Currency in GBP
Last close As at 25/01/2023
GBP2.12
▲ 0.50 (0.24%)
Market capitalisation
GBP189m
Research: Industrials
We believe that Norcros’s proven strategy remains on track, which should allow it to unlock significant market growth opportunities. We also believe that its key strengths are undervalued and that investors continue to underappreciate that most, if not all, of the legacy issues have been resolved. South Africa is now a large and rapidly growing part of the group, and the IAS 19R pension deficit has been eliminated. We value Norcros at 314p/share, implying c 45% upside.
Norcros |
Key strengths undervalued, legacy issues fixed |
Company update |
Construction and materials |
20 July 2022 |
Share price performance
Business description
Next events
Analyst
Norcros is a research client of Edison Investment Research Limited |
We believe that Norcros’s proven strategy remains on track, which should allow it to unlock significant market growth opportunities. We also believe that its key strengths are undervalued and that investors continue to underappreciate that most, if not all, of the legacy issues have been resolved. South Africa is now a large and rapidly growing part of the group, and the IAS 19R pension deficit has been eliminated. We value Norcros at 314p/share, implying c 45% upside.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/21 |
324.2 |
27.4 |
29.7 |
8.2 |
7.4 |
3.8 |
03/22 |
396.3 |
38.6 |
38.7 |
10.0 |
5.6 |
4.6 |
03/23e |
450.8 |
43.2 |
40.3 |
10.0 |
5.4 |
4.6 |
03/24e |
485.9 |
47.3 |
40.6 |
10.5 |
5.4 |
4.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Key underlying strengths overlooked by market
Over many years, Norcros’s highly experienced management has nurtured a consistent and successful growth strategy. It has championed the development of an unrivalled supply chain, which offers a competitive advantage, and a multi-channel sales model, which has leveraged the growth of its acquisitions, contributed to a group margin expansion trend and improving profitability. Norcros continues to operate in highly fragmented markets that offer revenue growth and market share opportunities. It also has scope to move into as yet unaddressed adjacent markets that offer additional long-term growth potential.
Legacy issues now resolved; good growth reported
Despite good trading, the share price is languishing, which seems to suggest that the market is giving Norcros little credit for the resolution of perceived legacy issues and the attractive underlying growth of the business. These issues include the modest size of its South African operations and the drag of the pension deficit. We believe the legacy issues have been resolved and that Norcros’s recent FY22 results highlighted good growth in both revenue and profits as well a solid net cash position, which was subsequently utilised for the Grant Westfield (GW) acquisition.
Strategic target success edging closer
Norcros’s growth strategy has remained largely unchanged for several years. The key targets are total revenue of £600m by 2025, which has the potential to be achieved; to derive 50% of revenues from overseas to diversify risk and to achieve a sustainable return on capital employed in excess of 15%, which the company has delivered annually since 2013.
Valuation: c 45% upside based on P/E/DDM valuation
Following the sell-off in the shares over the last 12 months, Norcros is now trading at the low end of its long-term forward P/E range, suggesting that a lot of bad news is priced in. In fact, it has only traded materially below the current 5.4x P/E rating for a period in early 2020 during the pandemic. We value the stock at 314p/share based on the average P/E-based valuation of 295/share, and our dividend discount model (DDM), which implies a value of 333p/share.
The key strengths of Norcros
Over many years, Norcros’s management has nurtured a simple, but successful growth strategy. Lead by a highly experienced management team that has championed the development of a multi-channel sales model, it has leveraged the growth of the acquisitions brought into the group. Ahead of the GW deal this year, the acquired businesses averaged revenue growth of 6.5% pa since purchase and contributed to a group margin expansion trend as well as an improving profitability trend. Norcros continues to operate in highly fragmented markets that offer revenue growth and market share opportunities, and has scope to move into as yet unaddressed adjacent markets that offer additional long-term growth potential.
Growth strategy unchanged
Norcros’s growth strategy has remained largely unchanged for several years, other than the timing, which was deferred due to the impact of the pandemic. The key targets are:
■
total revenue of £600m by 2025 (previously 2023), driven both organically and by acquisition,
■
50% of revenues derived from overseas, and
■
sustainable return on capital employed in excess of 15%.
