Norcros — Overseas challenges reduce estimates

Norcros (LSE: NXR)

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Research: Industrials

Norcros — Overseas challenges reduce estimates

Some pressure on local South African profitability and transitory effects of disrupted China supply lead us to reduce our Norcros earnings estimates by 5–8% following a trading update. Management remains firmly in credit for achieving outperformance versus local markets and we expect this to be a recurring feature. The company’s share price has retraced to pre UK general election levels now and its P/Es remain in single digits on our revised estimates.

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Norcros

Overseas challenges reduce estimates

Trading update

Construction & materials

27 February 2020

Price

239p

Market cap

£192m

ZAR19.5/£

Net debt (£m) at end September 2019
(excluding IFRS 16 lease liabilities of £30m)

41

Shares in issue

80.2m

Free float

98%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(21.6)

(5.9)

22.6

Rel (local)

(16.0)

(2.0)

22.5

52-week high/low

305.0p

185.5p

Business description

Norcros is a leading supplier of showers, enclosures and 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 event

FY20 trading update

14 April 2020

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Norcros is a research client of Edison Investment Research Limited

Some pressure on local South African profitability and transitory effects of disrupted China supply lead us to reduce our Norcros earnings estimates by 5–8% following a trading update. Management remains firmly in credit for achieving outperformance versus local markets and we expect this to be a recurring feature. The company’s share price has retraced to pre UK general election levels now and its P/Es remain in single digits on our revised estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

300.1

24.4

26.8

7.8

8.9

3.3

03/19

331.0

30.9

29.6

8.4

8.1

3.5

03/20e

354.2

30.0

29.2

9.3

8.2

3.9

03/21e

355.3

31.8

30.5

9.8

7.8

4.1

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptionals, pension net finance costs and change in fair value of derivatives.

Headwinds from South Africa and China

UK market conditions (domestic and export) appear to be similar to when H120 results were reported in mid-November. The Coronavirus is however affecting product sourcing; with a slower return to post-Chinese New Year full production by suppliers and a c six-week order lead time, Norcros has flagged some likely business impact around the end of this financial year and the beginning of the next. China is an important sourcing region – particularly so for some of the group’s UK companies – but we expect the impact to be short-lived and relatively small in financial terms. We have previously flagged challenges in South Africa (eg weak economic outlook and confidence, credit rating risk and power supply variability) and these are now being reflected in reduced economic growth expectations and competitive market conditions. Norcros notes slow construction sector activity at the start of its Q4, although management still expects local operations – including House of Plumbing – to deliver FY20 EBIT slightly ahead of the prior year.

Reflecting the above, we have lowered our group earnings estimates by 7.7% for the current year (and by 7.0% and then 4.8% for the next two). This includes c £1.3m lower underlying profit contributions in all three years in South Africa (with a slightly adverse updating of ZAR/£ to 19.5, previously 18.5, for FY21 and FY22 also). We have also made a sub 5% reduction to our UK EBIT projection for FY20 and around half of this for FY21 (with no change to FY22).

Valuation: UK more to the fore

The Norcros share price has performed well over the last 12 months. It also participated in the post-UK general election market rally, although the trading update, estimated short term Coronoavirus impacts and weaker equity markets generally have led to a return to pre-election levels now. On our revised estimates, the current year P/E of 8.2x and EV/EBITDA (adjusted for pensions cash) of 5.7x reduce to 7.3x and 4.7x respectively by FY22. South African exposure may dilute short-term investor sentiment, but underlying UK momentum will become a more important influence on the share price, in our view.

Exhibit 1: Financial summary

£'ms

2015

2016

2017

2018

2019

2020e

2021e

2022e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Revenue

 

 

222.1

235.9

271.2

300.1

331.0

354.2

355.3

367.5

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 IFRS16

 

 

24.3

28.0

31.6

34.7

42.2

43.9

46.1

48.3

Op Profit (before SBP)

 

 

18.3

22.5

25.2

28.3

35.6

36.9

38.9

41.1

Net Interest

 

 

(1.2)

(0.9)

(0.9)

(1.1)

(1.8)

(1.8)

(2.0)

(1.9)

Other financial - norm

 

 

(3.1)

(3.1)

(3.6)

(2.8)

(2.9)

(5.1)

(5.1)

(5.1)

