Ben­e­fits of do­ing the ba­sics bet­ter

Italtile hired some savvy brains to as­sist an al­ready ex­pe­ri­enced team

Financial Mail - Investors Monthly - - Guest Column - Anthony Clark is a small-to-mid cap an­a­lyst at Vu­nani Se­cu­ri­ties

For years Italtile was a solid, con­sis­tent per­former, but noth­ing out of the or­di­nary. It seemed a prop­erty busi­ness that just hap­pened to sell tiles, taps and sanitary ware, from the low-end Top T brand to the mid-end CTM and the up­scale Italtile.

The com­pany owns all its own land and build­ings, and that alone has a con­ser­va­tive value of R2.4bn — and let’s not talk about its leg­endary cash-gen­er­a­tive abil­i­ties and the wads of notes in its fat bank ac­count.

But a good two years ago some­thing hap­pened. Man­age­ment got a spark of life. There was a new en­ergy, a new vigour. Mar­gins and prof­its started to rise. I joked that Italtile CEO Nick Booth had popped some re­tail Vi­a­gra into his and his team’s morn­ing cof­fee.

That re­tail pill, some thought, may have been a one-hit won­der. But no. Re­sult af­ter re­sult, for the past three re­port­ing pe­ri­ods, have been de­fy­ing the dour eco­nomic grav­ity in SA. Italtile, like Cash­build, was ex­pe­ri­enc­ing ris­ing rev­enue, im­proved mar­gin and in­creas­ing prof­its. What was the se­cret? The an­swer was sim­ple. Italtile be­gan to think like a proper re­tailer and hired some savvy brains to as­sist an al­ready ex­pe­ri­enced man­age­ment team in the trans­for­ma­tion. Rather than just buy­ing stuff and hop­ing to sell it, Italtile op­ti­mised its ver­ti­cal in­te­gra­tion and used the tools it al­ready had in-house, but used them bet­ter. It bought bet­ter and gave its con­sumers more of what they wanted at bet­ter prices. Costs were stream­lined via bet­ter in­te­gra­tion, tech­nol­ogy and sup­ply chain, trap­ping mar­gin in-house. More fo­cus was put on the low-end value seg­ment via the fast-grow­ing Top T and through CTM. In the 2016 fi­nan­cial year re­sults, these di­vi­sions re­ported a 23% rise in profit to R285m, com­pared with only a 5% rise to R200m in the up­mar­ket Italtile chain. A bet­ter han­dle on sup­ply and sup­port ser­vices, which source and dis­trib­ute all of Italtile’s prod­ucts, made that unit in­crease profit by 30% to R358m.

Can the share price stay firm? I think the an­swer is a re­sound­ing yes. The counter re­cently hit a new high and there is much bub­bling in the com­pany.

Hav­ing once owned Ce­ramic In­dus­tries, a lead­ing do­mes­tic man­u­fac­turer of sanitary ware and tiles, Italtile spun the busi­ness off into a sep­a­rate JSE list­ing in 1992. In 2012, Ce­ramic was delisted from the JSE in a pri­vate buy-out and Italtile ac­quired a 20% stake.

In April 2016, Italtile made an R3.4bn of­fer to ac­quire the mi­nori­ties of Ce­ramic as well as raise R1.2bn in a rights is­sue at R11.47/share. The deal makes ex­cel­lent strate­gic sense as the busi­ness will be com­pletely ver­ti­cally in­te­grated. It will start from mak­ing the ba­sic prod­ucts it sells (tiles and sanitary ware) right through to re­tail­ing them.

But in Au­gust it hit a snag, as the com­pe­ti­tion com­mis­sion blocked the pro­posed ac­qui­si­tion, cit­ing mar­ket share con­cerns in se­lected cat­e­gories.

Italtile, be­liev­ing the com­mis­sion had used in­cor­rect data and facts, chose to re-sub­mit the deal to the com­pe­ti­tion tri­bunal. Booth is con­fi­dent the deal will be ap­proved. An an­swer should be re­ceived in Oc­to­ber.

Italtile is also spend­ing heav­ily on new prod­uct ranges, tech­nol­ogy to in­te­grate the parts of the busi­ness, a larger dis­tri­bu­tion cen­tre and an ex­pan­sion to its Gryphon tile plans. The weak rand has given do­mes­tic man­u­fac­tur­ers of tiles and sanitary ware an edge, which Italtile/Ce­ramic is ex­ploit­ing.

So the next two to three years look solid for Italtile. Ex­pan­sion of the busi­ness is un­der way, a ma­jor cost and ef­fi­ciency drive will de­liver mar­gin en­hance­ment and if the Ce­ramic deal is ap­proved the value trap from a ver­ti­cally in­te­grated man­u­fac­turer and re­tailer of prod­ucts is clas­sic MBA text­book stuff.

With the counter ris­ing high, sup­port for the rights is­sue will be strong. Man­age­ment con­tends that the Ce­ramic deal debt will be­labour the busi­ness for about 16 months, but it ex­pects that to be ma­te­ri­ally re­paid within three years, and says the ben­e­fits of the deal should en­hance prof­itabil­ity.

As a solid, well-run con­ser­va­tive blue-chip mid-cap counter, it’s an ideal stock for long-term funds.

Man­age­ment got a spark of life. There was a new en­ergy and vigour. Mar­gins and prof­its started to rise

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