Norcros — New CEO likely to pursue existing strategy

Norcros (LSE: NXR)

Last close As at 21/06/2024

GBP2.25

4.00 (1.81%)

Market capitalisation

GBP202m

More on this equity

Research: Industrials

Norcros — New CEO likely to pursue existing strategy

Norcros’s final results highlighted a solid FY23 performance, and although we have reduced our estimates to reflect a weaker macro outlook, we believe Norcros has an excellent base to evolve its strategy, which should allow it to unlock significant market share opportunities. We also believe that its key strengths are undervalued and that most, if not all, of the legacy issues, particularly the pension deficit, have been resolved. We have trimmed our valuation from 252p/sh to 246p, implying c 50% upside.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Norcros

Record results and strong financial position

FY23 results

Construction and materials

4 July 2023

Price

168p

Market cap

£150m

ZAR21.30/£

Net debt (£m) at 31 March 2023

49.9

Shares in issue

89.3m

Free float

98%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.9)

(12.0)

(28.3)

Rel (local)

(3.6)

(10.3)

(31.0)

52-week high/low

240p

165p

Business description

Norcros is a leading supplier of showers, enclosures, trays, tiles, taps and related fittings and accessories for bathrooms, kitchens, washrooms and other commercial environments. It has operations in the UK and South Africa, with some export activity from both countries.

Next events

AGM

July 2023

H1 trading update

October 2023

Analyst

Andy Murphy

+44 (0)20 3077 5700

NorcrosNorcros is a research client of Edison Investment Research Limited

Norcros’s final results highlighted a solid FY23 performance, and although we have reduced our estimates to reflect a weaker macro outlook, we believe Norcros has an excellent base to evolve its strategy, which should allow it to unlock significant market share opportunities. We also believe that its key strengths are undervalued and that most, if not all, of the legacy issues, particularly the pension deficit, have been resolved. We have trimmed our valuation from 252p/sh to 246p, implying c 50% upside.

Year

end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/22

396.3

39.3

38.2

10.0

4.4

6.0

03/23

441.0

41.8

37.4

10.2

4.5

6.1

03/24e

442.1

36.7

31.6

10.2

5.3

6.1

03/25e

447.2

37.9

32.4

10.2

5.2

6.1

Note: *PBT and EPS are ‘underlying’, excluding amortisation of acquired intangibles, exceptional items but including share-based payments. EPS is ‘diluted’.

Prelims exhibit solid growth, good balance sheet

FY23 group revenue increased 11.3% to £441.0m, and group underlying operating profit increased from £41.8m to £47.3m, implying a 20bp expansion in the operating margin to 10.7%. Underlying profit before tax rose by a more modest rate of 6.4%, to £41.8m, reflecting the good profit performance, but held back by higher interest costs. Diluted underlying EPS fell 2.1% due to the higher number of shares in issue post the equity raise. The dividend was increased 2.0% despite the decline in EPS, which resulted in dividend cover of c 3.7x. Net debt came in slightly better than expected at £49.9m, implying a net debt to EBITDA ratio of c 1.0x.

New CEO’s thoughts; ‘evolution, not revolution’

Following the retirement of long-time CEO Nick Kelsall, Thomas Willcocks was promoted from group business director – UK, to group CEO in April. He had previously held several senior positions in the South African division, and was formerly the MD of Norcros South Africa. At the full year presentation, he outlined his initial thoughts on Norcros and his immediate areas of focus for the group. Our reading of this is that the current strategy of developing the group as a ‘one-stop shop’ for bathrooms, focusing on organic and M&A-led growth, with disciplined capital allocation and operational excellence, will continue. We believe Norcros is likely to host a capital markets day in H2 to provide more detail, but material change is unlikely.

Valuation: Revised valuation offers 50% upside

Norcros is trading at the lower end of its long-term consensus forward P/E range on 5.5x, suggesting that a lot of bad news might already be priced in. It has only traded below current levels for two brief periods: COVID-19 and the 2022 ‘mini-budget’. Following the results, we have lowered our valuation as our earnings estimates have reduced due to short-term headwinds in South Africa, increased UK Corporation Tax rates and higher interests costs. Our P/E based valuation implies a value of 237p/sh based on our lowered diluted underlying FY24 EPS estimate of 31.6p/sh. Our revised dividend discount model (DDM) implies a value of 255p/sh, and if we take the average of the two, we arrive at 246p, implying c 50% upside.

