Questor share tip: Topps Tiles profits jump on DIY fever

Topps Tiles
120p unch
Questor says BUY

TOPPS Tiles, the UK’s largest tile and wooden flooring specialist, revealed yesterday that its pre-tax profits had nearly doubled as DIY fever and a recovering UK economy boosted results in the first half.

Matthew Williams, chief executive, said the company had enjoyed a “good start” to the second half, which follows a first half of strong sales growth, higher profit margins and rising profits.

Like-for-like sales in the seven weeks to May 17 increased 5.6pc, against a 2.6pc fall in the eight weeks to May 25 last year.

Mr Williams said trading conditions had improved on a higher level of consumer confidence. Pre-tax profits jumped to £8m, from £4.7m a year earlier, on revenue up 11.7pc to £97.7m.

The company said in a previous update that trading in the first quarter was strong, with like-for-like sales up 9.3pc. However, sales must have accelerated across the second quarter to hit that higher average.

“We have made a good start to the second half, with a healthy level of sales growth in the initial seven weeks of the period. We believe we continue to grow sales ahead of the market and remain confident,” said Mr Williams.

Topps Tiles ended the period with 330 stores and a 28.5pc market share, up from 320 and 27pc respectively a year earlier.

The company increased its interim dividend by 30pc to 0.65p per share from 0.5p, going ex-dividend on June 11 and to be paid on July 15.

Topps Tiles is still exposed to the febrile nature of consumer confidence, which can evaporate just as quickly as it starts. However, having nearly reached the end of May the company is almost eight months through its financial year and just needs a strong final quarter to hit analysts’ targets.

Analysts are expecting revenue to increase by roughly £16m, to £194.3m, in the current year ended September, and these half-year results of £97.7m show it is still on target to achieve that.

Encouragingly the company said the profit margin also increased marginally to 60.8pc from 59.8pc a year earlier. So, any sales in the last four months should generate more profits if that trend continues.

The balance sheet is also being strengthened, with net debt reduced to £36.3m at the end of March, from £44.9m a year ago. Topps Tiles has exited some expensive borrowing charges so the cost of repaying interest on its loans fell by almost half to £800,000, from £1.5m last year.

When Questor first recommended buying the shares (106½p, November 27, 2013) we expected revenue to beat expectations and a solid profit performance, and so it proved. Brokers upgraded full-year forecasts for revenue and profits at the time of the trading update on March 25.

Back in 2007, the company made a pre-tax profit of £37.8m on revenues of £207.9m and that is only 7pc ahead of today’s forecasts (see table). Back then the shares were trading at 300p. Questor doesn’t expect a return to those heady days, but we don’t need exceptional trading for the shares to rise further, just more of the same.

The opportunity offered by Topps Tiles hasn’t escaped the notice of other professional value investors. The Capital Group, which was founded in the US in 1931 by Jonathan Bell Lovelace and is famously called “the largest investment fund nobody has ever heard of”, more than doubled its stake in Topps Tiles in early December.

The shares have increased 13.5pc in the six months since Questor tipped them as a buy last year.

Small company shares have been hit hard since early March, and Topps Tiles hasn’t escaped the sell-off, giving back some of its gains. However, trading remains on target, so Questor retains the recommendation, Buy.