Victoria Plc (LON: VCP) – Track record of robust growth and margin improvement.

Victoria PLC (LON: VCP) is an FTSE AIM All-Share listed United Kingdom-based multinational household goods company. The Company designs, manufactures, and distributes innovative flooring products, including carpets, ceramic and porcelain tiles, flooring accessories, artificial grass and luxury vinyl tile (LVT). It was founded in 1895 and is headquartered in Kidderminster, United Kingdom. The Company offers its products geographically, mainly in the UK, Italy, Spain, the rest of Europe, and Australia. It has several subsidiaries such as Avalon BV, Abingdon Flooring Limited, Victoria Bidco BV, Whitestone Carpets Holdings Limited, Tacktrim Limited, Munster Carpets Limited, Saloni UK Limited, Quest Flooring Pty Ltd, etc. 

The UK Manufacturing Purchasing Managers Index (PMI)

In the latest release on 2 August 2021, the UK Purchasing Managers Index (PMI) for manufacturing had a reading of 60.4, which indicates expansion in the sector. Hence, it implies a positive momentum for Victoria as well as a positive momentum for the house builders in the UK. There is currently a resilient demand for new homes in the UK, which means more demand for household goods. Hence, VCP could utilise this opportunity to drive its growth.

Growth Prospects

• Value enhancing acquisitions: The Company made several value-enhancing acquisitions over the years. Even after the FY2021 year-end, VCP acquired five companies at very attractive valuations.
• Resilient residential renovation market: Due to restrictions on travel and leisure and work-from-home trends, people are spending more on home furnishings than before. Hence, the residential renovation market has become extremely resilient, which could drive VCP’s growth.
• Rebounded house sales: House sale is a leading indicator of household goods and flooring purchase. In VCP’s main markets, house sales have rebounded. In the UK, there is a rising demand trend for new homes.
• Development of new brands: The Company has been developing new brands and enhancing its product range. It leads to the target market expansion as well as cross-selling opportunities.

Key Risks 

• Raw material price volatility: Due to uncertain market conditions, there is a raw material price volatility for the Company, which could affect its margins.
• Integration failure of acquisitions: VCP may fail to integrate the acquisitions it made recently, which could lead to an impact on its margins.
• Cyclical housing market: The Company’s demand is derived from the cyclical housing market. Hence, muted demand for new homes could affect the financials of VCP.
• Highly competitive industry: The Company operates in a highly competitive and matured industry. Hence, it could face pricing and margin pressure from its competitors.
  

Now we will analyse some key fundamental and shareholders statistics of Victoria Plc.

Recent Development 

Acquisition: On 23 June 2021, the Company announced the acquisition of Cali Bamboo Holdings Inc. It would expand VCP’s North American distribution business further.

Financial and Operational Highlight (for the year ended 3 April 2021, as of 20 July 2021)

(Source: LSE Website)

• Despite revenue decline in Q1 FY2021 due to Covid-19 lockdowns, the Company in FY2021 achieved record revenue of £662.3 million, up 6.6% YoY.
• It led to underlying EBITDA surging 7.9% YoY and underlying profit before tax rising 4.4% YoY in FY2021.
• This solid performance resulted in the Company achieving a net profit of £2.8 million in FY2021 from a net loss of £71.8 million in FY2020.
• VCP had a decent cash conversion of 49% in FY2021. It led to an underlying free cash flow of £38.8 million in FY2021.
• It helped in the Company meeting its leverage target, which was 3.1x at the year-end.
• Driven by its substantial capital for deployment, the Company completed five more acquisitions after the year-end. Each of the acquisitions is earnings-enhancing.

Financial Ratios (H2 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 3 August 2021, at 7:05 AM GMT, VCP’s shares were trading at GBX 1,050.00, at par against the previous day closing price. Stock 52-week High and Low were GBX 1,204.75 and GBX 266.00, respectively.

On a daily chart, VCP’s price is sustaining above 200-day EMA of about GBX 837.00 and 200-day SMA of about GBX 807.00, indicating the possibility of an upward movement. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last six months, VCP’s stock has delivered a decent positive return of ~44.63%. Also, it has outperformed the FTSE All-Share Household Goods and Home Construction index with a return of about 5.62% and the FTSE AIM All-Share index with a return of about 5.77%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

VCP delivered a robust performance in FY2021, despite Covid-19 induced disruption in Q1 FY2021. It has increased its revenue by 6.6% YoY, underlying EBITDA 7.9% YoY and underlying profit before tax 4.4% YoY. The Company has also made several value-enhancing acquisitions and is looking for further opportunities. The Company could benefit from its portfolio of acquisitions, resilient residential renovation market, rebounded house sales and its development of new brands and enhanced product range in FY2022.  The management believes that the rising consumer confidence in the household goods market would be sustained in the years ahead.

Considering the Company’s solid growth opportunity, its portfolio of value-enhancing acquisitions, solid demand from the customers, the better liquidity of the business than the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Victoria Plc at the current price of GBX 1,050.00 (as of 3 August 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 31.20x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The reference data in this report has been partly sourced from Refinitiv.

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