Italtile: Grout and grit

• South Africa
• CTM, Home improvement, Italtile, Retail
• December 2, 2020

The DIY and home improvement market in South Africa is substantial. Using Stats SA trade sales data, it can be roughly estimated to represent around 8% of the total retail market in South Africa.

Within this space, there are DIY-focused players (like Build-it which is owned by Spar), wholesale-focused companies (like Cashbuild) and those who follow more of a hybrid model (like Builders Warehouse within Massmart).

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Italtile is a retail-focused group operating a variety of outlets, including retail banners like Italtile, CTM and TopT.

The company has been a dependable source of earnings growth for shareholders. Over the “lost decade” in which so many JSE-listed companies went nowhere fast, Italtile grew its trading profit from R389m in 2010 to just under R1.8bn in 2019, a Compound Annual Growth Rate (CAGR) of 18.5%.

This result needs to be viewed in the context of the tragedy that befell the company back in 2011, when the CEO and eight colleagues / business partners passed away in a plane crash. It’s a terrible thing for any family and business to endure, so such a strong decade despite this awful event really speaks volumes for the resilience of this family business.

The share price quadrupled over the past decade, but all the share price magic happened from 2010 to 2016. Since then, it’s been flat, other than the drop and recovery this year that so many stocks experienced.

Investors have had limited interest in this sector (Cashbuild has done far worse at -22% over five years), but does Italtile deserve better?

How has the company done in the past few months?

The result for the year ended June 2020 obviously took a knock because of trading restrictions towards the end. Thankfully for investors, a trading statement released today by Italtile confirmed that things are busy again and that the company was positioned beautifully for a recovery.

For the five months from July to November:

• Total retail store sales are up 16.4%
• Like-for-like retail sales are up 14.9% (an extraordinary result that strips out the benefit of opening new stores)

This means that earnings per share is expected to increase by over 20% for the six months to end-December 2020. Keep in mind that this is in comparison to the second half of the 2019 calendar year, before Covid-19 was a thing.

The result for the first six months of 2021 will be measured against a very weak first half of 2020, so you can expect an even stronger growth rate.

The company has attributed the performance to its localised supply chain, heightened demand for home improvement as people spend more time at home and lower interest rates helping people to afford these improvements.

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The operating model works

Italtile’s model is smart.

To maximise margin and control the supply chain, Italtile owns a number of manufacturing businesses that supply tiles and bathroomware to the retail operations.  A localised supply chain has been critical this year and is on-trend for how the world will think about supply chains going forward.

Then, to ensure that the group participates in growth in every LSM segment, the group operates different retail banners to target different customers. For example, Italtile sells upmarket products and CTM offers a cheaper range of products catering to middle class South Africans.

There’s also a combination of retail-owned and franchise stores in the group. Of the total network of 198 stores, there are 71 franchised stores. This allows for capital-efficient growth in the footprint and comes with the added benefit of owner-managers in stores.

It’s quite incredible that there are only 14 Italtile stores within the network, despite being the genesis of the group. The South African market only has space for so many upmarket sites.

If the valuation multiple was a tile, it would be at Italtile

Value investors who hope to pay a CTM multiple can move along. This multiple is from the Italtile catalogue.

A P/E (Price/Earnings) multiple of 18x isn’t silly in a retail context in South Africa but isn’t cheap either. The 2020 net profit was impacted by Covid though, so if we calculate P/E on 2019 earnings instead then it’s a 14.5x P/E.

Considering the company achieved 20% growth on pre-lockdown results, I don’t believe this is an unfair multiple. It’s just not a total bargain either.

Italtile deserves a better share price performance. It’s a great choice for an investor who believes that sentiment towards South African stocks might improve.

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