Victoria's shares are cheap for a reason

Things seem to just keep getting worse for beleaguered flooring business Victoria (VCP). The company’s shares plummeted by over a fifth on results day after half-year revenues cratered and it fell into the red. This came after delayed full-year results in September were released alongside a qualified opinion from auditor Grant Thornton due to issues at subsidiary Hanover Flooring. To make matters worse, the Financial Times has been investigating the alleged "violent past" of the board member of the subsidiary who sold the company to Victoria. 

There were painful revenue declines across key divisions in the year in the face of weak demand. In the UK and Europe (these markets contribute almost 80 per cent of the top line), soft flooring and ceramic tiles sales were down 14 per cent and 27 per cent respectively. The cost-of living crisis contributed to a 13 per cent decline in volumes for soft flooring, while management said demand for ceramic tiles is as bad as during the 2008 financial crisis. 

There were a couple of bright spots, however. The movement of manufacturing to more modern UK factories drove margin improvement, with the underlying cash profit margin up 100 basis points to 14.9 per cent. And progress was made in North America, the only division to see year-on-year revenue growth, with the cash profit margin climbing 520 basis points. 

This was lost in the noise, though, especially as executive chairman Geoff Wilding had some other unfortunate news to share. He said that weaker consumer demand and higher raw material input costs would cancel out £20mn of benefits from the company’s reorganisation programme, which kicked off 18 months ago. The company announced separately that Wilding's fellow board member Zachary Sternberg has stepped down after five years as a non-executive director. 

Joint house broker Singer Capital Markets argued that "there are significant potential performance gains to be captured through margin enhancement, primarily in soft flooring, and as building cash flow is directed to debt reduction". 

Based on the current evidence, this doesn't look like enough for a turnaround in sentiment. Either way, debt reduction is desperately needed. Leverage, already high, has worsened, with the ratio of net debt to cash profits rising from 3.4 times to 3.8 times year on year. 

The shares are valued at eight times forward consensus earnings, a significant discount to the five-year average of 15 times. But the rating is cheap for a reason, in our view. Sell. 

Last IC view: Sell, 401p, 19 Jul 2022