In a good position to perform after lockdown
was trading at R10.16, which gives it a market value of more than R12bn.
Only parts of the company’s business continued operating during the tight phase of the Covid-19 lockdown. East African and Australian operations remained open, and IM understands both territories have shown some growth. The closure of the mainstay retail stores and the ceramic industries’ manufacturing sites would have hit Italtile hard. IM estimates a cash burn of about R70m a month.
In a less restrictive phase of lockdown, stores will still need to adapt to a new operating environment, such as a limited number of customers in shops due to social distancing requirements. Sales will be reduced — but Italtile is confident its superior online platform will gain additional traction.
Capital expenditure in Italtile’s new tile and sanitaryware operations will be deferred and new store openings delayed. Inventory has been pared, further reductions are planned to release R150m, and excess property is expected to be sold to release another R100m. Italtile also intends to source more of its products domestically.
The company caters for all price points — from Italtile at the top end, a revamped and refreshed middle-market CTM and Top-t at the lower end — so the company is well placed to adjust to the new consumer environment.
With a solid balanced sheet, a clear post Covid-19 strategy and a management that is engaged in share buybacks, Italtile remains our preferred building supplies stock.
taltile has for some time been IM’S preferred company in the JSE’S brittle building materials sector.
In September 2019 we recommended a long Italtile, short Cashbuild play. It was a profitable trade, as Cashbuild subsequently heavily underperformed. In February we reiterated Italtile was the stock to follow in the sector, and being long on it remained profitable.
Then Covid-19 swept SA and the JSE succumbed to a bloodbath of selling. Hardly anything was immune. Both Italtile and Cashbuild were hit; the latter was savaged. But they have recovered from their latemarch lows. The performance in the year to date is: Italtile 22.4% and Cashbuild -30.3%.
Each counter has its strength and each is a leader in its market segment. Each has a strong balance sheet and sits on acres of cash, which will protect it after the lockdown.
IM continues to prefer
IItaltile for the post Covid-19 environment. Its product range is predominantly in the refurbishment and upgrade segment. House- building post the pandemic may be slow to restart, which will probably hamper Cashbuild. House sales could also be sluggish. So it seems safe, at this juncture, to assume more emphasis will be placed on “fixing up and refurbishing” an existing property rather than moving. This plays into Italtile’s strength.
What’s worth remembering is that Italtile has invested in a state-of-the-art online product and sales visualisation platform. This could prove a strategic masterstroke. In an ongoing Covid-19 world more sales may occur online as some consumers could shun the traditional full-on retail experience.
Italtile’s higher-value products are easier to market, convert and sell online than lowvalue bricks and cement.
At the time of writing Italtile many companies globally to manufacture it. The chloroquine hope quickly evaporated, but not before Ascendis had scrambled up to a intraday high of 229c in April — a 690% rally.
The market soon realised the froth was unjustified, and the stock drifted back to, at the time of writing, 98c (still a nifty 240% return from its March low). IM believes that is a fair price for this volatile counter. If second-half results match the interims, Ascendis is on a forward earnings multiple below two times.
Significant challenges remain, but IM is confident these can be surmounted. New CEO Mark Sardi believes Ascendis is a good company with a bad balance sheet.
The balance sheet is indeed straining. The rand’s blowout against the dollar and euro is a double-edged sword. Ascendis’s R5bn euro-denominated debt will have increased in rand terms — but hopefully so will offshore earnings. It’s worth noting that 58% of total interim revenue was derived offshore — but 70% of continuing operating profits was generated in hard currencies.
The key, in the short term, is for Ascendis to gain an “amend and extend” agreement from the banks that hold the debt. This will give Ascendis valuable breathing space and enable management to conduct asset sales to repay debt.
The smaller European businesses should be exited during 2020. IM forecasts their total value at around R1bn.
Re-engaging potential buyers on Remedica remains the best hope for debt reduction.
IM believes management would prefer to keep some of Remedica’s offshore revenue base to augment the domestic operations. This would enhance its post-debt valuation.
The road ahead will be bumpy. But management has clearly articulated the recovery strategy, debt has been reduced and operationally things look satisfactory. So if, ultimately, a smaller Ascendis is created, the current price probably balances the risks with some decent medium-term upside if the restructuring is effective and efficient.