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Last close As at 26/05/2023
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Market capitalisation
GBP156m
Research: Industrials
Norcros continues to deliver a progressive trading performance ahead of local market conditions and in line with management guidance. Its share price has risen this year, significantly outperforming the FTSE All Share Index, but the company’s rating remains in single-digit P/E territory. It seems that re-rating will be a gradual process but there is plenty of evidence to suggest that this can continue.
Written by
Toby Thorrington
Norcros |
Growing and investing |
H119 results |
Construction & materials |
18 December 2018 |
Share price performance
Business description
Next event
Analyst
Norcros is a research client of Edison Investment Research Limited |
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Norcros continues to deliver a progressive trading performance ahead of local market conditions and in line with management guidance. Its share price has risen this year, significantly outperforming the FTSE All Share Index, but the company’s rating remains in single-digit P/E territory. It seems that re-rating will be a gradual process but there is plenty of evidence to suggest that this can continue.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/17 |
271.2 |
20.7 |
24.4 |
7.2 |
8.2 |
3.6 |
03/18 |
300.1 |
24.4 |
26.8 |
7.8 |
7.5 |
3.9 |
03/19e |
321.3 |
31.1 |
29.5 |
8.4 |
6.8 |
4.2 |
03/20e |
331.0 |
33.2 |
31.2 |
9.0 |
6.4 |
4.5 |
Note: *PBT and EPS FD are normalised, excluding amortisation of acquired intangibles, exceptional items and change in fair value of derivatives.
Portfolio delivers growth
Norcros delivered good growth in revenue (+12.2%) and operating profit (+30%) in its H119 results, with strong contributions in the UK from Merlyn and Triton and a return to profitability following restructuring at Johnson Tiles. Outside the UK, while all three operating companies grew local currency sales, short-term profitability was held back by investment activity at Johnson Tiles South Africa. Behind these headlines, some common operational themes were the relative strength of trade sector customers and a breadth of new product activity across the group. A 7.7% uplift in the interim dividend provided a good marker of management’s confidence in the expected full-year outturn. While net debt increased to £53.5m during the first half, this was largely a seasonal effect.
Further progress expected, noting economic caution
A period of uncertainty in the UK and fragility in South Africa requires monitoring but expansion – albeit at relatively low levels – is anticipated in both economies. The H1 trading performance especially among the larger businesses and specific operational progress at both tile companies provides support for an unchanged estimate outlook, in our view. In the event, we have nudged up our UK expectations in all years, but incorporating a slightly stronger sterling/weaker rand assumption offsets this by lowering our expected contribution from South African operations. We also expect a significantly stronger free cash flow performance in H2 leading to end FY19 net debt down to c £40m.
Valuation: Share price outperforming, rating low
The Norcros share price has been above that seen at the start for almost the whole year so far, trading above 200p for the last five months. Consequently, it is now up c 16% for the year (versus an FTSE All Share Index down by c 12%). Nevertheless, on our robust underlying estimates, the company’s rating is still at single-digit levels (FY19 P/E 6.8x, EV/EBITDA adjusted for pensions cash 5.1x) with earnings growth expected in all three years.
H119 results overview
The benefits of a portfolio business model were demonstrated in H1 performance with the Merlyn acquisition complementing good – chiefly trade channel related – progress in some operating companies comfortably offsetting challenges in other areas. Norcros remains conservatively financed with headroom for both ongoing organic and acquisitive investment.
