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Last week was an interesting one for owners of a well-known penny stock, including me. Yes, it has fallen 45% in five years and the largest shareholder is reportedly unhappy with the way the business is run. But management laid out reasons suggesting the 6%-yielding stock may be undervalued and could potentially take off.
The penny in question is Topps Tiles (LSE: TPT). The name is well known to many of us, either as clients or simply because we have seen the company's showrooms at some point. After all, Topps sells one in every five tiles purchased in the UK.
Strong ambition, based on a proven strategy
That was the result of a strategy to target 20% of the market that the company established and successfully achieved in recent years.
As announced this week, the company is now targeting £365 million in annual sales. Not only is that an average of £1 million worth of tiles per day, but it would also represent 47% growth over last year's adjusted revenue. This is ambitious by any standards and especially considering that adjusted revenues last year fell 5.4%, albeit from a record level.
A continued digital push and the acquisition of parts of a failed competitor (currently under regulatory scrutiny) could help boost Topps' sales.
Topps performance is not the best
However, Topps has disappointed in more ways than one. Not only did adjusted revenues fall last year, but a £6.8m after-tax profit the previous year turned into a £16.2m pre-tax loss this time around. Meanwhile, adjusted net cash fell from £23.4m to £8.7m.
Unfortunately, the dividend per share fell by a third to 2.4p. Given its penny status, that still equates to a 6% yield. After its weak interim results, I thought there might be a dividend cut and indeed it happened. Still, I think that cut is bad for investor confidence and helps explain the 19% drop in Topps' share price so far in 2024.
The company is targeting a difficult market and the cyclical nature of tile demand is indeed a risk I see, especially if the real estate market slows down. It also noted last week that while sales have declined, its overall market share has been growing. The acquisition I mentioned above should help with that.
Still, the company has seen a drop in sales, fell into the red last year and has reduced payout to its shareholders. They are rarely signs that a company is performing at its best.
I'm holding on
So it's no surprise that Topps' largest shareholder continued its long-running dispute with the company over how management is doing.
With the maximum stake allowed without mounting a takeover bid, the long-term shareholder's focus is understandably on Topps' performance. I think that could help the company over time (if you listen).
I continue to like Topps' strategic ambition, its strong market position and its relatively simple business model.
So while I see the risk of even weaker performance, I consider the penny stock to be a good value from a long-term perspective and plan to hold on to my stake. I think it has fallen more than its long-term prospects deserve.
