Norcros — Update 22 April 2016

Norcros (LSE: NXR)

Last close As at 20/05/2024

GBP2.18

3.00 (1.40%)

Market capitalisation

GBP198m

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Research: Industrials

Norcros — Update 22 April 2016

Norcros

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Written by

norcros03

Industrials

Norcros

Strategic and financial progress

Acquisition & FY16 update

Construction & materials

22 April 2016

Price

177.75p

Market cap

£108m

£/ZAR 22.0

Net debt (£m) at end September 2015

29.2

Shares in issue

61.0m

Free float

98.3%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.5

1.6

3.0

Rel (local)

2.7

(7.6)

12.6

52-week high/low

225p

160p

Business description

Norcros is a leading supplier of showers, 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 event

FY16 results

14 June 2016

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Norcros is a research client of Edison Investment Research Limited

FY16 was a year of strategic and financial progress for Norcros, with improved profit contributions from both reporting regions and two acquisitions completed. The company’s rating has yet to reflect this momentum in our view.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

218.7

12.9

22.8

5.1

7.8

2.9

03/15

222.1

14.0

18.0

5.6

9.9

3.2

03/16e

240.6

17.5

21.1

6.4

8.4

3.6

03/17e

263.6

19.5

23.2

6.8

7.7

3.8

Note: *PBT and EPS FD are normalised, excluding intangible amortisation and exceptional items. EPS/DPS are adjusted for a one-to-10 share consolidation (30 September 2015).

Abode offers good strategic fit

Having acquired Croydex in June, Norcros announced its second FY16 deal at the year end. Abode Home Products designs, sources and distributes high-quality kitchen taps, sinks and bathroom taps with a customer proposition based on product innovation and service. We understand that its customer profile primarily comprises a mix of trade and specialist retail – supplied with both branded and own-label products – with limited DIY and merchant channel exposure. Strategically, Abode fits well with Vado, extending the kitchen-oriented range, bringing complementary distribution relationships and joint sourcing potential. In the year to June 2015, Abode generated £9.9m of revenue and EBITDA of £0.6m. Norcros paid an initial cash-free/debt-free consideration of £3.5m. (Terms also include deferred consideration of up to £0.9m – payable in FY19 – and a three-year management incentive plan of up to £0.4m, both dependent on financial performance.)

FY16 EBIT to exceed market expectations

A year-end trading update stated that underlying group EBIT is likely to be “marginally ahead” of market expectations. Regional revenues appear to have been slightly weaker in the UK overall (a stronger Croydex contribution, offset by retail and export exposures), while South Africa has been slightly better (with all three businesses progressing well) against our own estimates. Net debt (including Abode) of c £33m is in line with our expectations. Lastly, the March 2015 pension triennial review has resulted in a small increase in cash recovery payments. In our view, this provides increased clarity and certainty in this area and Norcros’s free cash flow credentials remain strong. In context, the c £2.5m FY17 total payment is less than 10% of our expected FY17 EBITDA.

Valuation: Scope for a positive re-rating

We have raised FY17 and FY18 PBT and EPS expectations by c 3% to reflect the Abode acquisition, with no other changes to existing estimates. On this basis, the FY17 valuation multiples become P/E 7.7x, EV/EBITDA (adjusted for pensions recovery cash) 4.4x, with a prospective 3.8% yield. With demonstrable financial and strategic progress and reiterated management revenue aspirations well above our FY18 projection, there is clear scope for a positive re-rating in our view.

Exhibit 1: Financial summary

£ms

2011

2012

2013

2014

2015

2016e

2017e

2018e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Continuing

Continuing

Continuing

Continuing

Revenue

 

 

196.1

200.3

210.7

218.7

222.1

240.6

263.6

275.7

Cost of Sales

 

 

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

EBITDA

 

 

18.2

18.6

19.9

22.9

24.3

28.3

30.9

32.8

Operating Profit (before SBP)

 

 

11.6

12.3

13.7

17.0

18.3

21.9

24.3

26.2

Net Interest

 

 

(1.5)

(1.4)

(1.3)

(1.5)

(1.2)

(1.3)

(1.7)

(1.5)

Other financial - norm

 

 

(1.1)

(0.9)

(2.4)

(2.6)

(3.1)

(3.1)

(3.1)

(3.1)

Other financial

 

 

(0.4)

0.6

(0.2)

(5.2)

2.1

(2.5)

(1.5)

(1.5)

Intangible Amortisation

 

 

0.0

0.0

0.0

(0.4)

(0.3)

(0.9)

(1.3)

(1.3)

Exceptionals

 

 

(1.1)

(1.2)

(4.4)

(1.5)

(4.8)

(1.7)

(1.0)

(1.0)

Profit Before Tax (norm)

 

 

9.0

10.0

10.0

12.9

14.0

17.5

19.5

21.6

Profit Before Tax (company norm)

 

10.2

10.7

11.7

14.6

15.8

19.3

21.3

23.4

Profit Before Tax (FRS 3)

 

 

7.5

9.4

5.4

5.8

11.0

12.4

15.7

17.8

Tax

 

