Italtile (ITE) reported lower top-line growth but improved margins due to stringent cost-control measures in 1H25. The half was underpinned by a tough trading environment in the first quarter, but this was partially offset by a stronger festive trading period.
Retail turnover was buoyed by strong demand during the festive period, with retail sales growing ahead of the Hardware market, as measured by Stats SA. We believe this was primality driven by Two-Pot retirement withdrawal spending, particularly in decorative products. The group is overstocked by c. R200m, with clearance sales being implemented to reduce inventory. This could adversely affect Retail GPM, as ITE was unable to pass on price increases during the period.
The Manufacturing segment continues to weigh on the group’s results, with the Vitro and Samca Wall factories mothballing one kiln each due to subdued demand and rising unit costs. It is likely that ITE will decide to mothball more kilns in an attempt to contain costs and protect margins. At the same time, the group is aware of changing fashion trends towards rectified tiles, and it is adding rectification lines to produce large-format rectified tiles to compete with products made by Chinese manufacturers.
Sasol has extended its supply of LNG from 2027 to June 2028, which should provide some relief to ITE as it tries to find a long-term solution to its energy needs at Ceramic Industries. Any alternative, such as converting kilns for coal-to-gas technology, will elevate capex, but ITE has been increasing its cash balances, likely to fund energy initiatives without having to use debt. Coal-to-gas conversion is expected to lead to an outflow of R100m per kiln, or c. R1bn to convert all kilns in the manufacturing facilities.