Overview
Victoria PLC (VCP) is a Worcestershire, United Kingdom-headquartered leading designer, manufacturer and distributor of innovative flooring products, including carpets, ceramic and porcelain tiles, flooring accessories, artificial grass and LVT (luxury vinyl tile). It is known for supplying its products to the mid-to-high end of its respective markets and selling primarily direct to retailers. The group was originally founded as a carpet manufacturer in 1985 and was admitted to the AIM market of the London Stock Exchange in 2013, and has now become the largest manufacturer of carpet in the UK and the second-largest in Australia as it is diversified geographically and by product to become a major player in wider flooring arena. Across more than 20 sites, it employs approximately 2,600 people and has operations in the UK, Europe and Australia.

The business is overwhelmingly focused on the home improvement market, and more than 300 customers in the UK range from independent retailers to distributors and large format chains like John Lewis. The ability to cross-sell bundled products and leveraging the distribution networks, allow it to enjoy commercial synergies and enabling it to transfer the best operating practice between acquired businesses to drive like-for-like margin improvement. Across several different brands, styles and price points, it offers a range of leading quality and complementary flooring products, with sales teams across each brand and product range.

Key Statistics



Management

Geoff Wilding is the Executive Chairman of the group since October 2012. The Chief Executive Officer of the group is Philippe Hamers. The CEO is supported by Michael Scott, who is the Group Finance Director.

Segments

The operations of the group are differentiated in three operating segments, namely Australia, UK & Europe Ceramic Tiles and the UK & Europe Soft Flooring. Australia includes the sale of soft flooring products in the region, UK & Europe Ceramic Tiles includes the sale of Ceramic Tiles and related products in the region, and the sale of soft flooring products in the UK & Europe is covered under UK & Europe Soft Flooring.

Top Shareholders


 (Source: Thomson Reuters)

Recent Development

The company on 06 August 2019 announced that it had acquired the business and certain assets of high-quality Spanish ceramic flooring manufacturer, Iberoalcorense, S.L, and the purchase price for the acquisition would represent a multiple of less than 5x EBITDA for the 12 months prior to completion. Iberoalcorense manufactures high-quality porcelain ceramic flooring, which is sold both domestically and internationally and is strategically close to the existing Spanish ceramics manufacturers of the group, Keraben and Saloni.

Financial Highlights (FY 2019, in £m)

 
(Source: Company Filings)

Revenue grew by 35% versus the prior year to £574.4 million(FY 2018: £424.8 million), driven by a number of organic commercial initiatives and acquisition in ceramic tiles during Q2, while the revenue growth at constant currency was reported at 36.9%, against 28.1% in the prior year. Even as the cost of sales rose considerably to £370.1 million in the FY 2019 from £279.4 million in the previous year, gross profit grew by 41% to £204.3 million (FY 2018: £145.4 million). Unadjusted operating profit for the year was £24.0 million (FY 2018: £26.4 million). Statutory loss before tax was £3.7 million (FY 2018: profit of £13.4 million), which was due to a number of non-cash, non-underlying finance items totalling £14.6 million and an increased interest costs of £5.1 million resulting from acquisitions. The company reported an underlying profit before tax of £57.2 million (FY 2018: £40.8 million) and delivered an underlying operating profit for the year of £70.3 million (FY 2018: £48.8 million). Underlying EBITDA for the year stood at £96.3 million, which reflected a growth of 49% predominantly driven by acquisitions and the current year contribution of Saloni. Underlying profit after tax during the period was £43.3 million against £31.6 million reported in the prior year. Adjusted earnings per share on a fully-diluted basis increased by 15.2% from 30.61p to 35.25p, while the group delivered a basic loss per share of 6.44p (FY 2018: reported earnings per share of 8.58p) due to material exceptional and non-underlying costs in the year. Due to the acquisition of Saloni and the organic investment in the synergy projects, compared with £258.7 million as at the previous year end of 31 March 2018, the net debt position was £339.9 million as at 30 March 2019.

Segmental Analysis
                                                              
(Source: Company Filings)

While the Australian market was impacted by tighter mortgage lending caps put in place by the Australian Prudential Regulation Authority in 2017, the UK market was impacted by softer consumer activity resulting from Brexit uncertainty and leading to a challenging trading environment in FY 2019 as compared to the prior year. Like-for-like revenue performance in the UK & Europe Ceramic Tiles remained resilient, with a small decline of -1.3% and the company delivered like-for-like growth in revenue of +7.3% in the UK & Europe Soft Flooring. However, like-for-like growth in revenue in Australia reported a decline of 6.9%.

