Anthony Clark: Decorate your portfolio with Italtile
It will be on every profit path, thanks to the deal with Ceramic — and excellent management
Ihave covered Italtile for 16 years and can say, tongue in cheek, that the counter was always seen as a cash-“flush” property company that happened to sell tiles and sanitaryware.
How times have changed, The R6.2bn revenue business has a network of 162 stores in three main brands — the lower-end Top T, the middle-range CTM and the upper Italtile. There are also manufacturing interests via a 21% stake in Ceramic Industries, property and supply chain divisions
I wrote about three years ago — after a change of management direction and strategy that had started delivering improved earnings to shareholders — that the CEO had seemingly taken “retail Viagra”.
The past few sets of results have shown Italtile sharpening its retail pencil, dramatically improving operational efficiency and earnings.
Expansion into the affordable lower end of the sector via Top T, competing against the offerings of Cashbuild and the like, has grown Top T dramatically.
In recent results, the lowerend segment was the fastestgrowing unit, beating the iconic CTM and Italtile stable of brands. Top T didn’t even exist a few years ago and now consists of 64 nationally represented stores.
Another strategic turn has been made recently. The competition tribunal, after a baby-elephant period of gestation and deliberation, has given the nod to Italtile’s buyout of 74% of Ceramic Industries. Ceramic is a leading domestic manufacturer of tiles and sanitaryware.
Italtile made an offer to acquire the minorities of Ceramic Industries, a business it has known for decades. The offer values Ceramic at R3.6bn payable in cash, debt funding and shares. A rights offer to raise R1.2bn from shareholders at a ratio of 22 new shares for every 100 held at 1,157c/share will also be undertaken.
While this seems like a large chunk of debt, Italtile’s prodigious cash flow and strong balance sheet, backed by cash of R511m and property valued at R2.6bn, will reduce debt sharply after three years.
The Ceramic deal will cement Italtile’s position and enable it to continue its growth vector for years to come.
In acquiring Ceramic, Italtile gains vertical integration, thus trapping margin along each turn, rather than giving much of it away to middlemen. From making tiles and toilets to distributing them to selling them (mostly) in their own stores to selling you the adhesive to stick the product to your walls, Italtile will be on every profit path.
While waiting for the Ceramic approvals, Italtile was launching new units, like supplying its own shower enclosures (a lucrative category) and refining its supply chain, distribution and logistics capacity.
Italtile’s 2017 results to June were a tale of two halves. H1 2017 had a sound performance. Then, as domestic consumer and economic confidence weakened thanks to government scandals and poor policy, the economy buckled in the second half from December to June 2017. Earnings for the year had a 7% first-half rise reverse by 7.4% in the second half as revenue fell by 9% in that period. Earnings for the year of 85.7c/share fell 1.4% y/y.
To cope with a weakening situation, Italtile cut inventory by 28%, hoarded cash to R511m and cut overheads by 7%.
Italtile, like its competitors, showed weakness in the past six months and indications are that the coming December interim results period will again be challenging.
Conditions may be challenging, but Italtile is in robust shape and the Ceramic deal adds a new growth vector. At the time of writing Italtile, at 1,286c, is on a p:e of 14.6, having come off by 6% this year.
Holders of Italtile should certainly follow their rights. Potential new investors should watch the counter. Given its inherent strong qualities, I’d use any weakness to buy the stock for the long term.
Indications are that the coming December interim results period will again be challenging