Victorian Plumbing surges, but margins remain tight

Victorian Plumbing (VIC) more than doubled its pre-tax profits for the six months to 31 March. This sounds impressive, but there is a caveat. The increase of £2.9mn is not insignificant, but it needs to be seen in context, specifically with reference to the anaemic pre-tax margin of 3.81 per cent.

To a certain extent, the bathroom product retailer’s tight margins are to be expected. The company only listed in 2021 and so it is in growth mode, which means costs are going up. As it scales-up, investors would expect that margin to increase. So far, however, the opposite has happened. Its pre-tax margin has shrunk from 11.4 per cent in its results for FY 2020 to 4.38 per cent in last year's preliminary figures. Its most recent results continue the trend.

The company pins some of this on inflation. It said staffing costs were up 18 per cent which it said was “slightly higher than anticipated owing to continuing inflationary pressures, and our commitment to attracting and retaining talent”. Meanwhile, it says that its 61 per cent increase in property costs was from “increasing its warehouse capacity on a more expensive short-term basis to support the growth of the business”.

To its credit, the company remains in a net cash position and has no bank borrowings whatsoever which is a big plus in an era of relatively high-interest rates. Still, at a price of 20 times earnings, the pace of growth for this company and its decreasing margin do not yet warrant a rating upgrade. We stick with our neutral position. Hold.

Last IC view: Hold, 70.4p, 6 Dec 2022