Greggs — Improving outlook for costs in FY23

Greggs (LSE: GRG)

Last close As at 22/06/2024

GBP28.58

−2.00 (−0.07%)

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Research: Consumer

Greggs — Improving outlook for costs in FY23

Greggs’ H123 results showed continued strong revenue growth, indicating good progress across the majority of its multi-year initiatives to drive revenue growth. Profitability continued to be hampered by input cost inflation as well as investment in the cost base to drive the expected revenue growth. A more favourable outlook for underlying cost inflation in FY23 than previously should be welcomed. We have slightly increased our estimates to reflect the strong growth in H123 and higher interest rates on cash deposits.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Greggs

Improving outlook for costs in FY23

H123 results

Retail

3 August 2023

Price

£25.00

Market cap

£2,556m

Net cash (£m) at 30 June 2023 (pre IFRS 16 liabilities of £304.4m)

138.6

Shares in issue

102.3m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.5)

(12.2)

17.3

Rel (local)

(3.1)

(9.8)

16.3

52-week high/low

2,904p

1,673p

Business description

With 2,378 shops and 12 manufacturing and distribution centres, Greggs is the leading UK ‘food-on-the-go’ retailer. It uses vertical integration to offer differentiated products at competitive prices. Its ambition is to grow revenue to £2.4bn by FY26.

Next events

Q323 trading update

3 October 2023

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Greggs is a research client of Edison Investment Research Limited

Greggs’ H123 results showed continued strong revenue growth, indicating good progress across the majority of its multi-year initiatives to drive revenue growth. Profitability continued to be hampered by input cost inflation as well as investment in the cost base to drive the expected revenue growth. A more favourable outlook for underlying cost inflation in FY23 than previously should be welcomed. We have slightly increased our estimates to reflect the strong growth in H123 and higher interest rates on cash deposits.

Year

end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

1,229.7

145.6

114.3

97.0

21.9

3.9

12/22

1,512.8

148.3

117.5

59.0

21.3

2.4

12/23e

1,778.4

164.9

116.3

66.1

21.5

2.6

12/24e

1,970.1

186.0

133.8

66.9

18.7

2.7

12/25e

2,196.6

207.7

149.4

74.7

16.7

3.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong revenue growth, investment dilutes margin

Total revenue growth of 21.5% to £844m in H123 included 16% like-for-like growth in company-managed stores and the addition of 50 net new stores, both company-managed and franchises. Greggs continued to benefit from volume growth and price growth in the period with the evening daypart, predominantly walk-in at the moment, providing incremental growth and the Greggs app driving increased loyalty (ie visits and transactions from registered users). The lower operating margin (7.7% vs H122’s 8.5%) primarily reflected the upfront investment in staff to serve the growing evening daypart sales and phasing of higher food and packaging inflation in H123. Lower free cash flow generation, due mainly to higher capital investment, as expected, led to a reduction in the net cash position, pre IFRS 16 liabilities, at the period end of around £139m (c £192m end-FY22).

Lower underlying cost inflation anticipated in FY23

Management’s profit expectations for the year are unchanged, including a lower level of underlying cost inflation of 9% (9–10% previously), predominantly due to lower food prices, meaning less pass-through to consumers than was originally anticipated by management. Our PBT estimates for FY23–25 have increased by 2% to reflect the strong revenue growth reported in H123 and higher interest income following the increase in interest rates on cash deposits.

Valuation: Deserved premium

On our revised estimates, Greggs’ P/E multiple for FY24 of 18.7x is at a deserved premium to the median multiple of the peers in the UK restaurants and pubs sector (15.7x) and the UK food retailer sector (11.8x), given its higher expected revenue growth rates and levels of profitability. Our DCF-based valuation with a revised higher weighted average cost of capital of 9% from 8.5% (increased risk-free rate) reduces to £29.70 per share from £30.50.

Strong revenue growth with margin dilution in H1

Income statement

Greggs reported strong revenue growth in H123 of 21.5% to £844m, which fed through to growth in gross profit of 19% to £514.3m, operating profit before exceptionals of c 11% to £65.4m, and underlying profit before tax of c 15% to £63.7m.

