Topps Tiles — Share gains with easing cost pressures in FY23

Topps Tiles (LSE: TPT)

Last close As at 21/05/2024

GBP0.44

0.20 (0.46%)

Market capitalisation

GBP85m

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Research: Consumer

Topps Tiles — Share gains with easing cost pressures in FY23

Topps Tiles’ (TPT’s) FY23 trading update indicates the company has delivered on consensus market profit expectations with a third consecutive year of record revenue. Management’s stated ‘significant outperformance’ versus the UK tiling market is testimony to its strategy of developing and diversifying its operations. It believes there has been rapid progress towards the early delivery of its ‘1 in 5 by 2025’ market share target. Of equal importance is the contribution from the expected increase in the Topps Tiles brand’s (Omnichannel) gross margin through the year as inflationary cost pressures eased.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Topps Tiles

Share gains with easing cost pressures in FY23

FY23 trading update

Retail

4 October 2023

Price

48p

Market cap

£94m

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

19.9

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

(3.8)

(0.2)

22.4

Rel (local)

(3.2)

1.1

14.2

52-week high/low

56.4p

38.1p

Business description

Topps Tiles is the market-leading specialist retailer and 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

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’s) FY23 trading update indicates the company has delivered on consensus market profit expectations with a third consecutive year of record revenue. Management’s stated ‘significant outperformance’ versus the UK tiling market is testimony to its strategy of developing and diversifying its operations. It believes there has been rapid progress towards the early delivery of its ‘1 in 5 by 2025’ market share target. Of equal importance is the contribution from the expected increase in the Topps Tiles brand’s (Omnichannel) gross margin through the year as inflationary cost pressures eased.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/21

228.0

16.5

6.7

3.1

7.1

6.5

09/22

247.2

16.4

6.4

3.6

7.5

7.5

09/23e

263.0**

13.2

4.8

3.6

10.1

7.5

09/24e

272.9

14.2

5.0

3.6

9.5

7.5

09/25e

286.4

15.6

5.7

3.6

8.5

7.5

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

FY23 revenue marginally ahead of our estimates

Group revenue grew by 6.4% y-o-y to c £263m (FY22: £247.2m), marginally ahead of our prior estimate of £261.3m. The year-on-year growth rate for total revenue reduced as the year progressed, as it did for the core Topps Tiles brand (we estimate 88% of total revenue), which finished the year with like-for-like growth of 3.1% (H123: 4.3%). While the deteriorating macroeconomic backdrop was likely not helpful, we believe lower price inflation accounts for some of the lower revenue growth offset by an improvement in volume trends through the year. Online Pure Play’s growth continued to be very strong at approximately 50% for the year on an underlying basis, which is pleasing in the first full year of ownership. Commercial’s revenue was not quantified but management points to a reassuring move back to profitability in Q423 following the business improvement plan, as guided.

FY23 profit guidance reiterated

Management has reiterated that TPT’s FY23 adjusted profit before tax will be in line with current market expectations of £11.3–12.3m, unchanged since the Q323 trading update, for which the range narrowed upwards from £10.6–12.3m at the H123 results. This includes the guided improvement in Omnichannel’s gross profit through every quarter of the year. Note that our definition of PBT differs slightly to consensus as we exclude estimated share-based payments of c £1.4m in FY23. We have nudged up our revenue figure for FY23 to be consistent with the trading update, but make no other changes to our FY23–25 estimates.

Valuation: Discount to historical EV/sales multiples

Sentiment on the macroeconomic environment continues to weigh on the share price. The prospective FY24 EV/sales multiple of 0.3x remains at a significant discount to prior periods, excluding COVID, when similar rates of revenue growth and profitability as we forecast in FY24 and FY25 were delivered – see Exhibits 15 and 16 of our initiation note.

Exhibit 1: Financial summary

£m

2021

2022

2023e

2024e

2025e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

228.0

247.2

263.0

272.9

286.4

Cost of Sales

(97.3)

(111.8)

(123.0)

(126.7)

(133.8)

Gross Profit

130.7

135.4

140.0

146.2

152.6

EBITDA

 

 

47.6

44.6

40.8

42.1

43.9

Operating profit (before amort. and excepts.)

