Given the astounding share price growth in the retail sector over the past few years, it's perhaps no surprise that investors seem to be cashing in as ratings have reached eye-watering, often unjustified, levels. But caught up in this wave of profit-taking is the humble Topps Tiles (TPT). It has seen its shares drift 30 per cent since January, despite delivering positive newsflow. Not only do we think this is overdone, we also believe the de-rating has created a nice buying opportunity in a company that's serving up strong like-for-like sales growth, widening its market share, steadily improving its margins and has a strong balance sheet topping it all off.
- Shares over-sold
- Rating down
- Margin potential
- Superior earnings growth
- Boutique stores
- Housing market worries
- Interest rate uncertainty
So far this year, sales growth has been impressive and Topps has taken market share: first-half like-for-like revenue was up 10 per cent, while third-quarter sales grew 6.3 per cent. Moreover, there's scope for huge margin improvement. Having grown 100 basis points to 60.8 per cent in the first six months of the year, the gross margin is set for further gains in the second half, thanks to tight cost control, direct sourcing and supply chain efficiencies. Even more exciting is the potential for the operating margin to more than double. Last year it reached 8.8 per cent, with 9.6 per cent pencilled in for this year. But analysts believe Topps is capable of lifting margins back to the beefy 15 to 20 per cent levels it enjoyed in the years before the credit crunch, when the share rating got to 3.6 times, sales compared with 1.2 times today.
Granted, Topps must keep the sales streaming in to capitalise on wider margins. But there are several reasons to believe it can do so. It offers a wide and growing product range, working closely with suppliers on innovative designs, while keeping prices down. The trade business, roughly 45 per cent of total revenue, is growing nicely and a loyalty scheme introduced in the second half should keep tilers sweet. Perhaps most exciting, though, are the encouraging results of the three Farrow & Ball-style boutique shops being trialled in London. If successful, they will be rolled-out across the country. These small showrooms are important as they have attracted customers who previously might not have given Topps a go.
| TOPPS TILES (TPT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 109p | MARKET VALUE: | £209m | |
| TOUCH: | 109-110p | 12-MONTH HIGH: | 156p | LOW: 70p |
| FORWARD DIVIDEND YIELD: | 2.8% | FORWARD PE RATIO: | 15 | |
| NET ASSET VALUE: | * | NET DEBT: | £36.3m | |
| Year to 28 Sep | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 176 | 13.9 | 5.5 | 1.1 |
| 2012 | 178 | 12.8 | 5.1 | 1.3 |
| 2013 | 178 | 13.0 | 5.4 | 1.5 |
| 2014** | 195 | 17.0 | 6.8 | 2.4 |
| 2015** | 201 | 18.8 | 7.5 | 3.0 |
| % change | +3 | +11 | +10 | 25 |
Normal market size: 2,000 Matched bargain trading Beta: 0.47 *Negative shareholders' funds **Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
Admittedly, there are fears that the housing market could cool as interest rates rise. But we don't think this will materially impact Topps. After all, homeowners who decide not to sell up often choose to redecorate instead, while any interest rate rise will be gradual.
As for the shares, having fallen 30 per cent since January, they now trade on 15 times 2015 earnings forecasts. That's not only cheap for the sector, but it seriously undervalues the 23 per cent earning growth expected this year, and the 10 per cent growth forecast for the following 12 months. Indeed, the stock now feels oversold, and the de-rating overdone, offering investors an attractive entry point.