Exhibit 1: Summary income statement

£m

H122

H222

FY22

H123

Revenue

694.5

818.3

1,512.8

844.0

Growth y-o-y

27.1%

19.7%

23.0%

21.5%

- Company-managed stores

622.6

729.7

1,352.3

755.8

Growth y-o-y

27.5%

19.6%

23.1%

21.4%

- Business-to-business (B2B)

71.9

88.6

160.5

88.2

Growth y-o-y

24.2%

20.4%

22.1%

22.7%

Gross profit

433.8

504.5

938.3

514.3

Gross margin

62.5%

61.7%

62.0%

60.9%

Distribution and selling costs

(339.3)

(373.9)

(713.2)

(408.0)

As % of sales

48.9%

45.7%

47.1%

48.3%

Admin Expenses

(35.5)

(35.2)

(70.7)

(40.9)

As % of sales

5.1%

4.3%

4.7%

4.8%

Operating profit

59.0

95.4

154.4

65.4

Margin

8.5%

11.7%

10.2%

7.7%

- Company-managed stores

92.2

132.4

224.6

103.0

Margin

14.8%

18.1%

16.6%

13.6%

- B2B

12.6

18.7

31.3

16.7

Margin

17.5%

21.1%

19.5%

18.9%

Exceptionals

0.0

0.0

0.0

16.3

Net finance costs

(3.2)

(2.9)

(6.1)

(1.7)

Underlying profit before tax

55.8

92.5

148.3

63.7

Reported profit before tax

55.8

92.5

148.3

80.0

Tax

(9.9)

(18.1)

(28.0)

(19.7)

Tax rate

17.7%

19.6%

18.9%

24.6%

Underlying profit after tax

45.9

74.4

120.3

47.8

Reported profit after tax

45.9

74.4

120.3

60.3

Underlying EPS fully diluted (p)

44.8

72.7

117.5

46.8

DPS - ordinary (p)

15.0

44.0

59.0

16.0

Source: Greggs accounts, Edison Investment Research

Greggs enjoyed strong growth from both its own company-managed stores as well as from its business-to-business channel (ie mainly franchise operations). The company-managed stores’ strong performance continued into Q2 with like-for-like growth of 15% versus Q123’s 17%, with some moderation due to it beginning to annualise the first, of three, price rises that were made from Q222 to counter the higher-than-expected input cost inflation. As indicated in other recent trading updates, the continued volume growth suggests there has been no negative response from customers to the price increases that have been made.

With respect to the multi-year growth initiatives, the evening daypart is contributing good growth (8.3% of company-managed sales in H123 vs 6.5% in H122) and the Greggs app is leading to more visits per user and transactions than originally anticipated. In prior periods, revenue from daytime delivery had been relatively disappointing versus initial expectations but its contribution to the group has stabilised and is now growing in line with the rest of the group.

50 net new store openings during H123 took the number of stores at the end of June 2023 to 2,378 and management reiterated its confidence in achieving the annual target of 150 net new stores.

The year-on-year decline in gross margin to 60.9% in H123 from 62.5% in H122 (ie c 150bp) was relatively consistent with the year-on-year declines seen in both H122 and H222, when Greggs began to pass on some of the input cost inflation to its customers.

Further down the income statement, Greggs was able to leverage its volume growth on both reported lines of operating costs, ie distribution and selling costs and administrative expenses.

The reduction in reported operating margin to 7.7% from 8.5% in H122 reflects the upfront investment in staff to grow the evening daypart, which will ultimately be recovered as revenue grows, and the phasing of higher food and packaging inflation in H123. The year-on-year decline in operating margin in H123 eased versus what Greggs experienced through FY22 (H122: -240bp y-o-y to 8.5%, H222: -210bp y-o-y to 11.7%) when Greggs was playing catch-up on the increasing cost inflation through the year. Management’s focus has been to recover overall cost inflation at the operating profit level rather than managing the individual cost lines where there are different rates of inflation. Greggs has effectively ‘underrecovered’ the above-average food cost inflation at the gross profit level but ‘over-recovered’ other cost inflation (eg wages and energy), which were lower than price inflation and where Greggs leverages the higher volume on that cost base.

