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Italtile Ltd28 February 2018

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Contents

1. Nature of business

2. Recommendation

3. Financial review

4. Divisional review

5. Company guidance

6. Portfolio guidance

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Nature of business01

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Nature of business

• Franchisor and retailer of:

- Local and imported tiles

- Sanitaryware

- Bathware

- Laminated flooring

- Other related home-finishing products

• Retail brands consists out of:

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Nature of business

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Recommendation02

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Recommendation

• Fully valued trading at historic P/E of 16 times and 3.4 times its NAV

• Solid operating margins, high return of equity (ROE) and historically good cash generation

• Retail operations strategically supported by:

- Vertically integrated supply chain

- Investments in key suppliers

- Extensive property portfolio.

• Impressive track record despite competitive environment

• Stronger rand will lead to an increase in imported products

• General oversupply situation across market contained by shortage of containers, shipping delays and supply disruptions in China

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Recommendation

• Price-rivalry and margin pressure persisted

• Group performs well in this trading environment- Brand portfolio extends across the income spectrum

• Efficiency gains relating to group’s Business Optimisation Programme (BOP)- Continue to help relieve margin pressure

• Online shopping has created a more price-savvy consumer - Changed consumers’ expectations of in-store experience

- Group has remained dynamic with regard to this

- Continues to invest in customer shopping experience

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Financial review03

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Financial review

• System-wide sales ↑ 22.0% y/y to R4.2bn- Like-for-like (LFL) down 4%, price deflation of 1%

• Manufacturing sales contributed R1.1bn to total sales• Gross profit ↑ 36% to R1.1bn

- Higher gross margin of 25.1% (H1FY2017: 22.4%)

• Operating profit ↑ by 31% to R716m,- 3% decline in LFL operating costs

• Adjusted operating margin ↑ to 16.8% (H1FY2017: 15.7%)

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Financial review

• Supply chain efficiencies and well managed overhead costs helped to absorb - Impact of currency volatility - Higher industrial input costs

• Profit before tax ↑ by 25% to R706m- Net finance expense of R10m (Income H1FY2017: R13m)

• Headline earnings ↑ 17% at R507m• Diluted HEPS ↑ 6% to 48.4cps

- Limited by 10% increase in weighted average number of shares in issue- Share issue to fund acquisition of Ceramic Industries

• Interim dividend ↑ 6% of 17cps (in line with HEPS growth)

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Divisional Review04

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Divisional Review

• Retail: • Retail sales declined by 1% to R1.7bn • Gross profit up 2% to R597m

- Gross margin up 100bps to 35%

• Net profit before tax (PBT) up 27% to R167m- Higher profit margin of 9.8% (H1FY2017: 7.6%)

• CTM:- Decline in market share and sales- Constrained consumer spending - Improved operating profit and margins

• Italtile:- Sales improved - delayed projects were reinstated - Improved market share - Improved profit and margins despite price deflation

• Top T:- Improved sales, profits and margins - Better merchandise range and consistently good in-stock-levels

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• Franchising: • Turnover higher at R1.4bn

• PBT down by 2% to R182m,

• Lower net profit margin of 12.8% (H1FY2017: 13.1%)

• Supply Chain: - Turnover down by 23% to R939m

- Gross profit declined by 6% to R90m

- Higher gross margin of 9.6% (H1FY2017: 7.9%)

- Net PBT down by 50% to R74m

- Lower net profit margin of 7.9% down (H1FY2017: 12.1%)

Divisional Review

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• Manufacturing: • Acquired additional 74.5% interest in Ceramic (total consideration of R3.5bn)

• Increasing effective shareholding to 95.5%

• Group obtained a controlling stake in Ezee Tile

• Sales and gross profit amounted to R1.1bn and R597m• Gross margin of 26.3%

• Net PBT R179m• Net margin of 16.8%

• Importing: • Adverse impact on sales and profitability due to de-stocking activities

• Margins under pressure due to limited price increases to support cost-conscious consumers

• Property: - Twelve new stores added (total store network 174 stores)

• Property portfolio estimated market value of R3.5bn (H1FY2017: R2.6bn)

Divisional Review

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Company guidance05

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Company guidance

• Management indicated that macroeconomic environment remains challenging

• Better H2 performance

- Recent initiatives which were implemented

• Add 10 new stores in H2

- Increasing total number of stores opened in FY18 to 22 stores

- Exceeding prior guidance: 20 stores

• Awaiting approval for the acquisition of CTM Tanzania business

• Order books for group’s manufacturing businesses are growing

- Should support higher sales, improved profits and margins

• Focus on integrating newly acquired business and realising synergies

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Portfolio guidance06

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Portfolio Guidance

Source: Bloomberg

• Capped Swix weighting of 0.12%• Recommended portfolio exposure of 0.00%

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Disclaimer

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