We initiate coverage of Topps Tiles with a Buy rating and target price of £0.90, a 63% upside to current share price.
Topps Tiles is a tile and flooring retailer operating 321 retail units (utilising 186,000 m2 of sales area), the company was initially listed in 1997 on the London Stock Exchange.
The company has been subject to significant decreases in demand during the 2007 - 2010 financial downturn; however its ability to survive and capitalise on competitor failures to absorb market excess should position the company for significant future growth.
We believe that this current strategy is the correct one.
Table of Contents
Background
News
Financial Analysis
Ratio Analysis
Valuation
Risks
Investment Case
Bibliography
Appendix 1: 5 Year Summary (Accounts)
Appendix 2: 5 Year Ratio Summary
Appendix 3: Financial Ratios Calculations
Appendix 4: Valuation Summary
Appendix 5: Industry Breakdown
Appendix 6: RiskGrade Calculation
Background
Topps Tiles Plc is the UK’s largest tile and wood flooring specialist and is based in Enderby.
Since opening their first professional tile centre in 1963 they have seen tremendous growth and success, offering customers high quality products at value prices (Topps Tiles, 2010).
Listed on the London Stock Exchange in 1997 the company is a constituent of the FTSE Small Cap Index.
Topps Tiles has 321 stores currently operating within the UK and with plans for further expansion they look to become a dominant presence across the country and a market leader within the DIY industry.
News
Topps Tiles Plc, the UK’s largest tile and wood flooring specialist, released pre-close trading statements on company trading for the 53 week period ending October 2nd 2010. The Board of Directors will publish preliminary results in late November. It is thought that figures released will report UK revenues in the region of £182.4 million, up by 2% on the previous year (£178.8 million in 2009), with pre-tax profits in the range of £14.5-17.1 million. Like for like revenues from UK stores are expected to highlight a 1.7% increase. However, in 2010 Topps Tiles have lost 41% of their share value, underperforming the 2% rise in generated revenue. The business is currently valued at £105 million. RNS 4704T (2010) & Thomson Reuters (2010).
DIY Week (2010) reports the DIY leaders for 2010 in their annual round up of top performers in the DIY retail sector. Although Topps Tiles is not considered one of the key 6 players (i.e. B&Q, Homebase, Wickes, Argos, Focus and Screwfix) in the DIY market, the company has performed well amongst its competitors, taking pole position for operating margin and coming in 6th for net margin.
illustration not visible in this excerpt
Figure 1.1: Tables to show the percentage of Operating and Net margins within the DIY industry
Source: DIY Week (2010)
Topps Tiles was hit hard by the economic recession. During the 2010 trading period the company has reported that consumers remain ‘subdued’, with little sign of any return in consumer confidence. Consequently, shares slid 8% in the first half of 2010. The firm has however seen an increase in market share as major competitors cut back on and close stores (Lynch, 2010).
Dawber (2010) reports that the price earnings ratio in 2010 is 10.2 times. This figure has declined sharply from the previous year (94.0 times in 2009) despite trade revenue increasing during 2010. The decrease can be attributed to the fragile recovery in the housing market, the lack of consumer confidence and the suspected government cuts within the public sector. Topps Tiles hopes to attract brave investors.
Financial Analysis
Over a five year timespan (2005-2009) drawing directly from Topps Tiles’ Annual Accounts (see appendix 1), an outline of the raw financial situation is, as follows:
Turnover grew for four out of the five years studied translating into a 20% increase in income; this figure is in contrast to the 2008-2009 period where sales dropped back approximately £22 million, or 10% year on year.
There are two significant points to investigate when looking at expenditure:
- Operating expenditure can be seen by the continual rise in cost of sales growing 15.5% over the five year period from £67.1 million to £77.6 million.
- The company took out a £110 million loan in 2006 to fund two stages of a 3 for 4 reverse share split, share buyback and to pay back previous long-term debt. It is this long-term liability that reflects in the annual interest payable to be around £10 million per annum.
Drawing from this we can see that, notwithstanding the recessionary period, turnover increased at a faster pace than cost of sales. We can infer that increasing efficiencies and economies of scale are being taken advantage of. We can also make a point that share consolidation and buyback schemes are normally taken by companies that are confident of their growth and future plans.
Significant changes to the balance sheet are limited with the exception of a £110 million loan taken out in 2006, of which approximately £90 million remains outstanding. This has caused the company to fall into negative equity, thereby potentially affecting profitability over the medium term.
The suspension of the dividend in the year ending 2009 is a direct response to plummeting profit after tax figures in that year; this could have had a causal negative effect on the share price. The resumption of the dividend once profitability is again healthy should trigger share price appreciation.
Note that HSBC is forecasting annual dividends of 0.11p in 2011 and 1.51p in 2012. (HSBC, 2010)
Dividends by Year
illustration not visible in this excerpt
Source: iii.co.uk (2010)
Ratio Analysis
Ratios are used to evaluate the performance and financial health of a company (Weygandt & Kiesso & Kimmel, 2005). A comprehensive analysis of a few financial ratios can build up a large and clear picture of a business (Broadbent & Cullen, 2003). It can offer clues to fundamental conditions that may not be evident from individual component inspectation of a particular ratio (Weygandt & Kiesso & Kimmel, 2005).
Ratio analysis compares numbers to each other; it expresses the relationship between them and can be presented as a percentage or proportionate (Proctor, 2006; Broadbent & Cullen, 2003).
