Likewise acquisition enhances growth says Zeus Capital


Likewise Group plc (LON:LIKE) announced (15thDecember 2021) the acquisition of Valley Wholesale Carpets (VWC) for a maximum consideration of £30.0m. The business expands the company’s footprint through its operations in the South East and East Midlands and makes it the clear second largest player in the £2bn UK flooring market, with c. 5.5% market share. In normalised trading conditions, VWC has historically generated c. £35.0m of revenue and c. £3.0m EBITDA but achieved £5.0m PBT in FY21 on the back of a covid tailwind in demand. The 2022 outlook for UK consumer spending is unclear, as a result ZC estimates assume normalised trading in both Likewise and VWC as well as factoring in a material step up in investment to capitalise on strategic opportunity the acquisition presents, it will be focused on the sales and marketing areas. Despite this, the deal is immediately earnings accretive, ZC FY22 revenue increases 35% to £110.0m whilst earnings increase c. 21% to 1.3p.

  • Strategic acquisition underpins growth potential: The acquisition of Valley Wholesale Carpets (VWC) is material, adding c. £30m of revenue and taking the Group to over £100m. It brings in three new sites, balancing the property portfolio between freehold and leasehold, and deepens exposure in the South East and East Midlands, areas where Likewise had been underweight. Overtime, there will be revenue and operational synergies, but the immediate benefit is the scale it brings. Investment is being brought forward to capitalise with Birmingham, Manchester and Glasgow operations being expanded. The next piece of the jigsaw remains a distribution centre along the M4 corridor. Once finalised the business will have the footprint to do well in excess of £200m in revenue. The Likewise Group balance sheet is robust and could fund bolt on acquisitions to enhance the regional offering.
  • Materially earnings accretive in the forecast period: ZC increases FY22 revenue by 35% to £110.0m, despite taking a conservative approach of the contribution from VWC in its first year of ownership. This results in an increase to operating profit of c. 42% to £4.5m. The impact to earnings per share is more muted, due to the £16.0m equity raise to help fund the deal, but remains over 20%. In FY22 and FY23 the uplift to profitability remains above 30%. The previous assumption of a 25% dividend pay-out ratio is maintained, despite the fund raise, meaning the dividend increases in line with earnings across the forecast period.    
  • Valuation: The Likewise Group valuation of 34x current year earnings reflects the growth of the business and strength of the management team. Earnings increase 67% in FY22 from a combination of organic growth and the contribution from VWC.
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