With the exception of the COVID-19 affected FY21, Norcros can point towards a long history of revenue growth, as shown in the chart below. Revenue almost doubled between 2013 and 2022 and is expected to increase further in future years as it continues to grow both organically and by acquisition. The material increase in revenue in 2023 and to a lesser extent in 2024 is driven by the acquisition of GW, which completed at the end of May. It will contribute 10 months of revenue this year (c £37m), and a full 12 months in FY24. Excluding the acquisition, we estimate that group revenue will grow c 3% on a constant currency basis.
Exhibit 1: Group revenue 2013–25e (£m) |
Source: Norcros, Edison Investment Research |
The GW acquisition fits well with Norcros’s strategy to move into adjacent markets. GW is the UK’s leader in the fast-growing bathroom panel market where it enjoys a c 40% share of a market growing in excess of 10% pa. Bathroom panels are taking share from traditional tiles due to the higher speed and lower cost of installation. It is expected that Norcros will use its existing network to expand GW’s sales in the UK and Europe, and utilise its existing manufacturing capacity. The deal offers Norcros the opportunity to cross-sell on a ‘one-stop-shop’ basis across the group and to leverage group products into the new housing and modular markets.
We are forecasting that Norcros generates almost £500m of revenue in 2024. However, it seems entirely possible that it could achieve its £600m revenue target if organic growth is supplemented with further acquisitions that are not included in our forecasts.
Exhibit 2: Summary of notable acquisitions since 2013
Date |
Company |
Country |
Activity |
Consideration (initial plus deferred) |
Revenue |
EBITDA |
Revenue multiple |
EBITDA multiple |
(£m) |
(£m) |
(£m) |
(x) |
(x) |
||||
April 2013 |
Vado |
UK |
Manufacturer and distributor of bathroom controls |
11.9 |
25.6 |
2.5 |
0.5 |
4.8 |
June 2015 |
Croydex |
UK |
Designer, manufacturer and distributor of bathroom furnishings and accessories |
20 |
19.9 |
3.1 |
1.0 |
6.5 |
April 2016 |
Abode |
UK |
Designer and distributor of kitchen and bathroom taps and kitchen sinks |
4.4 |
9.9 |
0.8 |
0.4 |
5.5 |
Nov. 2017 |
Merlyn |
UK |
Designer and distributor of high-end shower enclosures |
60 |
30.7 |
6.8 |
2.0 |
8.8 |
Jan 2019 |
House of Plumbing |
South Africa |
Specialist plumbing supplier |
9.7 |
22 |
1.9 |
0.4 |
5.1 |
May 2022 |
Grant Westfield |
UK |
Supplier of bathroom and kitchen products |
80 |
42.2 |
10.1 |
1.9 |
7.9 |
Source: Norcros
Norcros does have capacity in its balance sheet to finance overseas acquisitions. We estimate that by the end of FY23, it could have headroom of between £28.9m and £42.2m to invest in M&A assuming 1.5x/1.75x net debt/EBITDA, and by the end of FY24 that headroom could rise to £53.6m to £68.3m on the same basis. These calculations ignore the implied headroom of any acquired target. Taking the FY24e headroom average of c £61m, it implies the purchase of revenue of c £51m assuming a consideration/revenue multiple of 1.2x (being the arithmetic average of the six deals), which would add c £5.6m or over 10% to FY24e operating profit at the group margin.
Exhibit 3: Balance sheet headroom by financial year, estimated |
Source: Edison Investment Research |
This suggests that the FY25e revenue target of £600m might be a stretch, but our calculation not only ignores acquired profit of the target, but also ignores the potential to buy at more attractive multiples. The three acquisitions made between 2013 and 2016 were achieved at between 0.5x revenue and 1.1x revenue. It also ignores equity funded M&A. Finally, Norcros has a stated strategic target return on capital employed of more than 15%. The chart below highlights the returns generated over the last 10 years and clearly shows returns at or in excess of 15% in all but one year. Arguably the trend is also rising despite the dips in 2020 and 2021.
Exhibit 4: Underlying return on capital employed |
Source: Norcros |
Focused business model driving growth
Norcros has a carefully cultured ‘DNA’ that has led to successful long-term growth of revenue and profit in both of its chosen markets, the UK and South Africa. The DNA includes an experienced management team where the main board directors average nearly 20 years with Norcros, and the managing directors of the divisions can point to a collective duration with the company of more than 100 years, and materially longer than this in industry experience.