                                                             
 (Source: Company Filings)

The UK & Europe Ceramic Tiles reported a considerable increase in the gross profit to £87.5 million, which was driven by the acquisitions made, but gross margin declined marginally to 45.1%. Underlying EBITDA also rose to £59.2 million, while the margin declined to 30.5%.

The UK & Europe Soft Flooring reported a gross profit of £88.9 million, which remained flat over the year, while the gross margin declined to 31.7%. Underlying EBITDA also fell to £29.2 million, with a decrease in the margin to 10.4%.
Gross profit from Australia declined to £27.9 million, after delivering several years of consistent growth, while gross margin declined to 27.8%. Underlying EBITDA from the region reported a fall as well, declining to £9.5 million, with a margin of 9.5%.

Financial Ratios


                           
(Source: Thomson Reuters)

The gross and EBITDA margins of the group increased over the years and have consistently been better than the industry. However, the net margin and return on equity were negative during the year, which reflected material adjustments made during the period. The quick ratio was better than the industry, which indicates a higher proportion of liquid assets available with the company. However, the company was more indebted than its peers, which was partly because of acquisitions made by it. The asset turnover was also lower, suggesting that the company can improve its financials by better utilising its resources.

Valuation Methodology
Method 1:EV/EBITDA Multiple Approach (NTM)



To compare VCP with its peers, EV/EBITDA multiple has been used. The peers are Character Group PLC(NTM EV/EBITDA was 3.61), Tyman PLC(NTM EV/EBITDA was 6.44), Crest Nicholson Holdings PLC(NTM EV/EBITDA was 7.16), Portmeirion Group PLC (NTM EV/EBITDA was 8.37),and Kingspan Group PLC(NTM EV/EBITDA was 15.75) The mean of EV/EBITDA (NTM) of the company’s peers was 8.27x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare VCP with its peers, Price/Earnings multiple has been used. The peers are Tyman PLC(NTM Price/Earnings was 7.34), Character Group PLC(NTM Price/Earnings was 8.03),Crest Nicholson Holdings PLC(NTM Price/Earnings was 9.36), Portmeirion Group PLC(NTM Price/Earnings was 11.45), Mohawk Industries Inc(NTM Price/Earnings was 11.71), Howden Joinery Group PLC(NTM Price/Earnings was 16.52), and Kingspan Group PLC(NTM Price/Earnings was 22.29). The mean of Price/Earnings (NTM) of the company’s peers was 12.39x (approx.).

Share Price Commentary

 
Daily Chart as at 22-October-19, before the market closed (Source: Thomson Reuters)

On 22 October 2019, at the time of writing (before the market closed, at 12:31 pm GMT), VCP shares were trading at GBX 467.70, up by 0.50 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 638.50/GBX 315.00. The company's stock beta was 1.64,reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £581.85 million.

Growth Prospects and Risks Assessment

The company is relatively insulated from the more cyclical industries like construction, as the business is overwhelmingly focused on the home improvement market. It helps the group to sail away relatively easily in the face of economic downturn, the risk of which has increased significantly in the recent months. Moreover, the business is able to respond quickly to changes in demand as only 10% of its cost base is fully fixed, and manufacturing facilities are well-invested and highly efficient, allowing the group to vary production levels as appropriate, in order to maintain a low level of operational gearing. The group has taken note of the recent pressure on the financials due to various reasons in its markets and has taken appropriate steps to counter it. However, the company faces pressure on pricing and margins due to the mature and highly competitive markets it operates in, and material adverse changes in certain raw material prices could affect the profitability of the group. Moreover, economic conditions within the geographic areas within which it operates influences the operating and financial performance of the company and can face uncertainty in the medium-to-long term in light of Brexit.

Conclusion

Over the last decade, the stock has been one of the top performers in the market and has reported a CAGR growth of 51.74% in revenue in the last five years. While gross profit grew at a CAGR of 57.92%, operating margin was up at a CAGR of 53.68%, suggesting improved efficiency.

Based on the decent prospects and supported by valuation done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 464 (as on 21 October 2019) with single-digit upside potential based on 8.27x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 12.39x NTM P/E multiple (approx.) on FY20E earnings per share (approx.).
 
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 22-October-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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