Italtile sales update belies strength

Its tightly-held shares may be too illiquid for larger institutions, but therein lies the opportunity for the rest of us …
A high-quality counter whose shares are trading on an unremarkable price-earnings ratio of 11.7 times. Image: Supplied

Italtile (code: ITE) seems to fly below most radars, thus you would be forgiven for not realising that the domestic integrated tiling and ceramics group has a market cap of R21 billion.

In fact, we estimate that one in every two tiles sold in South Africa comes from the group, either directly (through its Italtile, CTM, TopT and/or U-Light retailers) or indirectly (from Ceramic Industries and Ezee Tile factories).

A closer look also reveals that the group has compounded its earnings by more than 10% year on year over the last decade, while maintaining high returns on its capital and paying out a steady stream of dividends (which have also grown, by around 15% year on year over the last decade).

Return on equity (ROE) and return on invested capital (ROIC)

Sources: Refinitiv, various company reports, author’s own workings

Earnings per share and dividend history

Sources: Refinitiv, various company reports, author’s own workings

Last Monday, the group put out its customary sales update for the five months ended November 30 (five-sixths of its 2022 interim period).

Firstly, note how this update was published on December 6.

It is a good sign of the quality of day-to-day management when a company can report to the market quickly – and for a R21 billion market cap, six days after month-end is spectacularly quick.

Secondly, it is also worth touching on context. Specifically, this period comes after the tremendous DIY boom last year and thus has a very high base to compare it with.

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Also, this period includes the domestic riots in July that will have negatively impacted retail sales, and it includes the global inflationary pressures that most economies and supply chains are experiencing.

Despite all these headwinds, Italtile’s three segments held their sales or grew modestly.

The group’s Supply Chain segment was flat, Manufacturing was up 1% year on year and Retail saw 3.1% year on year growth. We estimate that this combines into likely full-year group sales growth of 1% to 2% for its 2022 financial year.

These modest figures belie the underlying strength of the group.

Not only are they high double-digits above 2020’s first-half results (we estimate group sales are 20% to 30% higher than pre-Covid levels), but management has a range of clever levers to pull to continue generating growth – in this case, profit growth (more important than revenue growth) and, I assume, also dividend growth (as the group remains ungeared and cash-generative).

Indeed, all this is in line with what Italtile’s management expected at the end of its 2021 financial year: “We anticipate that our results for the first half of the new financial year will be in line with the prior corresponding period.”

Importantly, though, management went on to say that they “anticipate delivering sales and profit growth for the full year”.

This has once again been reiterated in this sales update.

While its 2021 financial year saw a huge sales base form, the group is holding onto its gains while working its efficiencies to extract bottom-line growth.

As an integrated tiling and ceramics operation, the group has a range of supply-side, distribution and even fashion/retail levers to flex as the DIY tailwinds (perhaps) moderate and the post-riot rebuilding spending starts to appear on the horizon. And – dare I mention it – maybe even some infrastructure spending sometime …

For all its quality and promise, this sleeping giant’s shares trade on an unremarkable 11.7x price earnings.

Perhaps for the larger institutions its tightly-held shares are too illiquid, but therein lies the opportunity for the rest of us to tag along in this high-quality counter.

Integral Asset Management holds Italtile in some of the portfolios.

Keith McLachlan is investment officer at Integral Asset Management.

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