Exhibit 1: Norcros interim and divisional splits
Mar y/e £m |
H118 |
H218 |
FY18 |
H119 |
Reported |
CER |
CER LFL* |
|
% ch y-o-y |
% ch y-o-y |
% ch y-o-y |
||||||
Group revenue |
145.0 |
155.1 |
300.1 |
162.6 |
12.1% |
13.3% |
-0.3% |
|
UK |
94.3 |
106.3 |
200.6 |
109.9 |
16.5% |
16.5% |
-4.1% |
|
South Africa |
50.7 |
48.8 |
99.5 |
52.7 |
3.9% |
7.1% |
7.1% |
|
Group operating profit |
11.7 |
15.7 |
27.4 |
15.2 |
30.3% |
31.6% |
3.6% |
|
UK |
7.4 |
11.2 |
18.6 |
11.4 |
54.5% |
54.5% |
11.1% |
|
South Africa |
4.3 |
4.5 |
8.8 |
3.8 |
-11.0% |
-8.3% |
-8.3% |
|
£/ZAR |
17.11 |
17.32 |
17.64 |
3.1% |
Source: Company. Note: *UK CER LFL operating profit: Edison Investment Research estimates.
UK: Profit growth from Merlyn and existing businesses
Merlyn contributed £19.5m revenue, up c 13% y-o-y, and an unspecified, above-average divisional margin (pre-acquisition levels were mid-teens) in its maiden H1 as part of the group. Management noted account wins and line extensions as positive influences on top-line progress. For the existing businesses, a tough trading environment was reflected in a modest y-o-y reduction in combined revenues. Triton (revenue +9.8%) performed strongly, clearly outperforming a flat at best RMI market with a positive response to new products and a significant marketing campaign and progress in all channels addressed. This channel performance was also achieved by the smaller Abode (+12.3%) and Norcros Adhesives (+25.0%) businesses from a combination of new listings and products. Vado (-5.3%) grew in the UK but this was offset by sub-brand weakness in overseas markets. The two other UK divisional companies both reported lower revenues y-o-y and this was related to a weak retail sector. Restructuring at Johnson Tiles (-21.7%) following a step down in B&Q business has been well flagged and Croydex (-12.2%) was affected by trading difficulties experienced by Bunnings/Homebase.
There is understandably less disclosure on profitability at the individual company level. We estimate that Merlyn contributed over £3m towards the £4m uplift in UK profitability. A return to profitability at Johnson Tiles following restructuring and good, revenue growth-driven profit progress more than explained the remainder. Croydex suffered the only material reverse in financial performance. Overall, we consider a c 11% increase in UK profit a very creditable performance; although existing operations were the smaller contributor our sense is that underlying momentum was understated by marketing and new product investment across the division.
South Africa: Profit progress constrained by JTSA investment
It is notable that all three South African operating companies managed to grow their revenues organically in a weak local economy. Despite the distractions of undertaking plant improvement actions at Johnson Tiles South Africa, JTSA sales rose by 38.6% in H1. We believe that an increase in third-party product sales contributed materially to this performance and significant project-based commercial work may have been a key driver here. TAL Adhesives (+5.0%) and Tile Africa (+2.2%) made more modest but still respectable progress. Some specific commercial projects were name-checked for both companies in the results announcement although Tile Africa primarily has a B2C focus and is Norcros’s only retail business. Evolution of the product offer, tweaks to the Tile Africa store estate and development of new export markets are all examples of initiatives taken in the period to sustain forward momentum in unhelpful general market conditions. (Note that the rand weakened by c 3% y-o-y against sterling resulting in a modest adverse translation effect.)
Nevertheless, disruption and downtime from capacity expansion at JTSA, not fully compensated for by lower margin third-party product sales, was probably the biggest influence on the c 8% reduction in local operating profit in H1. TAL and Tile Africa both improved their profitability modestly. Now that the JTSA capacity enhancement process is complete some recovery in performance, and perhaps re-balancing of own/third-party product sales, is likely to characterise the next few trading periods.
Working capital investment supporting growth
At the end of September, group net debt was £53.5m, an increase of just over £6m from the beginning of the year (and c £21m at the end of H118).
The operating profit uplift discussed earlier carried through to EBITDA of £19.3m (up £3.8m y-o-y) but lower trading cash generation in H119 reflected c £8m working capital absorption in the period. This was primarily due to absorption into inventory, which was attributed by management to new product launch activity across a number of businesses (eg Vado, Abode, Triton), some new business wins and lower than expected exports in the Middle East. Some businesses have extended/overseas supply chains so some inventory build in these circumstances is to be expected. We note a larger debtor outflow also compared to H118 but this was largely offset by the payables period end position. Exceptional cash costs relating to the Johnson Tiles reorganisation and unchanged pension cash recovery payments (together totalling c £2.7m) completed the trading cash picture.