Another element of the Norcros DNA is a clear and focused strategy, which we discuss in more detail later in the note, and its leading market positions and brands as well as a diversified portfolio of channels to market that includes a wide customer base, both of which can be seen in Exhibit 1 below. Norcros’s biggest customers include many of the UK’s largest housebuilders, which collectively account for c 10–12% of revenue, with no single customer accounting for more than 10% of group revenue.
Exhibit 5: UK channel revenue FY22 |
Source: Norcros |
Within the UK housebuilder sector, Norcros has customer relationships with each of the top 10 companies via at least one of its eight UK brands and in many cases, it has multiple relationships across its brand portfolio. However, as can be seen in Exhibit 2 below, there are many ‘holes’ in the matrix, which represent growth opportunities.
For example, Abode, which is a designer and distributor of high-quality kitchen and bathroom taps and kitchen sinks, sells into just two of the top 10 housebuilders, while GW, the recently acquired bathroom panel manufacturer, sells into only one, Barratt Homes. This clearly highlights both the growth opportunity that the housebuilder sector offers the group, but also some of the justification for acquiring GW.
Another element of Norcros’s DNA is its willingness to innovate and develop new products, which is likely to help it generate sales, especially with the UK housebuilders, which will be expected by their customers to offer modern styling and features on their new homes. The evidence of success here is seen in Norcros’s vitality rate (the Product Vitality Index is a measure of revenue derived from products launched in the last three years as a percentage of the total revenue), which stands at a market-leading rate of 29%, according to the company.
Exhibit 6: Leading positions with UK top 10 housebuilders |
Source: Norcros |
The market opportunity in the UK is sizable. Despite being a market leader in each of the six markets addressed by Norcros ahead of the GW acquisition, there is much scope for growth. With the exception of showers, the top three players accounted for less than c 35% of the total, implying a long tail of opportunity to either take market share organically, or to engage in M&A. Collectively, the six markets had total revenue of £2.1bn (source: AMA, BSRIA and Norcros estimates), with the top three players accounting for c 35%.
Exhibit 7: UK bathroom – selected markets (at manufacturer’s selling price) |
Source: Norcros |
Furthermore, there are numerous other bathroom markets that Norcros does not currently address including bathroom furniture, decorative radiators, ventilation and sanitaryware, which over time could be areas of opportunity for M&A activity. Collectively, these markets total over £750m of revenue, which could potentially add roughly a third to the revenue of Norcros if it gained a similar market share to that which it currently enjoys. The acquisition of GW in May was a clear example of Norcros using its balance sheet strength to move into new business areas within the bathroom market. The acquisition of Merlyn in 2017 was another example of Norcros gaining exposure to previously unaddressed markets.
Exhibit 8: Bathroom market opportunities |
Source: Norcros |
Norcros has a long and successful acquisition record stretching back nearly 10 years to the April 2013 purchase of Vado, a manufacturer and supplier of taps and mixer showers. All the completed deals fitted well with group strategy, and all satisfied Norcros’s acquisition criteria, which include a requirement for the target to operate in a complementary market, to offer a preferred channel mix and to have export and growth potential.
The chart below highlights the annual average revenue growth achieved by the five acquisitions executed between 2013 and 2019. On average, the group revenue CAGR amounts to 6.5%, which we believe demonstrates a superior growth rate to the underlying markets as the acquired businesses have been able to plug in to the varied sales channels developed by Norcros, as well as developing new products that have pushed up vitality sales.
Exhibit 9: Growth track record of pre-Grant Westfield acquisitions |
Source: Norcros |
Supply chain strength brings advantages
The bathroom plumbing market is very fragmented, but Norcros is one of the market leaders. This implies that it is better placed to monitor the supply chain than many of its peers. This includes being able to focus on the sourcing of products that are manufactured to the highest standards and ensuring that the supply chain is as robust as possible.
Norcros sources a significant percentage of its products from more than 120 manufacturers across China and it has more than 30 employees on the ground based at four representative offices that work closely with the suppliers, thus ensuring quality of product and certainty of supply. This local presence offers Norcros fundamental strength in terms of product supply, which is a clear point of differential versus peers and therefore a competitive advantage.
It also means that it is better able to control the supply chain and drive sourcing synergies, which will be an added focus in 2023.
Valuation suggests 45% upside
Following the sell-off in the shares over the last 12 months, Norcros is trading at the low end of its long-term forward P/E range, suggesting that a lot of bad news is priced in. In fact, it has only traded materially below the current rating for a period in early 2020 during the pandemic. We value the stock at 314p/share based on the average of a P/E-based valuation of 295p/share and our DDM, which implies a value of 333p/share.
