Build­ing on growth

Italtile has per­formed ex­tremely well, de­spite a weak hous­ing and build­ing en­vi­ron­ment. If you don’t own this share al­ready, con­sider in­clud­ing it in your port­fo­lio.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­ is pri­vate client man­ager at BayHill Cap­i­tal.


was founded in 1969 and is a fran­chisor and re­tailer of lo­cal and im­ported tiles, san­i­tary ware, bath­ware and other home fin­ish­ing prod­ucts. The busi­ness sells to the mar­ket un­der three pri­mary brands, namely Italtile, CTM and TopT. These brands cover the mar­ket from high-end to the en­try-level af­ford­able mar­ket seg­ment.

Over the past few years the group has spent much en­ergy be­hind the scenes work­ing on im­prov­ing lo­gis­tics, pro­cure­ment and sourc­ing, which has con­trib­uted strongly to mar­gins. These ef­forts, cou­pled with the group’s cov­er­age of the mar­ket from both a mar­ket seg­ment and mar­ket share per­spec­tive, have al­lowed the busi­ness to per­form well in both buoy­ant and slug­gish hous­ing en­vi­ron­ments.

The group’s strat­egy en­ables it to cap­ture both the new home and the home im­prove­ment mar­kets.

Im­por­tantly, Italtile is fo­cused on be­ing a su­perb cus­tomer ex­pe­ri­ence re­tailer. Not only does anec­do­tal ev­i­dence lend sup­port to this, but the fi­nan­cial met­rics give it weight too. Re­turn on eq­uity cur­rently stands at 28% and is con­sis­tently high. In ad­di­tion, Italtile re­ports an op­er­at­ing mar­gin of 30% and the share price has seen a 200% in­crease over the past five years. In the con­text of a weak hous­ing and build­ing en­vi­ron­ment, this is an ex­cel­lent re­sult.

While Italtile does rely on some im­ports, the ma­jor­ity of stock is sourced lo­cally, pro­vid­ing some shel­ter from the weak rand that has been a clear head­wind to com­peti­tors. Ad­di­tion­ally, the group’s strate­gic in­vest­ments in Ce­ramic In­dus­tries (CI is a man­u­fac­turer of tiles, san­i­tary ware and baths) and Ezeetile (a man­u­fac­turer of grout, ad­he­sive and re­lated prod­ucts) have also con­trib­uted to the last set of fi­nan­cial re­sults. CI launched a new plant, Gryphon, in Novem­ber 2015, which – in ad­di­tion to ex­pand­ing CI’s pro­duc­tion ca­pac­ity – is set to be South Africa’s largest man­u­fac­turer of large-for­mat glazed porce­lain tiles. The sig­nif­i­cance of this lies in the po­ten­tial for im­port re­place­ment and the ben­e­fits this brings in an era of a weak rand.

Italtile’s spe­cial­i­sa­tion in san­i­tary and bath­ware and home fin­ish­ing prod­ucts, as op­posed to also in­clud­ing a wide range of hard­ware like many of its com­peti­tors, has al­lowed the group to build a mar­ket share of 45%, giv­ing it a high de­gree of pric­ing power. In turn, Italtile has used some of this mus­cle to take over smaller in­de­pen­dent op­er­a­tors, mostly in the coastal re­gions, who were un­able to ab­sorb the im­pact of the weaker rand.

Italtile op­er­ates over 130 stores, with a care­fully grow­ing pres­ence in the form of 16 stores north of our bor­ders, pri­mar­ily in Kenya and Tan­za­nia. The group is also ex­pand­ing its e-com­merce of­fer­ing, hav­ing launched Italtile Re­tail’s web store in Fe­bru­ary 2015. CTM, which launched an on­line store sev­eral years ago, has con­tin­ued to ex­pe­ri­ence sig­nif­i­cant and grow­ing ac­tiv­ity from ex­ist­ing and new users.

Al­though the shares in the group are rel­a­tively tightly held, this un­der­tak­ing has grown into a size­able busi­ness, with a mar­ket cap­i­tal­i­sa­tion of R13.5bn. Its mar­ket-like priceto-earn­ings mul­ti­ple of 16.5 times and div­i­dend yield of 2.1% makes this look, on tra­di­tional met­rics, like a rea­son­able in­vest­ment prospect. How­ever, man­age­ment’s abil­ity to grow free cash flow over the last five years at 16% per an­num, main­tain a high re­turn on eq­uity and a high op­er­at­ing mar­gin in the cur­rent en­vi­ron­ment, gives us con­fi­dence that this is ex­actly the type of busi­ness to con­sider for in­clu­sion in a port­fo­lio.

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