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Low oil price environment should allow Tarkett to improve its financial performance

  • 20 Jan 16

h1. Business Tarkett has a €1.5bn market cap. It is the third largest manufacturer of flooring and sports surfaces (namely “Resilient” but the clear leader when considering the broad portfolio of products and geographical reach. Thanks to its high exposure to the renovation market (c.80% of sales in sqm), the company remains fairly resilient to the construction cycle. On the negative side, the company is absent from the residential carpet and the ceramic markets, which reduces its potential market by two-thirds. We estimate that Tarkett has a 10% to 14% global market share when considering only its end-markets. The company has a multibrand distribution strategy (global and national brands adapted to the distribution strategy implemented in each market) and management believes that it has the strongest brand portfolio. Brand awareness among installers and sales advisors is the key to maintaining market share and solid margins. This explains the high proportion of sales people amongst employees (c.10% of overall employees). The two other strengths of Tarkett’s business model is the diversified mix of distribution channels as well as its local manufacturing facilities (35 industrial sites) in each of its principal geographic regions. h1. Recommendation and upside Thanks to the overall decline in equity valuations, we are initiating coverage of Tarkett with a buy recommendation and 16% upside. One month ago, we would have initiated Tarkett with the same target price but with a lower recommendation. h1. The weak oil price environment acts as a strong catalyst to profitability In 2012 (last available information), purchases of raw materials represented 61.9% of the cost of sales, of which 74% relate to oil-based products, namely PVC and plasticisers. Hence the company should enjoy a significant benefit from the low oil price environment. We estimate that the 75% decrease in oil price should result in a c.20-30% decrease in the overall cost of sales, which should allow the company to increase its profitability and reduce the selling price of its products. h1. Need to know The two main shareholders are the Deconinck family (50.2%), namely the heirs of Mr Allibert, the founder of the company, and KKR (21.5%). The company’s bylaws provide for double-voting rights for registered shares held for more than two years by the same holders from 22 November 2015. As a consequence, the power of other shareholders is fairly limited. In our opinion, KKR could sell its remaining stake as soon as it is satisfied with the valuation, implying an overhang on the potential upside.