Why Victorian Plumbing has sprung a leak

And what investors can learn from this IPO gone wrong

Photo by Gabor Monori on Unsplash

When I left the IC, my original plan was to throw all of my energies into converting a collection of old barns on a rather decrepit Suffolk farm into a number of holiday lets and events spaces (look out for details of an in-person Invest-ability members event next year).

The local planners – and the launch of Invest-ability – have put the brakes on the project, which is probably a good thing as had we started building earlier, we’d have been hit by the supply chain crunch that meant shortages of all sorts of key building materials, from plaster to timber – and most importantly of all – builders.

One thing we would not have had any trouble buying was the bathroom furniture – the UK is awash with toilets, sinks and showers, which is just as well as we will eventually need at least 7 of each. And that is perhaps a clue as to what has gone wrong at Victorian Plumbing, whose shares took a nosedive after the company’s maiden final results this week.

What’s spooked the market?

Priced at 262p, the IPO valued the business at £850m when it floated on Aim. A flurry of interest saw that rise to over £1bn within two days of the placing, before a slide that’s taken the price down to the current 103p, a 61% fall from the IPO price and 69% from 330p a share peak.

Looking at the full year figures shows why the market has taken fright. Second half trading slowed dramatically – full year sales of £269m meant second half sales came in at £128m – 9% lower than in its first half.

The company said that the easing of Covid restrictions in the summer had led to “more subdued market conditions,” which after an improvement in September had continued into the current financial year as “consumers have continued to spend more on leisure and less on big ticket material homeware purchases”. It also said that although it had invested lots in inventory, and would be able to absorb supply chain pressures, gross margins would retreat to 2020 levels, which is around 44% from the 49% reported in FY2021. The market forecasts it points to don’t seem to acknowledge that the pandemic may have pulled some demand forward.

Brokers’ may have needed new red pens to adjust their forecasts – they’re now expecting just over 5p a share in 2022 rising to 7.7p in 2024, both well below the 11p delivered (after adjusting for hefty IPO costs and share based payments) in FY2021.

Were the signs there?

Should we be surprised? Perhaps not, and here’s what we could have spotted in the Admission Document that may have save investors a few quid and which hopefully offer some lessons for how you can avoid IPO pile ups in future.

  1. Ask why the business was being floated in the first place. In Victorian Plumbing’s case the answer was to unlock value for the selling shareholders who raised £285.9m of aggregate gross proceeds from the placing of their shares. Conversely, just £11.6m of gross proceeds were raised for the company. A £12m pre-IPO dividend to the founders was the cherry on top, and recent director buying is hardly a signal of confidence given how much they’d already taken out.
  2. Ask where any proceeds raised for the company are being spent. In Victorian Plumbing’s case, the £11.6m proceeds were mostly to be used to pay for the chunky costs of the IPO process itself. Not a single penny of the IPO would be used to fund the “next stage of [the company’s] development,” as it refers to it in a statement in June. It had mentioned expansion into Europe – perhaps this stumble will halt those ambitions, which is probably a good thing given how disatrous European ventures have proved for so many other UK retailers.
  3. Ask who’s buying. Victorian Plumbing said the “significantly over-subscribed” placing had been supported by “high quality” institutional investors. No disrespect intended, but I’d never heard of the Los Angeles-based Kayne Anderson Rudnick, one of the very few investors it identified before the IPO. JPMorgan Asset Management, which also participated, seems to have been selling down its stake ever since.
  4. Ask what the market looks like. Victorian Plumbing spoke of a “large and growing” bathroom products market. But it admitted to having a mere 14.2% market share of the £1.4bn market, which is expected to grow to £1.6bn by 2025 – hardly vast, and not very much bigger than Victorian Plumbing’s market cap at its peak. And as there is lots of competition this means pricing is a key differentiator. That’s always a threat to margins, because of discounting and the need to generally increase marketing expenditure, which costs it 26% of revenue and is likely to rise as suppliers compete for more subdued post-pandemic levels of home improvement activity.
  5. Ask why the company is different to its competitors. Perhaps Victorian Plumbing does something unique that means it isn’t dependent on price to gain market share and can protect its business with some kind of economic moat.It talked about a highly recognisable brand, lots of more-profitable own brand sales in its mix, and strong digital expertise supporting marketing and customer service. But are any of these really unique to Victoria Plum…sorry, I meant Victorian Plumbing?  
  6. Ask whether the valuation stacks up. I’m struggling to locate the forecasts that were issued when the company floated – but even if we assume expected earnings per share were at or around the 11p it eventually delivered, the shares would have been valued at a peak PE of 30. That’s demanding a lot of a company in a commoditised market whose pre-tax margins barely scrape 10%. The company talks of operating leverage in its latest presentation, but that’s not hugely evident in its figures.

None of this is to say that Victorian Plumbing isn’t a good online retailer of bathroom products – it’s just that the sale of bathroom products, like many big-ticket homeware items, is a fiercely competitive market. Over the years I’ve watched all of the major DIY chains flounder, and lots of the specialist ones too, like Carpetright and Topps Tiles. I struggle to see how Victorian Plumbing will scrub up any better in a domestic improvement market prone to constant ups and downs.

Victorian Plumbing’s pre-IPO figures

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