With respect to the output for cost inflation, management has reduced its outlook for underlying cost inflation in FY23 to 9%, from 9–10% previously, mainly due to lower food cost inflation than initially anticipated, which is helped a little by the recent strength of sterling. The lower cost inflation includes a much lower level of expected inflation of 7% in H223 versus the 11% experienced in H123. In the period, Greggs has recognised £16.3m of exceptional income from an insurance settlement for business disruption due to the COVID-19 pandemic. The cash from the settlement was received in July 2023, therefore as it was sitting in debtors at the H123 balance sheet date, it contributed to a more significant working capital outflow than is typical, that is a total outflow of £31.7m in H123 versus £15.7m in H122.

Greggs’ net finance cost has been helped by the increase in interest rates on cash balances during the period and the build-up in cash balances ahead of the peak investment in upgrading its infrastructure in FY23–25 under the five-year growth plan.

The higher effective tax rate of 24.9% in H123 reflects the increase in the headline corporate tax rate to 25% from 19% and the discontinuance of enhanced capital allowances from the start of April 2023.

Management increased the interim dividend by c 7% y-o-y to 16p per share, marginally ahead of the c 4% growth in normalised earnings.

Cash flow and balance sheet

Operating cash flow increased year-on-year to £100.3m from £91.5m in H122. The 10% y-o-y growth was below Greggs’ reported revenue growth of c 21.5% due to the lower profitability and a more significant working capital outflow of £31.7m versus H122’s £15.7m as the debtor for the exceptional insurance proceeds was booked and subsequently received in July 2023.

On an absolute basis and relative to revenue, free cash flow after interest deteriorated in H123 (£17.6m) versus H122 (£57.6m), due to the low growth in operating cash flow and the expected increase in capex and intangibles from £36.1m in H122 to £83.2m in H123 to drive the planned revenue growth. Management reiterated the plan for total investment in tangibles and intangibles of c £200m in FY23.

The lower free cash post interest of £17.6m, dividend payments of £44.6m and repayment of lease liabilities of £26.7m led to a cash outflow, and therefore a decline in the closing cash balance to £138.6m from £191.6m at the end of FY22.

IFRS 16 lease liabilities increased marginally to £304.4m from £301.3m at the end of FY22, taking the net debt position including leases to £165.8m at the end of June 2023 from £108.4m at the end of FY22.

Outlook and forecasts

Management highlighted that the strong trading momentum has continued into H223 and, as discussed above, the rate of cost inflation has started to ease and will continue through the end of the year. As such, management’s profit expectations for the year are unchanged.

The comparative growth rates are higher from Q422 (18.2% l-f-l in company-managed stores), which was helped by an easy Omicron comparative (from Q421), strong underlying trading and the two price increases from earlier in the year (ie in May 2022 and October 2022). Q323’s comparative (9.7% in Q322) is a little easier than Q423’s as it was negatively affected by the Queen’s funeral to the tune of c 1% and by the heatwave.

We have increased our underlying PBT estimates for FY23–25 by 2% to take account of the strong revenue growth reported in H123 and higher interest income following the rise in interest rates on cash deposits.

Valuation: Justified premium to peers

In Exhibit 2, we show Greggs’ growth rates, profitability and multiples relative to a number of different peer groups, with all numbers annualised to Greggs’ December year-end.

Greggs continues to offer premium revenue growth in FY23 and FY24 relative to the majority of its peers in the UK restaurants and pubs, US restaurants and UK food retailer sectors, and our forecast operating margin compares favourably with the UK-listed companies but is below those of the US peers. We believe its premium rates of revenue growth and profitability versus the UK peers justify a premium to these companies.