Robust results, depressed valuation

Norcros’s FY23 results demonstrated both good revenue and profit growth with underlying operating margins achieving the highest level in at least 10 years. They also showed that the net debt position had strengthened since the interim stage, with net debt falling to £49.9m, which was £2.5m better than we had expected. Despite the robust performance, trading in South Africa has weakened due to load shedding (ie, power outages) and borrowing costs have risen. Therefore, we have pared back our FY24 and FY25 EPS estimates by c 7% and reduced our valuation from 252p/share to 246p/share, implying c 50% upside. That said, the new CEO is likely to maintain the existing growth strategy, which includes M&A, which could add upside to this depressed valuation.

Solid results highlight record operating margin

FY23 group revenue increased 11.3% to £441.0m, driven primarily by the UK, which was up 15.2%, benefiting from price increases and the inclusion of Grant Westfield, bought in May 2022. South Africa revenues increased 4%, following growth of 10% in H1, and a decline in H2 of 2.0% as electricity ‘load shedding’ affected demand and operations. Group underlying operating profit increased from £41.8m in FY22 to £47.3m, implying a 20bp expansion in the operating margin to 10.7%. It is worth noting here that this margin figure exceeds the pre-COVID FY19 margin of 10.4%, and is the highest reported margin for at least 10 years.

Underlying PBT rose by a more modest rate of 6.4% to £41.8m, reflecting the good profit performance, but held back by higher interest expenses due to higher acquisition-related interest costs and now higher borrowing costs as interest rates have risen. Diluted underlying EPS fell 2.1% due to the higher number of shares in issue post the equity raise to partly finance the purchase of Grant Westfield. The dividend was increased 2% despite the decline in EPS, which resulted in dividend cover of c 3.7x.

Exhibit 1: FY results summary, last four years

£m

FY20

FY21

y-o-y % chg

FY22

y-o-y % chg

FY23

y-o-y % chg

Total revenues

342.0

324.2

-5.2%

396.3

22.2%

441.0

11.3%

Operating profit (underlying)

32.3

33.8

4.6%

41.8

23.7%

47.3

13.2%

Underlying operating margin

9.4%

10.4%

-

10.5%

-

10.7%

-

Underlying PBT (£m)

28.8

30.6

6.3%

39.3

28.4%

41.8

6.4%

Profit before tax (post exceptionals and other)

15.0

18.5

23.3%

33.0

78.4%

21.7

-34.2%

EPS – diluted, underlying (p)

28.2

31.1

10.3%

38.2

23.1%

37.4

-2.1%

Dividend per share

3.1

8.2

164.5%

10.0

22.0%

10.2

2.0%

Underlying net cash/(debt)

(36.4)

10.5

N/A

8.6

-18.1%

(49.9)

-680.2%

Source: Norcros accounts, Edison Investment Research

FY23 net debt was £49.9m, a reversal from the net cash position as at FY22, but lower than we expected and also materially lower than the H123 net debt figure of £58.9m as cash flow was well managed and the Grant Westfield acquisition performed as expected.

Outlook and higher finance costs lead to estimate ‘haircut’

The macro outlook remains uncertain and we have reflected this, and other issues, in our revised estimates. For example, we maintain a low growth forecast for the UK of 1% pa for the next three years, but in South Africa, given the weakening economy and the issues with ‘load shedding’ we have reduced revenue growth estimates from 2% pa in FY24 and FY25 to minus 2% and zero in the two years respectively. Coupled with a weaker South African rand versus sterling, this results in a c 45% reduction in group revenue for FY24 and FY25.

Lower revenue and potentially some higher cost pressures are likely to have a disproportionate impact on profitability and we have therefore reduced normalised, underling operating profit by 6.5% in FY24e and 6.7% in FY25e. Lower profits and higher financing costs lead to reduced EPS, although we have edged up our dividend expectations (lowered previously) given the dividend cover remains robust at 3.0x and the balance sheet remains strong with FY24 net debt to EBITDA declining to 0.8x.

Exhibit 2: Changes to forecasts

£m

2023

2024e

2025e

Old

New

% chg

Old

New

% chg

Revenue

441.0

462.6

442.1

-4.4%

468.8

447.2

-4.6%

y-o-y % change

11.3%

3.1%

0.2%

-

1.3%

1.2%

-

EBITDA - Edison basis

52.3

52.4

49.4

-5.8%

53.9

49.8

-7.5%

y-o-y % change

11.3%

-2.2%

-5.6%

-

2.9%

1.0%

-

EBITDA - Reported pre IFRS 16

50.5

51.1

48.1

-6.0%

52.6

48.5

-7.7%

y-o-y % change

11.2%

-2.3%

-4.8%

-

2.9%

1.0%

-

Normalised, underlying operating profit

47.3

46.2

43.2

-6.5%

46.8

43.7

-6.7%

y-o-y % change

13.2%

-3.1%

-8.7%

-

1.3%

1.1%

-

PBT (Underlying)

