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magazineVictoria’s a compelling growth yarn
Shares views the global growth scope and future dividend paying potential of innovative flooring specialist Victoria (VCP:AIM) as underappreciated. Take advantage as the design-led carpets-to-hardwood flooring manufacturer ahead of further earnings upgrades and acquisitions in a fragmented global flooring market.
Victoria has achieved scale in carpet manufacturing through acquisitions and is now turning its attentions to growing its hard flooring business.
In a real coup, the £485m cap recently hired seasoned flooring industry operator Philippe Hamers as CEO, enabling executive chairman Geoff Wilding to focus on acquisitions. In response to rapid growth, Victoria has also kick-started a reorganisation of its UK production and logistics that will also increase capacity, drive efficiencies and boost cash flow.
ON A ROLL
Better-than-expected full year results (25 Jul) showed revenue up 29.5% to £330.4m and a 61% surge in underlying profit before tax to £29.4m, reflecting organic growth and earnings enhancing acquisitions. The second half performance was boosted by contributions from acquired underlay makers Ezi-Floor and Dunlop.
Going forwards, the acquisition of Dutch artificial grass businesses GrassInc and Avalon has positioned Victoria in a rapid growth, high margin European artificial grass market. With scale now achieved in carpet manufacturing, Victoria is turning its acquisitive attentions to higher margin hard flooring in Europe.
FORMIDABLE CASH FLOW
Last year, Victoria generated £23.7m of underlying free cash flow, equating to more than 100% of underlying profit after tax. The charismatic Wilding reminds investors that in 2006, Warren Buffett acquired leading flooring manufacturer Shaw Industries for its prodigious cash flow. Well-run flooring makers generate oodles of cash due to attractive supplier terms, quality debtors and the long life of their manufacturing assets.
Victoria currently trades without a dividend, management’s focus being on industry consolidation and paying down debt which remains manageable – the net debt to earnings ratio is comfortably below 2 times. In the medium-term however, Victoria’s formidable cash flow means it will be capable of paying an attractive dividend indeed.
For the year to March 2018, Cantor Fitzgerald Europe forecasts pre-tax profit of £38.2m and earnings per share of 31.3p, rising to £40.2m and 32.9p respectively by March 2019. Despite a series of upgrades in recent years, Shares believes consensus estimates are conservatively pitched, as canny Wilding likes to under-promise and over-deliver.
A prospective PE of 17.4 doesn’t immediately scream value but we’re increasingly bullish about Victoria’s global growth potential, cash generation and future dividend-paying potential. Buy at 545p.
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