Exhibit 2: Peer valuation

Share price (local ccy)

Currency

Market cap (local m)

Sales growth CY23 (%)

Sales growth CY24 (%)

EBIT margin CY23 (%)

EBIT margin CY24 (%)

EV/sales CY23e (x)

EV/sales CY24e (x)

P/E CY23e (x)

P/E CY24e (x)

Div yield CY23e (%)

Div
yield CY24e (%)

Domino's Pizza Group

406

GBp

1,685

6

6

17.6

17.7

3.3

3.1

23.4

20.1

2.5

2.7

Loungers

206

GBp

212

19

16

7.6

7.3

1.0

0.9

20.8

16.7

0.0

0.0

Marston's

49

GBp

309

6

3

15.7

16.4

2.1

2.0

5.2

4.2

0.0

0.0

Restaurant Group

51

GBp

385

5

5

5.8

6.7

1.0

0.9

24.7

13.7

0.0

0.0

SSP Group

260

GBp

2,058

30

12

6.1

7.1

1.0

0.9

29.2

18.2

1.4

2.2

J D Wetherspoon

560

GBp

716

8

5

5.9

6.5

1.0

1.0

19.4

14.7

0.0

0.0

UK restaurants and pubs median

7

5

6.8

7.2

1.0

1.0

22.1

15.7

0.0

0.0

Domino's Pizza

390.1

US$

13,999

(0)

7

18.1

18.4

4.2

3.9

29.2

25.5

1.2

1.3

McDonald's p

264.2

US$

195,410

10

7

45.8

46.3

9.7

9.0

25.1

23.4

2.1

2.2

Starbucks

84.9

US$

97,383

11

11

16.0

16.6

3.5

3.1

28.0

23.7

2.1

2.3

Wendys o

21.2

US$

4,546

6

4

17.9

18.6

3.3

3.1

21.8

19.1

4.7

5.0

Yum! Brands

122.7

US$

35,001

7

7

32.7

33.4

6.8

6.3

26.5

23.1

1.7

1.9

US restaurants median

7

7

18.1

18.6

4.2

3.9

26.5

23.4

2.1

2.2

J Sainsbury

221

GBp

5,133

3

2

3.0

3.0

0.4

0.4

12.9

12.7

4.7

4.6

Tesco

265

GBp

19,697

5

2

3.9

4.0

0.4

0.4

11.8

10.9

4.3

4.6

UK food retailer median

4

2

3.5

3.5

0.4

0.4

12.4

11.8

4.5

4.6

Greggs

2,500

GBp

2,556

18

11

9.4

9.6

1.3

1.2

21.5

18.7

2.6

2.7

Greggs premium/(discount) to UK restaurants median

27%

25%

(3)%

19%

N/A

N/A

Greggs premium/(discount) to US restaurants median

(68)%

(69)%

(19)%

(20)%

25%

20%

Greggs premium/(discount) to UK food retailer median

234%

208%

74%

59%

(41)%

(42)%

Source: Refinitiv, Edison Investment Research. Note: Priced 2 August 2023.


Exhibit 3: Financial summary

£m

2020

2021

2022

2023e

2024e

2025e

Year-end December GBP millions

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

811.3

1,229.7

1,512.8

1,778.4

1,970.1

2,196.6

Cost of Sales

(299.6)

(447.7)

(574.5)

(696.7)

(773.4)

(868.5)

Gross Profit

511.7

782.0

938.3

1,081.7

1,196.7

1,328.1

EBITDA

 

 

115.4

259.0

269.9

303.7

350.6

395.1

Operating profit (before amort. and excepts.)

 

 

(6.2)

153.2

154.4

167.6

190.0

212.2

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.8)

0.0

0.0

16.3

0.0

0.0

Operating Profit

(7.0)

153.2

154.4

183.9

190.0

212.2

Net Interest

(6.7)

(7.6)

(6.1)

(2.7)

(4.0)

(4.5)

Profit Before Tax (norm)

 

 

(12.9)

145.6

148.3

164.9

186.0

207.7

Profit Before Tax (FRS 3)

 

 

(13.7)

145.6

148.3

181.2

186.0

207.7

Tax

0.7

(28.1)

(28.0)

(45.3)

(48.4)

(54.0)

Profit After Tax (norm)

(12.2)

117.5

120.3

119.6

137.6

153.7

Profit After Tax (FRS 3)

(13.0)

117.5

120.3

135.9

137.6

153.7

Average Number of Shares Outstanding (m)

