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Loos and kitchens are right here to remain, which is sweet information for the long-term well being of the tile business. However over the medium time period, demand for tiles ebbs and flows. That has dampened investor enthusiasm for one penny share I personal, Topps Tiles (LSE: TPT).
Regardless of providing a 7.6% dividend yield, the share has fallen out of favour with the Metropolis and is now 28% cheaper than it was 5 years in the past.
But this month it quietly pulled off what might but transform a enterprise masterstroke, for my part.
Confirmed enterprise mannequin
Topps had been constructing its measurement lately. Final yr’s gross sales revenues have been its highest ever. The corporate now sells one in 5 tiles throughout the nation.
However the tile market has been struggling these days. Topps estimates that it’s 10%-15% down in comparison with final yr.
Topps has been taking market share. However not all rivals have achieved as properly. CTD Tiles Restricted went into administration final week. Topps has acquired the model, 30 of its retailers, chosen inventory, and associated mental property from the directors. Whereas it didn’t disclose phrases for the deal, given the circumstances I count on that the worth was low-cost.
The transaction stops different rivals getting these property. It ought to enhance Topps’ revenues and provides it extra economies of scale. The retailers it acquired had gross sales of round £20m final yr, equal to over 7% of Topps’ complete revenues.
However what I believe is most fun right here is the enlargement of Topps’ architectural and designer enterprise in addition to its expectation that the deal affords “a meaningful entry into the housebuilder segment”.
The actual worth of the acquisition won’t be in its retail elements, however in including important scale to Topps’ bulk commerce gross sales.
Doubtlessly transformative deal
That brings dangers, resembling doubtlessly lean revenue margins in comparison with the retail enterprise.
However Topps just isn’t taking up any new debt to fund the deal and I believe it might add substantial gross sales quantity in coming years. It additionally brings in experience to the corporate in areas the place it has historically had a weak presence. In the meantime, the present Topps enterprise continues to profit from a robust retailer community and digital footprint in addition to a big buyer base.
Promoting extra into the constructing commerce might mitigate among the seasonal dangers current within the present enterprise mannequin, particularly given the anticipated robust housebuilding exercise within the UK over coming years.
Integrating the non-retail enterprise could possibly be tough but when achieved properly – and Topps has a observe file of delivering on its strategic goals – it could possibly be a serious development driver for the corporate.
As its penny share standing suggests, Topps nonetheless has loads to show. Ongoing weak demand is a threat to gross sales and earnings and integrating the acquisition will take effort and time.
However I believe this was a superb strategic transfer and plan to hold onto my Topps tiles shares.
