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Pick up a bargain with Topps Tiles

The wider sell-off across the retail industry has left certain stocks looking like a bargain
July 14, 2016

We think there are a number of post-referendum bargains to be had in the retail sector right now. One such example is high street chain Topps Tiles (TPT), which has lost a third of its value since the vote to leave the EU, leaving its shares trading at just 10 times next 12 months' earnings. But the group managed to deliver an impressive like-for-like sales increase of 6.2 per cent in the three months to 2 July, which suggests that the scale of the sell-off outweighs the future downside risk. In our view, this is an opportunity for investors to buy while the shares are going cheap and for existing shareholders to top up.

IC TIP: Buy at 100p
Tip style
Value
Risk rating
High
Timescale
Short Term
Bull points
  • Strong third-quarter growth
  • Execution of specialisation strategy
  • Robust balance sheet
  • Bargain rating
Bear points
  • Brexit uncertainty
  • Currency exposure

Management believes there may have been some disruption in trading immediately before the vote at the end of June, although it's apparently still too early to see the impact of the Brexit vote on sales, particularly as customers tend to be tied in to lengthy home improvement projects.

The good news for Topps' investors is that roughly 75 per cent of goods are sourced in sterling, with the remainder split between the euro and US dollar, which is fully hedged for the rest of the 2016 financial year to the end of September and into the first half of the 2017 financial year. There is potential for inflationary pressure in 2017, but this may not be too much of an issue, as City analysts say tile demand has historically not been particularly price sensitive. The possible downgrade risk to existing analysts' forecasts from future margin pressure is therefore less of a concern than the risk to sales due to a deterioration in consumer demand that an economic downturn could cause.

But there are a number of other factors that could work to the group's favour while uncertainty clouds the retail market. Topps has a strong balance sheet with a net debt to cash profit ratio of just 0.9. Meanwhile, initiatives such as its 'out-specialising the specialists' strategy have successfully driven market share gains and propelled like-for-like sales growth.

At the time of the half-year results in late May, trade-based sales also tipped over into accounting for more than half of total revenue compared with 48.3 per cent a year before, thanks in part to a growing tendency for home inprovers to employ professionals rather than take the DIY-approach, as well as an extension of the trade loyalty scheme.

TOPPS TILES (TPT)
ORD PRICE:100pMARKET VALUE:£193m
TOUCH:99.5-100p12-MONTHHIGH:171pLOW: 95p
FWD DIVIDEND YIELD:4.5%FWD PE RATIO:10
NET ASSET VALUE:6.7pNET DEBT:£28.4m

Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201317813.05.51.5
201419517.16.62.3
201521220.48.53.0
2016*21822.79.33.7
2017*22725.010.34.5
% change+4+10+11+22

Normal market size: 3,000

Matched bargain trading

Beta: 0.14

*Peel Hunt forecasts, adjusted PTP and EPS