Benefits of doing the basics better
Italtile hired some savvy brains to assist an already experienced team
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