Topps Tiles – A market leader aiming high

Mark Watson-Mitchell thinks shares in Topps Tiles are looking cheap ahead of the company’s interim results, due in a couple of weeks. 

A strategy to outperform a market is admirable and extremely attractive to investors. That is why the shares of Topps Tiles (LON:TPT) appeal to me ahead of the company announcing its interim results in a couple of week’s time (21^st).

The company is the UK’s largest specialist supplier of tiles and associated products. From its 375 nationwide retail stores it targets the UK domestic refurbishment market, whilst its three commercial showrooms serve its trade customers.

In the UK it is reckoned that the total tile market is worth some £700m at the retail selling price. Topps has around 18% of the retail market (which aims at the refurbishment of residential properties), while other specialists hold a total of just 16%, with the DIY sheds taking another 17% chunk of the market.

Commercial (catering for architects, designers and the construction industry) commands 45% of the marketplace. And it is upon the commercial market that Topps Tiles is looking to make its mark. Having acquired Parkside Tiles in August 2017, it is a recent newcomer to the trade side, and it is already showing some strong advances.

The recent acquisition of Strata Tiles will add even more scale to the group’s commercial business unit. Strata is a recognised and respected brand in commercial tile supply, with offices in Guildford and a showroom in Bermondsey, in East London.

Strata’s customer base is within the architect and design community. It is a leading supplier of quality porcelain, polished concrete, mosaics, natural stone and technical stone tiles for commercial design projects. Its key market segments include transport, retail, building cladding projects, university buildings, and residential apartment blocks.

With Parkside and Strata as its commercial side Topps Tiles is making a strong play at becoming the market leader in that part of the trade. At the time of acquiring Strata, Matthew Williams, the Topps CEO, stated that the group’s commercial business was already expanding at a pace, with sales in the first half having grown by some three times on a year on year basis. Strata will boost that expansion.

Overall the group has a very good grip on the UK tile market. It has a ‘leading product’ strategy, exemplified by having launched 20 ranges in the first half year and it is developing a new porcelain tile range for outdoor use.

The key source to its competitive advantage is by sourcing and developing differentiated ranges. Over 75% of the new ranges are developed in-house, whilst 95% of the total tile range is own-brand or exclusive.

In the retail market its aim is to ‘out specialise the specialists’ and it is growing ahead of the market. In the first half it completed 39 mini refits to its retail estate, taking the total of completed stores up to 180. It is worth noting that its estate is very flexible, being very prepared to close down stores, refit some and open new outlets. The average unexpired lease periods (Mike Ashley take note) is around four years.

The commercial side is a key source to the group’s growth. Through its vital relationships with traders it is also a channel to homeowners. It even operates a trade loyalty programme, with over 70,000 traders collecting Rewards+ points.


However, the group recognises that the internet is immensely important to its whole business. They reckon that almost all customers will use digital at some stage. Its retail website is already in the top 25 UK retail websites list – further emphasising the company’s commitment to online. It has over 40,000 uses per week and sends out over 5,000 personalised e-brochures to customers each month. Driving online traffic has strong links to store footfall.

Now let us look at the company’s equity structure. Apart from Stuart Williams, who holds 20.59m of the company’s 195m shares in issue, some 10.5% of the equity, the list has a strong bevy of institutional names.

Its professional holders include Aberforth Partners (with 9.86%), AXA Investment Managers (9.78%), BlackRock Investment Management (5.73%), Woodford Investment Management (5.99%), Invesco Asset Management (4.98%), Investec Asset Management (4.95%), Fidelity Management & Research (4.94%), Miton Asset Management (4.54%), and Standard Life Investments (with 3.96% of the equity).

The first half-year to the end of March 2019 is expected to show revenues slightly easier at £108.8m, down just £0.6m, despite a poor set of first quarter returns. Brokers estimates for the current year are for revenue of £217m and pre-tax profits of £15.75m, generating 6.5p of earnings and paying a twice covered 3.25p of dividend. The coming year is expected to see some £225m of sales produce £16.75m pre-tax, and close to 7p in earnings and 3.5p in dividend per share.

At the current price of 75p the shares of this £146m company trade on a low current year price earnings ratio of 11.5 times, yielding a healthy 4.3%. For the coming year that puts the shares on a very attractive 10.7 times PE and a 4.7% prospective yield.

The shares of Topps Tiles are looking very cheap to me and I see 100p as an easy target price within the next year or so.