Simple forward P/E multiple valuation implies 295p/share
The chart below details the progression of Norcros’s forward P/E over the last cycle. The range at the extremes is a low of 4x post COVID-19, and the high is c 12x at the end of 2013, before the Brexit hiatus. Over this period and outside the extreme ratings, the ‘real’ range has arguably been 6–9x and the average over the whole period is 7.5x.
Exhibit 15: Norcros – forward P/E ratio (x) |
Source: Refinitiv |
If we apply the 7.5x forward P/E multiple to our estimate of FY23e diluted underlying EPS of 39.4p, we arrive at a value of 295p/share, implying c 30% upside to the share price. Arguably, this method gives little credit for future acquisitions which are part of the company’s strategy and may be forthcoming. We note that Norcros’s stockbroker currently has a target price of 365p/share, which implies a P/E of 9.25x when applied to our FY23e diluted underlying EPS of 39.4p. Other brokers currently have target prices for Norcros well in excess of 365p.
Exhibit 16: Implied valuation based on a range of P/E multiples
P/E target (x) |
5.0 |
6.0 |
7.0 |
7.5 |
8.0 |
9.0 |
Implied valuation (p/share) |
197 |
236 |
275 |
295 |
315 |
354 |
Source: Edison Investment Research
Dividend discount model implies a valuation of 333p
A DDM based on our FY23e dividend of 10p, applying an 8% cost of equity and a 5% growth rate, implies a valuation of 333p/share, which is not materially different to our P/E-based valuation of 295p. 333p/share implies a forward P/E multiple of c 8.5x, which could be justified if one was to consider the potential acquisition-led growth that is arguably not reflected in the current forward P/E ratio.
Exhibit 17: Implied valuation/share (p) based on a range of inputs
Dividend growth rate (%) |
||||||
3.0% |
4.0% |
5.0% |
6.0% |
7.0% |
||
Cost of equity |
12.0% |
111.1 |
125.0 |
142.9 |
166.7 |
200.0 |
11.0% |
125.0 |
142.9 |
166.7 |
200.0 |
250.0 |
|
10.0% |
142.9 |
166.7 |
200.0 |
250.0 |
333.3 |
|
9.0% |
166.7 |
200.0 |
250.0 |
333.3 |
500.0 |
|
8.0% |
200.0 |
250.0 |
333.3 |
500.0 |
1000.0 |
Source: Edison Investment Research
Exhibit 18: Financial summary
£m |
2020 |
2021 |
2022 |
2023e |
2024e |
||
31-March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
342.0 |
324.2 |
396.3 |
450.8 |
485.9 |
EBITDA |
|
|
39.1 |
39.2 |
47.0 |
54.3 |
59.8 |
Normalised operating profit |
|
|
32.3 |
33.8 |
41.8 |
48.4 |
53.6 |
Operating profit - Underlying |
32.3 |
33.8 |
41.8 |
48.4 |
53.6 |
||
Amortisation of acquired intangibles |
(1.5) |
(1.4) |
(1.7) |
(1.7) |
(1.7) |
||
Impairment |
(4.0) |
(3.7) |
(4.8) |
(7.0) |
(4.7) |
||
Other |
(9.0) |
(3.8) |
0.9 |
0.0 |
0.0 |
||
Reported operating profit |
17.8 |
24.9 |
36.2 |
39.7 |
47.2 |
||
Net Interest |
(2.8) |
(6.4) |
(3.2) |
(5.2) |
(6.3) |
||
Profit Before Tax (norm) |
|
|
29.5 |
27.4 |
38.6 |
43.2 |
47.3 |
PBT - Underlying |
|
|
28.8 |
30.6 |
39.3 |
44.0 |
48.1 |
Profit Before Tax (reported) |
|
|
15.0 |
18.5 |
33.0 |
34.5 |
40.9 |
Reported tax |
(4.1) |
(3.5) |
(7.3) |
(9.0) |
(11.3) |
||
Profit After Tax (norm) |
25.4 |
23.9 |
31.3 |
