Topps Tiles still undervalued by 36%

After a difficult few years, and despite numerous false dawns, Topps remains a great business and the shares should go higher still, reports Graeme Evans.

Named at the start of 2018 as a value stock to watch, the performance of high-yielding Topps Tiles has been anything but eye-catching this year.

The stock fell by 40% between March and July, depressed by difficult trading conditions and fears that continued sales disappointment could threaten a dividend that presently yields about 5%.

Today, however, the company had reassuring news for investors when it revealed that a robust fourth quarter performance would leave profits slightly ahead of top-end City hopes for the year to September 29.

Shares jumped 12% to touch the 70p barrier for the first time since June. Investors have experienced plenty of false dawns in the past, most notably after better-than-expected trading figures in November.

With Peel Hunt also picking Topps in January as one of its value stocks to own in 2018, shares rose 50% in the wake of the results last autumn. Having fallen back since then, the shares again look cheap with a price earnings multiple of 9.8x.

Analysts at Liberum raised their target price by 5p to 95p following today's update, while they also lifted their 2018 profits guidance by 5% to £15.5 million.

The house broker said: "Topps continues to demonstrate that it remains very well positioned to benefit when a more sustained market recovery takes hold.

"The group's market leading proposition continues to resonate with consumers and there has been good progress in developing the longer-term opportunities within the UK commercial tile market."

Recent strategic progress reported by Topps includes the launch of 25 new product ranges and upgrades to merchandising best practice at 150 stores out of a 370-strong estate.

It said the development of its new commercial tiling business has "continued at pace" following the acquisition of Parkside Ceramics in September last year.

Chief executive Matt Williams says commercial will be an important source of future growth, while the core Topps Tiles business is "a well invested, cash generative market leader with a proven strategy".

This helped deliver like-for-like revenues growth of 1.2% in the 13 weeks to September 29, albeit against favourable comparisons a year earlier when revenues were 3% lower on a same-store basis.

Today's update is particularly significant as it shows that shopping patterns have returned to normal after a summer dominated by hot weather and the World Cup.

Even so, the economic uncertainty means the company will remain cautious, leading to a continued focus on margins, cost control and cash generation. Last year's dividend of 3.4p a share was covered more than two times by earnings.