41.8

39.7

36.7

-7.5%

41.3

37.9

-8.3%

y-o-y % change

6.4%

-6.8%

-12.2%

-

4.0%

3.2%

-

EPS - diluted, underlying (p)

37.4

33.8

31.6

-6.7%

35.0

32.4

-7.3%

y-o-y % change

-2.1%

-7.9%

-15.7%

-

3.6%

2.8%

-

DPS (p)

10.2

9.3

10.2

9.7%

9.5

10.2

7.4%

y-o-y % change

2.0%

-7.0%

0.0%

-

2.2%

0.0%

-

Net (debt)/cash (pre IFRS 16)

-49.9

-42.0

-40.1

-4.4%

-24.4

-28.7

17.5%

y-o-y % change

N/A

-18.3%

-19.5%

-

-41.9%

-28.6%

-

Source: Norcros accounts, Edison Investment Research

We believe that Norcros is well placed to offset weaker than expected demand. The business generally operates on a capital-light model and has demonstrated the ability to flex in times of declining demand. This can be seen particularly in H121 during the pandemic, when demand fell and the business was run for cash. Norcros reported a net debt position of £36.4m at 31 March 2020, which reduced to net debt of £7.3m by the end of September, and swung to a net cash position of £10.5m just 12 months later.

The wider point about declining demand is how well placed Norcros is versus its competitors to take market share, as it is well capitalised (net debt to EBITDA was c 1.0x at the end of March 2023) and focused on new products, with good stock availability and customer service. Many competitors have greater leverage, have squeezed working capital to the detriment of customer service and will not have the infrastructure in China to manage the ongoing supply chain challenges. It is possible that some of the competition would not survive in a downturn and Norcros is well placed to benefit from any opportunities to gain market share as well as pick up new pieces for its ‘one-stop shop for bathrooms’ jigsaw.

Valuation suggests c 50% upside

Norcros is trading at the lower end of its long-term consensus forward P/E range on 5.5x (Edison forecast P/E: 5.3x), suggesting that a lot of bad news is priced in. In fact, it has only traded materially below the current rating for a brief period in early 2020 during the pandemic and for a short period around the time of Liz Truss’s brief stint as prime minister. Following the results, we have lowered our valuation from 252p/share as our earnings estimates have reduced, largely due to weakness in South Africa and higher interest costs at group level. Our P/E based valuation implies a value of 237p/share based on our lowered diluted underlying FY24 EPS estimate of 31.6p/share. Our revised DDM implies a value of 255p/share, and if we take the average of the two, we arrive at 246p, implying c 50% upside.

Simple forward P/E multiple valuation implies 237p/share

The chart below details the progression of Norcros’s consensus forward P/E over the last cycle. The range at the extremes is a low of 4x, reached briefly post COVID-19 and again recently, 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 3: Norcros – forward P/E ratio (x)

Source: Refinitiv

If we apply the 7.5x forward P/E multiple to our lowered estimate of FY24e diluted underlying EPS of 31.6p, we arrive at a value of 237p/share, down from 253p/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.

Exhibit 4: 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)

158

189

221

237

252

284

Source: Edison Investment Research

Dividend discount model implies a valuation of 255p

Given we have slightly increased our FY24e dividend payment from 10.0p to 10.2p, ie in line with the FY23 dividend payment, our DDM based valuation rises from 250p/share to 255p/share. We are confident that forecasts are likely to rise in the longer term given the numerous growth channels available to Norcros, justifying our 5% long-term dividend growth rate assumption.

Exhibit 5: Implied valuation (p/share) based on a range of inputs

Dividend growth rate (%)

3.0%

4.0%

5.0%

6.0%

7.0%

Cost of equity

12.0%

113.3

127.5

145.7

170.0

204.0

11.0%

127.5

145.7

170.0

204.0

255.0

10.0%

145.7

170.0

204.0

255.0

340.0

9.0%

170.0

204.0

255.0

340.0

510.0

8.0%

204.0

255.0

340.0

510.0

1,020.0

Source: Edison Investment Research

Exhibit 6: Financial summary

£'m

2021

2022

2023

2024e

2025e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

324.2

396.3

441.0

442.1

447.2

EBITDA

 

 

39.2

47.0

52.3

49.4

49.8

Normalised operating profit

 

 

33.8

41.8

47.3

43.2

43.7

Operating profit - Underlying

33.8

41.8

47.3

43.2

43.7

IAS 19R Pension scheme expenses

(1.4)