For analysis of Topps Tiles performance for last 5 years were investigated the following groups of ratios: Profitability, Efficiency, Liquidity, Financial Gearing and Investment Over a five year timespan (2005-2009) the following financial ratios have indicated the following:
Profitability Ratios
Profitability ratios express businesses ability to generate earnings compared to expenses over a certain period of time (Lopes, 2010). They make possible measurement of financial performance of a company, test the management efficiency and are for potential investors (Broadbent & Cullen, 2003).
A graph to show profitability ratios for Topps Tiles over a five-year timespan.
illustration not visible in this excerpt
Gross Profit Ratio
An average value of 61.4% with a standard deviation of 0.018 showing a steady position through the period, reflective of the stability of the industry and the company’s ability to pay operating expenses and develop the business.
Net Profit Ratio
An average of 11% with a range of 16 percentage points is reflective of an increased debt position and need to service the debt as well as an increase in cost of sales and impacts of the recent economic downturn.
Return on Shareholders’ Fund
Decreasing pre-tax profits combined with recent negative equity positions on shareholders funds stemming from a long term loan taken out in 2006 totalling £110.0 million which was used to help fund a £122.4 million cash return and share capital consolidation, has seen ROSF move negative in 2006 from 75% to -65%, lower pre-tax profits in 2009 brought this figure to -9%.
Ratio Analysis
Return on Capital Employed
An average of 68%, combined with a range of 62%; whilst peaking in 2007 dropped significantly in 2009 to 26% the main factor is the large decrease in earnings before interest and tax (EBIT) in 2009 due to lower sales volumes.
Efficiency Ratios
Efficiency ratios measure how proficient the management is using ‘working capital’ (current assets minus current liabilities) (Broadbent & Cullen, 2003). It analyses how the assets are used and controlled within the company, how effectively the suppliers are paid and whether the firm is undertrading or overtrading on its equity (D&B, 2010). Efficiency ratios are critical to ensure the survival and smooth running of the company. The appropriate control of efficiency ratios aims to keep the overall value of working capital to a minimum, which will improve profitability without affecting sales revenue (Proctor, 2006).
A graph to show efficiency ratios for Topps Tiles over a five-year timespan.
illustration not visible in this excerpt
Inventory Turnover Period
Without available competitor statistics the inventory turnover period provides little in terms of relative value but too much stock could imply that there is a lack of demand, overstocking, or products are poorly sold. It took Topps Tiles 129 days to sell its stock for the year ending 2009 down from a five-year-high of 146 days.
Age of Receivables
On average it takes Topps Tiles’ customers 8 days to pay outstanding invoices, perhaps implying that the inventory sold is not very expensive otherwise customers would take longer to pay.
Age of Payables
Frequently Asked Questions About Topps Tiles Plc Analysis
What is Topps Tiles Plc?
Topps Tiles Plc is the UK’s largest tile and wood flooring specialist, based in Enderby. They operate 321 stores across the UK and are listed on the London Stock Exchange as a constituent of the FTSE Small Cap Index.
What recent news is available about Topps Tiles Plc?
Topps Tiles released pre-close trading statements for the 53-week period ending October 2nd, 2010, reporting anticipated UK revenues of approximately £182.4 million, a 2% increase from 2009. Pre-tax profits were expected to be in the range of £14.5-17.1 million. However, the company's share value declined by 41% in 2010.
How has Topps Tiles performed in the DIY retail sector?
While not considered one of the top 6 players in the DIY market, Topps Tiles performed well among its competitors, achieving the top position for operating margin and ranking 6th for net margin in 2010, according to DIY Week.
How was Topps Tiles affected by the economic recession?
Topps Tiles was significantly impacted by the economic recession, with subdued consumer confidence leading to an 8% share price decline in the first half of 2010. However, they gained market share as major competitors reduced their operations.
What is the Price Earnings Ratio of Topps Tiles?
The price earnings ratio in 2010 was 10.2 times, a sharp decline from 94.0 times in 2009, despite increased trade revenue. This decrease is attributed to the fragile housing market recovery and lack of consumer confidence.
What was Topps Tiles' turnover like over the five years leading to 2010?
Turnover grew for four out of five years (2005-2009), representing a 20% increase. However, sales decreased by approximately £22 million (10%) between 2008 and 2009.
What major financial event occurred for Topps Tiles?
Topps Tiles took out a £110 million loan in 2006 to fund a share split and buyback and to repay long-term debt. This loan has resulted in significant annual interest payments and has contributed to negative equity.
When was the dividend suspended for Topps Tiles and why?
The dividend was suspended in 2009 in response to a significant drop in profit after tax figures. Resumption of dividends is expected to improve the share price.
What do the profitability ratios indicate about Topps Tiles?
The gross profit ratio remained relatively stable, while the net profit ratio decreased due to increased debt and the economic downturn. Return on Shareholders’ Fund went negative due to the loan and associated costs.
What do the efficiency ratios reveal?
The inventory turnover period indicates how long it takes Topps Tiles to sell its stock. The age of receivables shows how long it takes for customers to pay, while the age of payables shows how long Topps Tiles takes to pay its suppliers, which appears to be a significant advantage for Topps Tiles cashflow.
- Quote paper
- Christopher Ulph (Author), Dorothe Abou-Hamad (Author), Olesea Novac (Author), Amy Vernon (Author), 2010, Topps Tiles Investment Appraisal, Munich, GRIN Verlag, https://www.grin.com/document/166057
