Italtile building on growth

Italtile 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 price-to-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.

*Andrew Newell is private client manager at BayHill Capital.

This article originally appeared in the 5 May 2016 edition of finweek. Buy and download the magazine here

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