(1.7)

(1.6)

(1.7)

(1.7)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Impairment and acquisition related costs

(3.7)

(4.8)

(8.4)

(8.2)

(8.2)

Other

(3.8)

0.9

(9.8)

0.0

0.0

Reported operating profit

24.9

36.2

27.5

33.3

33.8

Net Interest

(6.4)

(3.2)

(5.8)

(7.9)

(7.2)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

27.4

38.6

41.5

35.3

36.5

PBT - Underlying

 

 

30.6

39.3

41.8

36.7

37.9

Profit Before Tax (reported)

 

 

18.5

33.0

21.7

25.4

26.6

Reported tax

(3.5)

(7.3)

(4.9)

(7.9)

(8.2)

Profit After Tax (norm)

23.9

31.3

36.6

27.4

28.2

Profit After Tax (Underlying)

25.1

31.5

36.9

28.8

29.6

Profit After Tax (reported)

15.0

25.2

16.8

17.5

18.3

Net income (normalised)

23.9

31.3

36.6

27.4

28.2

Net income (Underlying)

25.1

31.5

36.9

28.8

29.6

Net income (reported)

15.0

25.2

16.8

17.5

18.3

Basic average number of shares outstanding (m)

81

81

88

89

89

EPS - basic normalised (p)

 

 

29.65

38.70

41.53

30.73

31.64

EPS - diluted normalised (p)

 

 

29.58

37.99

40.89

30.02

30.91

EPS - Diluted, underlying

 

 

31.06

38.23

37.43

31.55

32.44

EPS - basic reported (p)

 

 

18.61

31.15

19.06

19.64

20.55

Dividend (p)

8.20

10.00

10.20

10.20

10.20

Revenue growth (%)

(-5.2)

22.2

11.3

0.2

0.0

EBITDA Margin (%)

12.1

11.9

11.9

11.2

11.1

Normalised Operating Margin

10.4

10.5

10.7

9.8

9.8

BALANCE SHEET

Fixed Assets

 

 

141.2

158.8

226.8

215.7

205.0

Intangible Assets

93.6

90.3

167.1

159.5

151.9

Tangible Assets

28.0

29.0

24.8

27.6

30.8

Investments & other

19.6

39.5

34.9

28.6

22.3

Current Assets

 

 

171.0

200.7

216.2

221.3

225.8

Stocks

78.1

100.6

103.9

108.3

111.8

Debtors

64.6

71.1

83.3

84.0

85.0

Cash & cash equivalents

28.3

27.4

29.0

29.0

29.0

Other

0.0

1.6

0.0

0.0

0.0

Current Liabilities

 

 

(104.1)

(110.8)

(112.7)

(113.0)

(114.1)

Creditors

(95.4)

(102.4)

(99.2)

(99.5)

(100.6)

Tax and social security

(1.0)

(2.7)

(0.9)

(0.9)

(0.9)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Other

(7.7)

(5.7)

(12.6)

(12.6)

(12.6)

Long Term Liabilities

 

 

(59.7)

(48.4)

(119.9)

(101.5)

(81.5)

Long term borrowings

(17.8)

(18.8)

(78.9)

(69.1)

(57.7)

Other long term liabilities

(41.9)

(29.6)

(41.0)

(32.4)

(23.8)

CASH FLOW

Op Cash Flow before WC and tax

39.2

47.0

52.3

49.4

49.8

Working capital

21.8

(23.6)

(13.3)

(4.8)

(3.3)

Exceptional & other

0.0

0.0

0.0

0.0

0.0

Tax

(3.5)

(6.5)

(7.7)

(7.9)

(8.2)

Other

(2.0)

(0.9)

(2.5)

(0.9)

(0.9)

Net operating cash flow

 

 

55.5

16.0

28.8

35.7

37.4

Capex

(2.8)

(5.4)

(6.0)

(8.5)

(9.0)

Acquisitions/disposals

0.0

0.0

(78.3)

0.0

0.0

Net interest

(3.2)

(2.5)

(5.5)

(4.8)

(4.1)

Dividends

0.0

(9.1)

(9.2)

(9.0)

(9.1)

Other

(3.2)

(2.5)

14.6

(3.7)

(3.7)

Net Cash Flow

46.3

(3.5)

(55.6)

9.8

11.5

Opening net debt/(cash)

 

 

36.4

(10.5)

(8.6)

49.9

40.1

FX

0.6

1.6

(2.9)

0.0

0.0

Closing net debt/(cash)

 

 

(10.5)

(8.6)

49.9

40.1

28.7

Source: Norcros and Edison Investment Research


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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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