Market tough through H124

H124 trading update

Retail

3 April 2024

Price

44p

Market cap

£87m

Net cash (£m) at 30 September 2023 (excluding IFRS 16 liabilities)

23.4

Shares in issue

196.7m

Free float

70.2

Code

TPT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.1

(9.8)

(3.9)

Rel (local)

(0.9)

(12.0)

(7.2)

52-week high/low

56p

43p

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

H124 results

21 May 2024

Q324 trading update

3 July 2024

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Topps Tiles is a research client of Edison Investment Research Limited

Topps Tiles’ (TPT’s) H124 update shows that trading deteriorated further in Q224, following the weakness that began in Q124. Management attributes the decline to the soft external environment as noted by others in the repairs, maintenance and improvement market, other home improvement/DIY retailers and data from the Office for National Statistics. For the individual businesses, the trends remain consistent with previous updates: strong revenue growth for Online Pure Play offset by weakness in Topps Tiles stores, and Parkside continues to see a significant improvement in its financial performance. The company is well positioned for the upturn when it comes given its leading brand, breadth of product and customer service. The share price looks extremely undervalued with a prospective EV/sales multiple of 0.25x versus historical multiples of 0.7x and above in years when TPT reported operating margins that are consistent with current estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/22

247.2

15.9

6.2

3.6

7.2

8.2

09/23

262.7

13.8

4.6

3.6

9.6

8.2

09/24e

249.6

7.9

2.7

3.6

16.3

8.2

09/25e

263.8

11.9

4.3

3.6

10.1

8.2

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

Revenue weaker than expected

TPT’s H124 revenue declined by 5.9% year-on-year against a ‘record’ H123 comparative, and represented a more negative trend than the 4% fall reported for Q124. The main cause for the overall decline was further weakness in Topps Tiles stores (c 88% of group revenue in FY23), with a revenue decline of 11.3% in Q224 following Q124’s fall of 7.1%. Here, management points to lower footfall, more so by retail than trade customers, albeit both have reduced, while conversion rates to sales actually grew, providing some encouragement about the company’s relative positioning. Online Pure Play continues to trade strongly, growing by 38.3% year-on-year, and it is pleasing to see TPT will purchase the remaining 40% stake soon and retain the co-founders. Parkside’s financial performance has improved, achieving break-even during H124 despite the commercial market being difficult.

Forecasts for FY24–25 reduced

The weaker-than-expected revenue growth compounds management’s prior guidance that profits will be H224 weighted due to the typical seasonality of profits from higher energy usage during the winter months and accrual for holiday pay. For Topps Tiles retail stores in particular, lower cost of goods pressures and ongoing operating cost controls have been offset by lower volumes and operating cost inflation and leverage. Management will provide details about future opportunities and goals at the interim results presentation. We reduce our FY24 and FY25 PBT forecasts, the former by 40%, with the broad assumption that H224 revenue declines by c 4% helped by a more supportive macro environment (eg real wage growth and lower interest rates), as well as an easier comparative.

Exhibit 1: Financial summary

Year end 30 September; accounts IFRS; £m

2021

2022

2023

2024e

2025e

INCOME STATEMENT

Revenue

 

 

228.0

247.2

262.7

249.6

263.8

Cost of sales

(97.3)

(111.8)

(123.5)

(116.1)

(123.5)

Gross profit

130.7

135.4

139.2

133.5

140.3

EBITDA

 

 

47.6

44.2

42.0

35.6

40.0

Operating profit (before amort. and excepts.)

 

 

20.6

19.8

18.1

11.3

15.3

Amortisation of acquired intangibles

0.0

0.0

0.0

(0.5)

(0.5)

Exceptionals

(1.9)

(4.5)

(6.1)

(2.0)

0.0

Share-based payments

(0.7)

(0.5)

(0.9)

(0.9)

(0.9)

Reported operating profit

18.0

14.8

11.1

8.0

13.9

Net Interest

(4.1)

(3.9)

(4.3)

(3.4)

(3.4)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Adjusted profit before tax (company)

 

 

15.0

15.6

12.5

6.5

10.5

Profit before tax (norm)

 

 

16.5

15.9

13.8

7.9

11.9

Profit before tax (reported)

 

 

14.0

10.9

6.8

4.5

10.5

Reported tax

(3.3)

(1.8)

