Could this penny share bounce back thanks to one potential masterstroke?

Loos and kitchens are right here to remain, which is sweet information for the long-term well being of the tile business. However over the medium time period, demand for tiles ebbs and flows. That has dampened investor enthusiasm for one penny share I personal, Topps Tiles (LSE: TPT).

Regardless of providing a 7.6% dividend yield, the share has fallen out of favour with the Metropolis and is now 28% cheaper than it was 5 years in the past.

But this month it quietly pulled off what might but become a enterprise masterstroke, in my view.

Confirmed enterprise mannequin

Topps had been constructing its measurement in recent times. Final 12 months’s gross sales revenues had been its highest ever. The corporate now sells one in 5 tiles throughout the nation.

However the tile market has been struggling these days. Topps estimates that it’s 10%-15% down in comparison with final 12 months.

Topps has been taking market share. However not all rivals have completed as effectively. CTD Tiles Restricted went into administration final week. Topps has acquired the model, 30 of its retailers, chosen inventory, and associated mental property from the directors. Whereas it didn’t disclose phrases for the deal, given the circumstances I anticipate that the worth was low-cost.

The transaction stops different rivals getting these property. It ought to increase Topps’ revenues and provides it extra economies of scale. The retailers it acquired had gross sales of round £20m final 12 months, equal to over 7% of Topps’ complete revenues.

However what I believe is most enjoyable right here is the growth of Topps’ architectural and designer enterprise in addition to its expectation that the deal gives “a significant entry into the housebuilder phase”.

The true worth of the acquisition may not be in its retail elements, however in including important scale to Topps’ bulk commerce gross sales.

Probably transformative deal

That brings dangers, comparable to probably lean revenue margins in comparison with the retail enterprise.

However Topps just isn’t taking up any new debt to fund the deal and I believe it might add substantial gross sales quantity in coming years. It additionally brings in experience to the corporate in areas the place it has historically had a weak presence. In the meantime, the prevailing Topps enterprise continues to learn from a robust retailer community and digital footprint in addition to a big buyer base.

Promoting extra into the constructing commerce might mitigate a number of the seasonal dangers current within the present enterprise mannequin, particularly given the anticipated sturdy housebuilding exercise within the UK over coming years.

Integrating the non-retail enterprise might be tough but when completed effectively – and Topps has a observe report of delivering on its strategic goals – it might be a serious progress driver for the corporate.

As its penny share standing suggests, Topps nonetheless has quite a bit to show. Ongoing weak demand is a threat to gross sales and earnings and integrating the acquisition will take effort and time.

However I believe this was a wonderful strategic transfer and plan to hold onto my Topps tiles shares.