34.2 |
36.1 |
||
Profit After Tax (reported) |
10.9 |
15.0 |
25.7 |
25.5 |
29.7 |
||
Net income (normalised) |
25.4 |
23.9 |
31.3 |
34.2 |
36.1 |
||
Net income (reported) |
10.9 |
15.0 |
25.7 |
25.5 |
29.7 |
||
Basic average number of shares outstanding (m) |
80 |
81 |
81 |
85 |
89 |
||
EPS - basic normalised (p) |
|
|
31.63 |
29.65 |
38.70 |
40.31 |
40.61 |
EPS - diluted normalised (p) |
|
|
31.37 |
29.58 |
37.99 |
38.45 |
39.67 |
EPS - diluted, underlying |
|
|
28.16 |
31.06 |
38.23 |
39.35 |
40.55 |
EPS - basic reported (p) |
|
|
13.57 |
18.61 |
31.77 |
30.06 |
33.41 |
Dividend (p) |
3.10 |
8.20 |
10.00 |
10.00 |
10.50 |
||
Revenue growth (%) |
3.3 |
(-5.2) |
22.2 |
13.7 |
7.8 |
||
EBITDA Margin (%) |
11.4 |
12.1 |
11.9 |
12.0 |
12.3 |
||
Normalised Operating Margin |
9.4 |
10.4 |
10.5 |
10.7 |
11.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
150.8 |
141.2 |
158.8 |
228.6 |
216.0 |
Intangible Assets |
96.5 |
93.6 |
90.3 |
86.2 |
82.1 |
||
Tangible Assets |
29.0 |
28.0 |
29.0 |
111.5 |
114.3 |
||
Investments & other |
25.3 |
19.6 |
39.5 |
30.9 |
19.6 |
||
Current Assets |
|
|
188.7 |
171.0 |
200.7 |
231.8 |
247.7 |
Stocks |
78.9 |
78.1 |
100.6 |
117.2 |
126.3 |
||
Debtors |
60.5 |
64.6 |
71.1 |
85.6 |
92.3 |
||
Cash & cash equivalents |
47.3 |
28.3 |
27.4 |
27.4 |
27.4 |
||
Other |
2.0 |
0.0 |
1.6 |
1.6 |
1.6 |
||
Current Liabilities |
|
|
(79.2) |
(104.1) |
(110.8) |
(125.6) |
(129.0) |
Creditors |
(72.9) |
(95.4) |
(102.4) |
(117.2) |
(126.3) |
||
Tax and social security |
(1.0) |
(1.0) |
(2.7) |
(2.7) |
(2.7) |
||
Short term borrowings |
(0.1) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(5.2) |
(7.7) |
(5.7) |
(5.7) |
0.0 |
||
Long Term Liabilities |
|
|
(155.9) |
(59.7) |
(48.4) |
(99.2) |
(79.3) |
Long term borrowings |
(83.6) |
(17.8) |
(18.8) |
(78.0) |
(61.5) |
||
Other long term liabilities |
(72.3) |
(41.9) |
(29.6) |
(21.2) |
(17.8) |
||
Shareholders' equity |
|
|
104.4 |
148.4 |
200.3 |
235.7 |
255.3 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
39.1 |
39.2 |
47.0 |
54.3 |
59.8 |
||
Working capital |
(4.8) |
21.8 |
(23.6) |
(16.3) |
(6.7) |
||
Exceptional & other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Tax |
(5.3) |
(3.5) |
(6.5) |
(9.0) |
(11.3) |
||
Other |
0.4 |
(2.0) |
(0.9) |
(2.9) |
(0.9) |
||
Net operating cash flow |
|
|
29.4 |
55.5 |
16.0 |
26.1 |
41.0 |
Capex |
(4.8) |
(2.8) |
(5.4) |
(8.0) |
(8.5) |
||
Acquisitions/disposals |
(9.2) |
0.0 |
0.0 |
(80.0) |
0.0 |
||
Net interest |
(3.5) |
(3.2) |
(2.5) |
(2.7) |
(3.8) |
||
Equity financing |
(0.9) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(7.0) |
0.0 |
(9.1) |
(8.3) |
(8.5) |
||
Other |
(3.8) |
(3.2) |
(2.5) |
13.7 |
(3.7) |
||
Net Cash Flow |
0.2 |
46.3 |
(3.5) |
(59.2) |
16.5 |
||
Opening net debt/(cash) |
|
|
35.0 |
36.4 |
(10.5) |
(8.6) |
50.6 |
FX |
(1.6) |
0.6 |
1.6 |
0.0 |
0.0 |
||
Other non-cash movements |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
36.4 |
(10.5) |
(8.6) |
50.6 |
34.1 |
Source: Norcros, Edison Investment Research
|
|
Research: Industrials
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