 

 

20.6

20.3

16.8

17.7

19.1

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

(1.9)

(5.0)

(5.4)

(1.6)

0.0

Share-based payments

(0.7)

(0.5)

(1.4)

(1.4)

(1.4)

Reported operating profit

18.0

14.8

10.1

14.8

17.8

Net Interest

(4.1)

(3.9)

(3.6)

(3.6)

(3.5)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Adjusted Profit Before Tax (company)

 

 

15.0

15.6

11.8

12.8

14.3

Profit Before Tax (norm)

 

 

16.5

16.4

13.2

14.2

15.6

Profit Before Tax (reported)

 

 

14.0

10.9

6.4

11.2

14.3

Reported tax

(3.3)

(1.8)

(2.4)

(3.6)

(3.9)

Profit After Tax (norm)

13.3

12.8

9.9

10.3

11.3

Profit After Tax (reported)

10.7

9.2

4.0

7.7

10.3

Minority interests

(0.0)

(0.2)

(0.4)

(0.2)

0.0

Net income (normalised)

13.3

12.6

9.5

10.0

11.3

Net income (reported)

10.6

9.0

3.6

7.4

10.3

Average Number of Shares Outstanding (m)

195

196

197

198

199

EPS - basic normalised (p)

 

 

6.81

6.44

4.80

5.07

5.69

EPS - normalised fully diluted (p)

 

 

6.73

6.37

4.77

5.04

5.66

EPS - basic reported (p)

 

 

5.46

4.60

1.81

3.76

5.19

EPS - adjusted (company) (p)

 

 

6.02

6.14

3.86

4.34

5.19

Dividend (p)

3.10

3.60

3.60

3.60

3.60

Revenue growth (%)

18.2

8.4

6.4

3.8

5.0

Gross Margin (%)

57.3

54.8

53.2

53.6

53.3

Normalised Operating Margin

9.0

8.2

6.4

6.5

6.7

BALANCE SHEET

Fixed Assets

 

 

122.5

119.0

118.7

118.4

117.9

Intangible Assets

0.5

7.5

7.0

6.5

6.0

Tangible Assets

119.1

109.4

109.6

109.8

109.9

Investments & other

2.9

2.1

2.1

2.1

2.1

Current Assets

 

 

65.6

61.8

64.8

62.6

68.5

Stocks

32.8

38.6

42.5

43.7

46.2

Debtors

4.5

6.4

6.6

6.7

6.9

Cash & cash equivalents

27.8

16.2

15.2

11.6

14.9

Other

0.5

0.5

0.5

0.5

0.5

Current Liabilities

 

 

(69.3)

(63.3)

(67.0)

(69.6)

(72.6)

Creditors

(47.4)

(43.7)

(47.7)

(50.2)

(53.2)

Tax and social security

(2.0)

(1.2)

(1.2)

(1.2)

(1.2)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(19.5)

(18.2)

(18.2)

(18.2)

(18.2)

Other

(0.4)

(0.4)

(0.0)

(0.0)

(0.1)

Long Term Liabilities

 

 

(93.8)

(88.4)

(89.7)

(82.9)

(80.9)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

(91.8)

(84.7)

(82.8)

(80.8)

(78.8)

Other long term liabilities

(2.0)

(3.7)

(6.9)

(2.1)

(2.1)

Net Assets

 

 

25.0

29.0

26.8

28.5

33.0

Minority interests

0.0

2.5

2.9

0.0

0.0

Shareholders' equity

 

 

25.0

31.5

29.8

28.5

33.0

CASH FLOW

Operating Cash Flow

47.6

44.6

40.8

42.1

43.9

Working capital

(14.6)

(11.0)

(0.0)

1.1

0.3

Exceptional & other

(0.8)

(3.4)

(2.6)

(0.2)

0.0

Tax

(1.5)

(3.5)

(2.4)

(3.6)

(3.9)

Net operating cash flow

 

 

30.6

26.8

35.7

39.5

40.3

Capex

(2.3)

(3.0)

(6.0)

(6.4)

(6.6)

Acquisitions/disposals

(0.2)

(4.0)

0.0

(6.3)

0.0

Net interest

(4.1)

(3.9)

(3.6)

(3.6)

(3.5)

Equity financing

0.1

0.1

0.0

0.0

0.0

Dividends

0.0

(8.0)

(7.5)

(7.1)

(7.2)

Other

(27.4)

(19.6)

(19.6)

(19.7)

(19.8)

Net Cash Flow

(3.2)

(11.5)

(1.0)

(3.6)

3.3

Opening net debt/(cash)

 

 

(26.0)

(27.8)

(16.2)

(15.2)

(11.5)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

5.1

(0.1)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(27.8)

(16.2)

(15.2)

(11.5)

(14.8)

Closing net debt/(cash) including leases

 

 

83.5

86.7

85.8

87.4

82.1

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 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

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