Bathrooms and kitchens are here to stay, which is good news for the long-term health of the tile industry. But over the medium term, demand for tiles ebbs and flows. That has dampened investor enthusiasm for one penny share I own, Topps Tiles (LSE: TPT).
Despite offering a 7.6% dividend yield, the share has fallen out of favour with the City and is now 28% cheaper than it was five years ago.
Yet this month it quietly pulled off what could yet turn out to be a business masterstroke, in my opinion.
Proven business model
Topps had been building its size in recent years. Last year’s sales revenues were its highest ever. The company now sells one in five tiles across the nation.
But the tile market has been struggling lately. Topps estimates that it is 10%-15% down compared to last year.
Topps has been taking market share. But not all rivals have done as well. CTD Tiles Limited went into administration last week. Topps has acquired the brand, 30 of its shops, selected stock, and related intellectual property from the administrators. While it did not disclose terms for the deal, given the circumstances I expect that the price was cheap.
The transaction stops other rivals getting those assets. It should boost Topps’ revenues and give it more economies of scale. The shops it acquired had sales of around £20m last year, equivalent to over 7% of Topps’ total revenues.
But what I think is most exciting here is the expansion of Topps’ architectural and designer business as well as its expectation that the deal offers “a meaningful entry into the housebuilder segment”.
The real value of the acquisition might not be in its retail components, but in adding critical scale to Topps’ bulk trade sales.
Potentially transformative deal
That brings risks, such as potentially lean profit margins compared to the retail business.
But Topps is not taking on any new debt to fund the deal and I think it could add substantial sales volume in coming years. It also brings in expertise to the company in areas where it has traditionally had a weak presence. Meanwhile, the existing Topps business continues to benefit from a strong store network and digital footprint as well as a large customer base.
Selling more into the building trade could mitigate some of the seasonal risks present in the current business model, especially given the expected strong housebuilding activity in the UK over coming years.
Integrating the non-retail business could be tricky but if done well – and Topps has a track record of delivering on its strategic objectives – it could be a major growth driver for the company.
As its penny share status suggests, Topps still has a lot to prove. Ongoing weak demand is a risk to sales and profits and integrating the acquisition will take time and effort.
But I think this was an excellent strategic move and plan to hang onto my Topps tiles shares.
This post was originally published on Motley Fool