Other movements further down the cash flow statement were routine with higher interest costs following the prior year acquisition-related debt increase, a lower tax cash payment (a timing effect only) and net capex slightly below the prior year and in line with depreciation. H119 free cash flow (FCF) of c £2m was matched by final deferred consideration payments for Croydex and Abode and, after taking into account the FY18 final dividend payment (c £4m) and treasury share purchases c £1m), the total group cash outflow in the first half was £5m. An adverse translation effect on South African cash balances (which stood at £15m at the end of FY18) also contributed the change in headline net debt.
Cash flow outlook: seasonally higher profitability and a partial working capital flow back before the year end should be the primary drivers behind our expected H2 free cash inflow of almost £16m. After the H119 dividend payment, we anticipate c £13m cash inflow in H2 overall, leaving net debt at c £40m by the end of FY19, or just below 1x unadjusted EBITDA. Thereafter, we anticipate FCF in excess of £12m per year, which, absent any further acquisitions, results in net debt reducing to c £14m by the end of FY21. Subject to opportunities with the right fit arising, we anticipate that more M&A activity will take place so net debt progression may well take a different course. For the record, Norcros has a £120m revolving credit facility and a £30m accordion facility in place (to 2021 with a one-year extension option) which provides good funding options for further M&A.
Challenging markets, estimates maintained
Norcros’s primary markets have various challenges that are not to be overlooked. Management expectations for the full year were unchanged on announcing the H1 results. After small revenue adjustments (primarily Rand translation), our estimates are also unchanged at the operating profit level (including a small UK uplift offset by a translation-only reduction in South Africa) and, after a lower assumed annual pension administration cost, have been nudged up by c 1% in all three years. (Note that the company excludes IAS 19R costs from its definition of underlying earnings.) Our FY19e DPS uplift of 7.7% is in line with the interim increase so we have made no changes to dividend expectations.
Exhibit 2: Financial summary
£'ms |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
||
March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|
|
|
Cont. |
Cont. |
Cont. |
Cont. |
Cont. |
Cont. |
Cont. |
Revenue |
|
|
200.3 |
210.7 |
218.7 |
222.1 |
235.9 |
271.2 |
300.1 |
321.3 |
331.0 |
341.0 |
Cost of Sales |
|
|
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Gross Profit |
|
|