101.0

101.5

101.5

102.0

102.0

102.0

EPS - normalised fully diluted (p)

 

 

(12.1)

114.3

117.5

116.3

133.8

149.4

EPS - (IFRS) (p)

 

 

(12.9)

115.7

118.5

133.2

134.9

150.7

Dividend per share (p)

0.0

97.0

59.0

66.1

66.9

74.7

Gross Margin (%)

63.1

63.6

62.0

60.8

60.7

60.5

EBITDA Margin (%)

14.2

21.1

17.8

17.1

17.8

18.0

Operating Margin (before GW and except.) (%)

(0.8)

12.5

10.2

9.4

9.6

9.7

BALANCE SHEET

Fixed Assets

 

 

631.0

622.3

685.1

819.5

952.2

1,045.5

Intangible Assets

15.6

14.9

13.5

22.0

28.5

33.4

Tangible Assets

345.3

343.8

390.0

501.0

612.3

685.7

Right-of-Use Assets

270.1

263.6

281.6

296.5

311.4

326.4

Other

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

98.7

266.1

283.0

281.8

266.6

305.3

Stocks

22.5

27.9

40.6

49.2

54.7

61.4

Debtors

39.4

37.6

50.2

59.0

65.4

72.9

Cash

36.8

198.6

191.6

172.9

146.0

170.4

Other

0.0

2.0

0.6

0.6

0.6

0.6

Current Liabilities

 

 

(144.1)

(206.9)

(244.1)

(287.5)

(315.6)

(350.0)

Creditors

(91.1)

(153.4)

(191.7)

(232.5)

(258.1)

(289.8)

Leases

(48.6)

(49.3)

(48.8)

(51.4)

(54.0)

(56.6)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other

(4.4)

(4.2)

(3.6)

(3.6)

(3.6)

(3.6)

Long Term Liabilities

 

 

(264.0)

(252.3)

(284.3)

(296.6)

(309.0)

(321.3)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Leases

(243.1)

(233.9)

(252.5)

(264.8)

(277.2)

(289.5)

Other long term liabilities

(20.9)

(18.4)

(31.8)

(31.8)

(31.8)

(31.8)

Net Assets

 

 

321.6

429.2

439.7

517.2

594.3

679.5

CASH FLOW

Operating Cash Flow

 

 

61.6

312.1

272.3

347.3

368.4

416.6

Net Interest

(6.7)

(7.4)

(4.8)

(2.1)

(3.4)

(3.9)

Tax

(10.7)

(19.2)

(13.3)

(45.3)

(48.4)

(54.0)

Capex

(59.8)

(54.0)

(102.4)

(200.0)

(220.0)

(200.0)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

0.0

Equity financing

3.7

4.6

3.1

3.1

3.1

3.1

Dividends

0.0

(15.3)

(98.5)

(67.4)

(68.2)

(76.2)

Borrowings and lease liabilities

(42.1)

(49.0)

(52.7)

(55.6)

(58.4)

(61.2)

Other

(0.5)

(10.0)

(9.4)

0.0

0.0

0.0

Net Cash Flow

(54.5)

161.8

(5.7)

(20.0)

(26.9)

24.4

Opening cash

 

 

91.3

36.8

198.6

192.9

172.9

146.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

Closing cash

 

 

36.8

198.6

192.9

172.9

146.0

170.4

Closing net debt/(cash)

 

 

(36.8)

(198.6)

(191.6)

(172.9)

(146.0)

(170.4)

Closing net debt/(cash) including leases

 

 

254.9

84.6

109.7

143.3

185.1

175.7

Source: Greggs accounts, Edison Investment Research

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Greggs and prepared and issued by Edison, in consideration of a fee payable by Greggs. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Norcros — Strong anchors weather the storms

Norcros’s total revenue grew 2.1% in Q124 versus a strong comparator period despite tough UK market conditions and power outages in South Africa as the company’s strong service offering and multiple routes to market allowed it to unlock market share opportunities. We continue to believe Norcros’s key strengths are undervalued and that most, if not all, of the legacy issues, particularly the pension deficit, have been resolved. We retain our estimates and value Norcros at 246p, implying c 50% upside.

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