(2.9)

(1.7)

(2.9)

Profit after tax (norm)

13.3

12.4

9.8

5.7

8.6

Profit after tax (reported)

10.7

9.2

3.9

2.8

7.6

Minority interests

(0.0)

(0.2)

(0.7)

(0.4)

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

13.3

12.2

9.1

5.4

8.6

Net income (reported)

10.6

9.0

3.2

2.5

7.6

Average number of shares outstanding (m)

195

196

196

197

197

EPS - basic normalised (p)

 

 

6.81

6.22

4.63

2.73

4.39

EPS - normalised fully diluted (p)

 

 

6.73

6.15

4.59

2.70

4.35

EPS - basic reported (p)

 

 

5.46

4.60

1.63

1.25

3.87

EPS - adjusted (company) (p)

 

 

6.02

6.14

4.34

1.98

3.87

Dividend (p)

3.10

3.60

3.60

3.60

3.60

Revenue growth (%)

18.2

8.4

6.3

(5.0)

5.7

Gross margin (%)

57.3

54.8

53.0

53.5

53.2

Normalised operating margin (%)

9.0

8.0

6.9

4.5

5.8

BALANCE SHEET

Fixed Assets

 

 

122.5

119.0

109.0

108.8

107.8

Intangible Assets

0.5

7.5

6.9

8.2

9.3

Tangible Assets

119.1

109.4

100.2

98.6

96.7

Investments & other

2.9

2.1

1.9

1.9

1.9

Current Assets

 

 

65.6

61.8

65.4

60.5

64.0

Stocks

32.8

38.6

36.4

34.2

36.3

Debtors

4.5

6.4

5.3

5.2

5.3

Cash & cash equivalents

27.8

16.2

23.4

20.7

22.0

Other

0.5

0.5

0.4

0.4

0.4

Current liabilities

 

 

(69.3)

(63.3)

(66.9)

(66.9)

(69.5)

Creditors

(47.4)

(43.7)

(45.1)

(50.5)

(53.2)

Tax and social security

(2.0)

(1.2)

(0.4)

(0.4)

(0.4)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(19.5)

(18.2)

(15.6)

(15.6)

(15.6)

Other

(0.4)

(0.4)

(5.9)

(0.3)

(0.3)

Long-term liabilities

 

 

(93.8)

(88.4)

(81.1)

(79.7)

(78.3)

Long-term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(91.8)

(84.7)

(78.9)

(77.5)

(76.0)

Other long-term liabilities

(2.0)

(3.7)

(2.2)

(2.2)

(2.2)

Net Assets

 

 

25.0

29.0

26.4

22.7

24.1

Minority interests

0.0

2.5

3.2

0.4

0.4

Shareholders' equity

 

 

25.0

31.5

29.6

23.1

24.5

CASH FLOW

Operating Cash Flow

47.6

44.2

42.0

35.6

40.0

Working capital

(14.6)

(11.0)

3.4

7.8

0.3

Exceptional & other

(0.8)

(2.9)

(0.8)

(0.9)

(0.5)

Tax

(1.5)

(3.5)

(3.3)

(1.7)

(2.9)

Net operating cash flow

 

 

30.6

26.8

41.3

40.8

36.9

Capex

(2.3)

(3.0)

(4.2)

(6.4)

(6.1)

Acquisitions/disposals

(0.2)

(4.0)

0.0

(7.5)

0.0

Net interest

(4.1)

(3.9)

(4.0)

(3.4)

(3.4)

Equity financing

0.1

0.1

0.0

0.0

0.0

Dividends

0.0

(8.0)

(7.5)

(7.1)

(7.1)

Other

(27.4)

(19.6)

(18.5)

(19.1)

(19.1)

Net Cash Flow

(3.2)

(11.5)

7.1

(2.7)

1.3

Opening net debt/(cash)

 

 

(26.0)

(27.8)

(16.2)

(23.4)

(20.7)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

5.1

(0.1)

0.1

0.0

0.0

Closing net debt/(cash)

 

 

(27.8)

(16.2)

(23.4)

(20.7)

(22.0)

Closing net debt/(cash) including leases

 

 

83.5

86.7

71.1

72.4

69.7

Source: Topps Tiles accounts, Edison Investment Research

General disclaimer and copyright

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

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

United States

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

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

United States

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

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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