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
EBITDA |
|
|
18.6 |
19.9 |
22.9 |
24.3 |
28.0 |
31.6 |
34.7 |
42.4 |
44.7 |
46.4 |
Operating Profit (before SBP) |
|
|
12.3 |
13.7 |
17.0 |
18.3 |
22.5 |
25.2 |
28.3 |
35.6 |
37.7 |
39.2 |
Net Interest |
|
|
(1.4) |
(1.3) |
(1.5) |
(1.2) |
(0.9) |
(0.9) |
(1.1) |
(2.0) |
(2.0) |
(1.9) |
Other financial - norm |
|
|
(0.9) |
(2.4) |
(2.6) |
(3.1) |
(3.1) |
(3.6) |
(2.8) |
(2.5) |
(2.5) |
(2.5) |
Other financial |
|
|
0.6 |
(0.2) |
(5.2) |
2.1 |
(0.2) |
(4.2) |
(4.5) |
3.1 |
(1.2) |
(1.2) |
Intangible Amortisation |
|
|
0.0 |
0.0 |
(0.4) |
(0.3) |
(0.9) |
(1.2) |
(2.2) |
(3.5) |
(3.5) |
(3.5) |
Exceptionals |
|
|
(1.2) |
(4.4) |
(1.5) |
(4.8) |
(2.0) |
(3.8) |
(4.2) |
(1.0) |
(1.0) |
(1.0) |
Profit Before Tax (norm) |
|
|
10.0 |
10.0 |
12.9 |
14.0 |
18.5 |
20.7 |
24.4 |
31.1 |
33.2 |
34.8 |
Profit Before Tax (company norm) |
|
10.7 |
11.7 |
14.6 |
15.8 |
20.4 |
22.9 |
26.3 |
32.7 |
34.8 |
36.4 |
|
Profit Before Tax (FRS 3) |
|
|
9.4 |
5.4 |
5.8 |
11.0 |
15.4 |
11.5 |
13.5 |
29.7 |
27.5 |
29.1 |
Tax |
|
|
0.0 |
0.2 |
4.3 |
(3.0) |
(2.4) |
(3.0) |
(3.6) |
(7.0) |
(6.6) |
(7.0) |
Other |
|
|
0.0 |
0.0 |
(1.4) |
0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit After Tax (norm) |
|
|
10.4 |
9.3 |
13.9 |
11.1 |
16.1 |
17.7 |
20.8 |
24.1 |
26.6 |
27.9 |
Profit After Tax (FRS 3) |
|
|
9.4 |
5.6 |
8.7 |
8.1 |
13.0 |
8.5 |
9.9 |
22.7 |
20.9 |
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
57.7 |
58.0 |
58.4 |
59.2 |
60.6 |
61.1 |
68.0 |
80.5 |
81.2 |
81.9 |
|
Average Number of Shares Outstanding FD (m) |
58.0 |
58.9 |
60.8 |
61.5 |
62.2 |
63.1 |
69.8 |
82.2 |
82.9 |
83.6 |
||
EPS FD - normalised (p) |
|
|
17.9 |
15.8 |
22.8 |
18.0 |
24.7 |
24.4 |
26.8 |
29.5 |
31.2 |
32.5 |
EPS FD - company normalised (p) |
|
|
19.2 |
18.7 |
27.9 |
21.1 |
27.7 |
27.8 |
29.5 |
31.5 |
33.1 |
34.4 |
EPS - FRS 3 (p) |
|
|
16.2 |
9.5 |
14.3 |
13.2 |
19.7 |
9.8 |
11.2 |
27.8 |
24.3 |
25.7 |
Dividend per share (p) |
|
|
4.2 |
4.6 |
5.1 |
5.6 |
6.6 |
7.2 |
7.8 |
8.4 |
9.0 |
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
EBITDA Margin (%) |
|
|
9.3 |
9.4 |
10.5 |
10.9 |
11.9 |
11.7 |
11.6 |
13.2 |
13.5 |
13.6 |
Operating Margin (before GW and except.) (%) |
6.1 |
6.5 |
7.8 |
8.2 |
9.5 |
9.3 |
9.4 |
11.1 |
11.4 |
11.5 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
80.0 |
86.7 |
80.0 |
78.3 |
93.4 |
98.8 |
147.9 |
139.4 |
138.9 |
138.2 |
Intangible Assets |
|
|
23.4 |
27.6 |
27.1 |
26.9 |
44.7 |
44.8 |
98.9 |
94.9 |
91.4 |
87.9 |
Tangible Assets |
|
|
44.8 |
43.5 |
36.9 |
37.6 |
38.2 |
43.0 |
45.0 |
43.8 |
46.8 |
49.6 |
Investments |
|
|
11.8 |
15.6 |
16.0 |
13.8 |
10.5 |
11.0 |
4.0 |
0.7 |
0.7 |
0.7 |
Current Assets |
|
|
89.7 |
104.6 |
102.2 |
100.4 |
119.4 |
165.3 |
165.1 |
