Our opinion on the current state of ITE

Italtile (ITE) operates as a franchisor in the market of tiles, sanitary ware, flooring, and home finishing products, encompassing manufacturing and wholesale distribution. It is under the control of the Ravazotti family and boasts a network of 206 stores, alongside six online web stores. The company also holds a property portfolio with retail and industrial properties valued at approximately R4.3 billion. Notably, Italtile has successfully acquired 95.47% of Ceramic Industries and 71.54% of Ezee Tile, referring to these as its "manufacturing" business, distinct from its "retail" business.

The company has been adept at increasing its "share of wallet" while optimizing inventory management and working capital. The ongoing trend of people working from home and a heightened focus on enhancing living environments has contributed to increased sales. Italtile has plans to add between 10 and 15 new stores during the current year. Additionally, the company executed share buybacks totaling around R240 million at lower price levels.

Italtile faced challenges due to civil unrest, with 18 stores in Natal and 16 other stores closed for 10 days. Two stores in Orange Farm and Spruitview were damaged during these events. The company also contended with store closures due to the COVID-19 pandemic in July 2021.

In the financial results for the year ending June 30, 2023, Italtile reported a 1% increase in turnover but a 13% decrease in headline earnings per share (HEPS). The net asset value (NAV) surged by 12% to 642 cents per share. The company cited a 6.7% selling price inflation rate and a 5.6% decrease in gross profit margin due to weaker consumer demand and inefficiencies in the manufacturing business.

In a sales update for the five months ending November 30, 2023, Italtile noted a 2.9% decrease in turnover, with manufacturing sales declining by 5.9%. In a trading statement for the six months ending December 31, 2023, the company estimated a HEPS decline ranging from 13.1% to 17%.

From a technical perspective, Italtile's share price moved sideways for two years, but the onset of COVID-19 pushed it down to levels around R10. Subsequently, it has experienced a period of sideways movement with a downward trend in recent months. The current price around 1131 cents per share, coupled with a P:E ratio of 8.55, presents a significant buying opportunity. However, it is advisable to wait for a clear breakout above the current downward trendline before considering an investment.