TPW has decided to leverage its online expertise in an attempt to capture a share of the large home improvement market.
The scope of TPW’s target market is estimated at more than $16 billion, which leaves it some way short of the A$79 billion and NZ$15 billion ‘Interconnected Home and Lifestyle; Commercial’ market that Bunnings serves.
Bunnings is not the only competitor in this market. Mitre 10, IKEA, Reece, Spotlight, Beaumonts (now owned by Bunnings) and High grove Bathrooms are among many companies with a vast array of brands, prices, service and approaches.
TPW’s key point of difference will be its online-only approach for home renovators. In this regard, TPW has established expertise whereas it could be argued the likes of Bunnings and others are stragglers in providing an advanced online experience.
TPW’s initial investment of about $10 million across FY22-23f will grow based on achieving milestones. The company expects to be EBITDA positive by FY26f.
For comparison, Bunnings has just opened its latest megastore at Pymble on Sydney’s leafy upper north shore. The $80 million multilevel store has 15,000 sqm of space and 300 carparks.
TPW’s scope market opportunity is focused on ‘front of wall’ products including plumbing fixtures, garden and landscaping, paint and supplies, window furnishings, blinds and awnings, tools and equipment, flooring, tiles, and other products.
TPW says it already has over 200 suppliers across 39 categories on its site. A longer term question may revolve around the quality of the products and brands offered. Pricing will also be a key metric to monitor as competitors are unlikely to give The Build a free pass to building market share easily.
Investment view
There is no question that the market opportunity is large and TPW has become highly proficient at online retailing. The sector is underpenetrated by online sales at about 4%.
TPW’s financial commitment is modest at this point and its expectation of profitability by FY26f suggests it is prepared to be patient in the build-up. Unusually for TPW, the shift to a standalone brand for this venture but perhaps this is because it is targeting the trade/builder market.
In the four months to April, TPW has delivered 23% growth and EBITDA margins guidance is ~3%, in line with the long term 2-4% range.
Risks to investment view
Rising interest rates could soften the housing market in Australia and reduce demand for TPW’s homewares products. The launch of a new standalone brand targeting the home improvement market brings a new set of risks to the earnings profile of the company.
Recommendation
We have lowered our recommendation from Buy to Hold. The uncertain outlook for the economy with rising inflation and interest rates, together with risks associated with the new venture gives some reason for caution.