178.1 |
194.7 |
213.0 |
Stocks |
|
|
45.5 |
52.8 |
50.2 |
52.2 |
60.1 |
70.3 |
74.9 |
75.2 |
77.5 |
79.8 |
Debtors |
|
|
34.5 |
36.3 |
48.1 |
42.6 |
53.4 |
57.5 |
64.4 |
67.4 |
69.4 |
71.5 |
Cash |
|
|
2.9 |
6.8 |
3.9 |
5.6 |
5.9 |
37.5 |
25.8 |
35.5 |
47.8 |
61.7 |
Current Liabilities |
|
|
(52.5) |
(54.0) |
(58.1) |
(60.0) |
(67.6) |
(105.7) |
(89.8) |
(78.6) |
(82.3) |
(86.9) |
Creditors |
|
|
(52.1) |
(53.5) |
(57.3) |
(58.6) |
(64.8) |
(74.8) |
(81.3) |
(78.6) |
(82.3) |
(86.9) |
Short term borrowings |
|
|
(0.4) |
(0.5) |
(0.8) |
(1.4) |
(2.8) |
(30.9) |
(8.5) |
0.0 |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(46.1) |
(75.7) |
(58.6) |
(67.4) |
(97.6) |
(101.8) |
(118.6) |
(108.2) |
(106.7) |
(105.3) |
Long term borrowings |
|
|
(20.3) |
(37.0) |
(30.5) |
(18.4) |
(35.6) |
(29.8) |
(64.4) |
(75.5) |
(75.5) |
(75.5) |
Other long term liabilities |
|
|
(25.8) |
(38.7) |
(28.1) |
(49.0) |
(62.0) |
(72.0) |
(54.2) |
(32.7) |
(31.2) |
(29.8) |
Net Assets |
|
|
71.1 |
61.6 |
65.5 |
51.3 |
47.6 |
56.6 |
104.6 |
130.7 |
144.5 |
159.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
6.0 |
6.6 |
13.6 |
16.2 |
18.5 |
25.5 |
23.5 |
33.8 |
38.4 |
40.0 |
Net Interest |
|
|
(1.6) |
(1.3) |
(1.6) |
(1.3) |
(0.9) |
(0.9) |
(1.1) |
(2.0) |
(2.0) |
(1.9) |
Tax |
|
|
(0.6) |
(1.0) |
(1.7) |
(0.5) |
(1.0) |
(1.9) |
(4.9) |
(6.0) |
(7.0) |
(6.6) |
Capex |
|
|
(6.7) |
(4.2) |
(2.8) |
(1.4) |
(6.6) |
(8.0) |
(7.7) |
(7.9) |
(10.0) |
(10.0) |
Acquisitions/disposals |
|
|
0.0 |
(10.6) |
0.1 |
3.3 |
(23.6) |
(2.7) |
(59.1) |
(2.0) |
0.0 |
0.0 |
Financing |
|
|
0.2 |
0.3 |
0.4 |
0.2 |
0.1 |
0.0 |
30.1 |
(1.1) |
0.0 |
0.0 |
Dividends |
|
|
(2.2) |
(2.5) |
(2.8) |
(3.1) |
(3.6) |
(4.2) |
(5.0) |
(6.3) |
(7.0) |
(7.7) |
Net Cash Flow |
|
|
(4.9) |
(12.7) |
5.2 |
13.4 |
(17.1) |
7.9 |
(24.2) |
8.5 |
12.3 |
13.8 |
Opening net debt/(cash) |
|
|
10.6 |
17.8 |
30.7 |
27.4 |
14.2 |
32.5 |
23.2 |
47.1 |
40.0 |
27.7 |
HP finance leases initiated |
|
|
(0.8) |
(0.1) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
|
|
(1.5) |
(0.1) |
(1.9) |
(0.2) |
(1.2) |
1.5 |
0.3 |
(1.4) |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
17.8 |
30.7 |
27.4 |
14.2 |
32.5 |
23.1 |
47.1 |
40.0 |
27.7 |
13.8 |
Source: Company, Edison Investment Research
|
|
Research: TMT
discoverIE reported H119 revenue growth of 11%, with 7% organic growth and 5% growth from the Santon acquisition offset by a 1% currency effect. Good order intake in H1 provides support for growth in H2 and management sees FY19 trading in line with its expectations. We have revised our forecasts to reflect H1 trading, resulting in upgrades to our normalised EPS forecasts of 3% in FY19e and 2% in FY20e.
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