ITALTILE: Building on a better foundation
Just when it looked like things would never improve for SA’s beleaguered building-supplies sector, a much-needed boost — in the form of Cyril Ramaphosa being named ANC president — seems to have saved the day.
"Until late last year conditions were exceptionally weak," says John Loos, FNB household and property sector strategist. "The building and renovations sector will not shoot the lights out but sentiment has now improved all round."
Italtile, SA’s largest tile retailer and manufacturer, is already seeing signs of improvement.
"High-income earners who last year held back on spending are back in the market," says Italtile CFO Brandon Wood. "In our relatively small commercial division we are also seeing projects that were put on hold now coming back on stream."
Italtile, which has a tile retail market share of about 45%, serves the market through its high-end Italtile, midmarket CTM and lower-end TopT brands.
MD of Spar Group’s Build It division, Wayne Hook, also puts a positive slant on market conditions. "There has been only a slight improvement but things are moving in the right direction," he says.
In the 17 weeks to January 27, Build It recorded a solid 7.2% rise in sales.
In its half-year to December Italtile posted a modest 5% rise in headline EPS. But it was a half-year of momentous change for Italtile. Included from October 2 were the consolidated results of Ceramic Industries.
Italtile upped its stake in the tile manufacturer from 20% to 95.5% in a R3.61bn deal, of which half was funded through the issue of new ordinary shares and the balance in cash underpinned by a R1.59bn rights issue. In a full year Ceramic should add more than R5bn to Italtile’s R6bn revenue generated by its owned and franchised stores.
The Ceramic deal is a game-changer for Italtile, says Old Mutual Investment Group’s Warren Jervis.
"The market is missing the scale of Ceramic," says Jervis. "It is a huge asset for which Italtile actually underpaid. It has placed them in an unassailable position."
Wood is as enthusiastic. "Having control of our supply chain from the factory gate to the point of sale in stores provides us with a big competitive advantage," he says. Ceramic supplies 80% of Italtile’s requirements.
High local content brings other advantages, not least of which is Italtile’s ability to react swiftly to changes in consumer preferences at a time when imported products are subject to protracted lead times. "At the end of the day we are a fashion retailer," says Wood.
He is looking for a solid improvement in Italtile’s second-half results to June. One reason for his optimism is the completion of a right-sizing of stock levels in the first six months.
Caught off guard by a slump in demand in 2017, the group found itself heavily overstocked. "We are now a lot more comfortable with our stock level," says Wood. "We will now put more [demand] pull on our supply chain, which battled in the first half."
Italtile is also continuing with its rapid rollout of TopT stores, most of which are franchised. "We have a pipeline of about 10 TopTs in the second half of the year," says Wood. It will take TopT store numbers to 84, against 70 CTM stores and 12 Italtile stores.
Wood says the TopT stores are attractive to franchisees because of their low-cost business model, with little by way of expensive shopfitting. Franchisees are also entering a market segment that has been very underserved.
"TopT has experienced no fall in demand," says Wood. "Lower-income groups continue to invest in their homes."
Only the middle-income market segment, served by CTM stores, has yet to show signs of recovering, though it is holding "stable at weaker levels", says Wood.
But Italtile has no intention of staking its future on the SA market alone. With R562m in cash on its ungeared balance sheet it is looking further afield.
"We are able to look at expansion outside of SA," says Wood. "We have very ambitious plans for the next five years. For example, we can ramp up in East Africa."
With Italtile’s price trading within 5% of a new high and on a 16 p:e, its followers are looking to the group to sustain its record of excellent long-term growth.
They appear unlikely to be disappointed.