 

(0.8)

0.0

0.2

4.3

(3.0)

(3.7)

(4.2)

(4.7)

Other

 

 

0.0

0.0

0.0

(1.4)

0.1

0.0

0.0

0.0

Profit After Tax (norm)

 

 

8.2

10.4

9.3

13.9

11.1

13.8

15.3

16.9

Profit After Tax (FRS 3)

 

 

6.7

9.4

5.6

8.7

8.1

8.7

11.5

13.1

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

57.7

57.7

58.0

58.4

59.2

60.6

61.3

62.0

Average Number of Shares Outstanding FD (m)

57.7

58.0

58.9

60.8

61.5

62.3

63.0

63.7

EPS FD - normalised (p)

 

 

14.1

17.9

15.8

22.8

18.0

21.1

23.2

25.4

EPS FD - company normalised (p)

 

 

16.3

19.2

18.7

27.9

21.1

24.0

26.1

28.2

EPS - FRS 3 (p)

 

 

11.6

16.2

9.5

14.3

13.2

12.9

17.2

19.5

Dividend per share (p)

 

 

3.6

4.2

4.6

5.1

5.6

6.4

6.8

7.3

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

 

 

9.3

9.3

9.4

10.5

10.9

11.8

11.7

11.9

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

5.9

6.1

6.5

7.8

8.2

9.1

9.2

9.5

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

80.7

80.0

86.7

80.0

78.3

94.2

97.2

97.9

Intangible Assets

 

 

23.9

23.4

27.6

27.1

26.9

42.9

44.3

43.3

Tangible Assets

 

 

49.1

44.8

43.5

36.9

37.6

40.1

41.7

43.4

Investments

 

 

7.7

11.8

15.6

16.0

13.8

11.2

11.2

11.2

Current Assets

 

 

94.4

89.7

104.6

102.2

100.4

110.3

126.9

141.3

Stocks

 

 

42.3

45.5

52.8

50.2

52.2

58.5

65.9

68.9

Debtors

 

 

36.4

34.5

36.3

35.5

37.5

44.1

49.4

51.7

Cash

 

 

7.7

2.9

6.8

3.9

5.6

3.7

7.6

16.7

Current Liabilities

 

 

(56.4)

(52.5)

(54.0)

(58.1)

(60.0)

(67.3)

(80.0)

(87.0)

Creditors

 

 

(53.3)

(52.1)

(53.5)

(57.3)

(58.6)

(67.3)

(80.0)

(87.0)

Short term borrowings

 

 

(3.1)

(0.4)

(0.5)

(0.8)

(1.4)

0.0

0.0

0.0

Long Term Liabilities

 

 

(39.3)

(46.1)

(75.7)

(58.6)

(67.4)

(83.1)

(82.1)

(81.0)

Long term borrowings

 

 

(15.2)

(20.3)

(37.0)

(30.5)

(18.4)

(35.6)

(35.6)

(35.6)

Other long term liabilities

 

 

(24.1)

(25.8)

(38.7)

(28.1)

(49.0)

(47.5)

(46.5)

(45.4)

Net Assets

 

 

79.4

71.1

61.6

65.5

51.3

54.2

62.0

71.2

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

10.8

6.0

6.6

13.6

16.2

22.8

22.9

26.9

Net Interest

 

 

(1.0)

(1.6)

(1.3)

(1.6)

(1.3)

(1.3)

(1.7)

(1.5)

Tax

 

 

(0.6)

(0.6)

(1.0)

(1.7)

(0.5)

(1.8)

(2.7)

(3.7)

Capex

 

 

(6.3)

(6.7)

(4.2)

(2.8)

(1.4)

(8.5)

(8.3)

(8.3)

Acquisitions/disposals

 

 

4.4

0.0

(10.6)

0.1

3.3

(23.6)

(2.7)

(0.4)

Financing

 

 

0.0

0.2

0.3

0.4

0.2

0.0

0.0

0.0

Dividends

 

 

(0.7)

(2.2)

(2.5)

(2.8)

(3.1)

(3.5)

(3.7)

(4.0)

Net Cash Flow

 

 

6.6

(4.9)

(12.7)

5.2

13.4

(15.9)

3.9

9.2

Opening net debt/(cash)

 

 

15.9

10.6

17.8

30.7

27.4

14.2

31.9

28.0

HP finance leases initiated

 

 

0.0

(0.8)

(0.1)

0.0

0.0

0.0

0.0

0.0

Other

 

 

(1.3)

(1.5)

(0.1)

(1.9)

(0.2)

(1.8)

0.0

0.0

Closing net debt/(cash)

 

 

10.6

17.8

30.7

27.4

14.2

31.9

28.0

18.9

Source: Company accounts, Edison Investment Research. Note: Edison norm includes IAS19R pension administration costs and amortisation costs of raising finance (c £1.7m and £0.1m respectively from FY15 onwards). Exceptional items in 2015 and 2016 relate to the resolution of legacy property items and acquisition activity. Historic per share values have been restated to reflect the 1 for 10 share consolidation undertaken in September 2015.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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