Victoria — Update 27 January 2016

Victoria — Update 27 January 2016

Victoria

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Victoria

Transformational strategy

Consumer discretionary

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28 January 2016

Price

1,080p

Market cap

£197m

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Share details

Code

VCP

Listing

AIM

Shares in issue

18.2m

Business description

Victoria is a manufacturer, supplier and distributor of design-led carpets and flooring for the mid- and premium-end markets. It has operations in the UK and Australia.

Bull

Manufacturing presence in the UK and Australia plus in-house cut-and-wrap capability supports rapid response to customer orders.

Acquisition strategy brings economies of scale, which, together with experienced operational management, is helping improve margins.

Shift to high-performance synthetic yarns improves margins by reducing loom downtime.

Bear

Flooring is a “large-ticket” discretionary item highly sensitive to a downturn in consumer sentiment.

Markets served are low growth, but supported by levels of home remodelling and improvement, not house building, which is more volatile.

151% gearing at end H116 with net debt £81.1m before £8.5m equity fund-raising; however, H116 interest cover (adjusted EBITDA/interest charges) is comfortable at 5.8x and bank net debt/EBITDA below 2.25x Nov 2015.

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Following a controversial boardroom change in October 2012, the incoming management has transformed Victoria’s profitability and growth profile. A sequence of five acquisitions in less than two years underpins the long-term strategy of becoming a major player in the UK, Australian and European markets and raising margins to industry-leading levels.

Revenues quadrupled, EBITDA margins doubled

During its first year, the new management focused on reducing the overheads of the existing businesses, eg consolidating spinning operations in Australia; cutting stock levels to free up cash and reduce warehousing costs and reviewing selling prices to ensure acceptable margins. This resulted in a swing back to the black in H114. Profits have continued to grow through a sequence of acquisitions that make the group the largest flooring manufacturer in the UK and the second largest in Australia. Annualised revenues following completion of the most recent transaction are now c £300m compared with £77m in FY12. The enlarged group is much more effective at procuring raw materials, which are a significant proportion of costs, helping raise the H115 EBITDA margin to 8.5% compared with 4.1% in H113.

More growth to come

Management intends to continue with its acquisition strategy to build the group up to around $1bn revenues over the long term. The most recent acquisition, that of Interfloor in September 2015, added complementary underlay product to the portfolio. Management notes that it would like to add hard flooring manufacturing capability and mainland European presence to the group as part of the next phase of acquisitions. In parallel, it intends to make further improvements to the cost base, focusing initially on logistics, which is another significant element of cost. The aim is to achieve EBITDA margins of c 10% during FY17, realising the industry-leading levels of 14% achieved by major US manufacturers longer term. Management policy is to keep net debt/EBITDA at c 2.0x or below, rising in the short term to facilitate acquisitions, eg reaching 2.5x at the end of H116 to acquire Interfloor.

Valuation: Trading at a discount to peers

The shares currently trade at a discount to the average for peers in the consumer discretionary sector. In year 1 the P/E peer average is 17.0x vs 15.0x for Victoria. Crucially, the gap widens in year 2 (15.8x vs 11.6x), reflecting the full year benefit of Interfloor. We believe the ratings differential reflects investors waiting to see how much more the transformation strategy can deliver; we can expect the price to respond positively if confidence about current market estimates strengthens.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

71.4

2.1

27.1

0.0

39.9

N/A

03/15

128.3

7.0

45.5

292.0*

23.7

27.0

03/16e

253.4

15.1

72.0

0.0

15.0

N/A

03/17e

305.8

22.1

93.3

10.0

11.6

0.9

Source: Bloomberg. Note: *Special dividend of 292p/share in July 2014.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: TMT

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Ebiquity

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