Other financial

 

 

2.1

(0.2)

(4.2)

(4.5)

2.3

(0.8)

(0.8)

(0.8)

Intangible Amortisation

 

 

(0.3)

(0.9)

(1.2)

(2.2)

(3.5)

(4.0)

(4.0)

(4.0)

Exceptionals

 

 

(4.8)

(2.0)

(3.8)

(4.2)

(4.3)

(1.0)

(0.6)

0.0

Profit Before Tax (norm)

 

 

14.0

18.5

20.7

24.4

30.9

30.0

31.8

34.1

Profit Before Tax (company norm)

 

15.8

20.4

22.9

26.3

32.6

32.0

33.8

36.1

Profit Before Tax (statutory)

 

 

11.0

15.4

11.5

13.5

25.4

24.2

26.4

29.3

Tax

 

 

(3.0)

(2.4)

(3.0)

(3.6)

(6.0)

(5.6)

(6.0)

(6.5)

Other

 

 

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit After Tax (norm)

 

 

11.1

16.1

17.7

20.8

24.9

24.4

25.9

27.7

Profit After Tax (statutory)

 

 

8.1

13.0

8.5

9.9

19.4

18.6

20.5

22.9

 

 

 

 

 

 

 

 

 

 

 

Avge Number of Shares Outstanding (m)

 

59.2

60.6

61.1

68.0

80.2

80.3

81.4

81.2

Avge Number of Shares Outstanding FD (m)

 

61.5

62.2

63.1

69.8

81.1

81.3

82.4

82.2

EPS FD - norm (p)

 

 

18.0

24.7

24.4

26.8

29.6

29.2

30.5

32.8

EPS FD - co norm (p)

 

 

21.1

27.7

27.8

29.5

31.7

31.6

32.9

35.2

EPS - statutory (p)

 

 

13.2

20.8

13.4

14.1

23.9

22.9

24.8

27.8

Dividend per share (p)

 

 

5.6

6.6

7.2

7.8

8.4

9.3

9.8

10.0

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

 

 

10.9

11.9

11.7

11.6

12.8

12.4

13.0

13.2

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

 

8.2

9.5

9.3

9.4

10.8

10.4

11.0

11.2

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

78.3

93.4

98.8

147.9

138.0

168.1

162.5

159.3

Intangible Assets

 

 

26.9

44.7

44.8

98.9

94.9

98.3

94.3

92.7

Tangible Assets

 

 

37.6

38.2

43.0

45.0

42.3

69.0

67.4

65.8

Investments

 

 

13.8

10.5

11.0

4.0

0.8

0.8

0.8

0.8

Current Assets

 

 

100.4

119.4

165.3

165.1

169.5

182.8

197.0

211.9

Stocks

 

 

52.2

60.1

70.3

74.9

79.5

85.1

85.3

88.3

Debtors

 

 

42.6

53.4

57.5

64.4

62.8

69.2

69.6

72.0

Cash

 

 

5.6

5.9

37.5

25.8

27.2

28.5

42.0

51.7

Current Liabilities

 

 

(60.0)

(67.6)

(105.7)

(89.8)

(85.1)

(92.6)

(95.2)

(98.8)

Creditors

 

 

(58.6)

(64.8)

(74.8)

(81.3)

(81.3)

(92.6)

(95.2)

(98.8)

Short term borrowings

 

 

(1.4)

(2.8)

(30.9)

(8.5)

(3.8)

0.0

0.0

0.0

Long Term Liabilities

 

 

(67.4)

(97.6)

(101.8)

(118.6)

(96.7)

(118.5)

(111.9)

(105.4)

Long term borrowings

 

 

(18.4)

(35.6)

(29.8)

(64.4)

(58.4)

(63.5)

(63.5)

(63.5)

Other long term liabilities

 

 

(49.0)

(62.0)

(72.0)

(54.2)

(38.3)

(55.0)

(48.4)

(41.9)

Net Assets

 

 

51.3

47.6

56.6

104.6

125.7

139.9

152.3

167.0

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

16.2

18.5

25.5

23.5

35.3

40.8

45.9

44.9

Net Interest

 

 

(1.3)

(0.9)

(0.9)

(1.1)

(1.8)

(3.6)

(3.8)

(3.7)

Tax

 

 

(0.5)

(1.0)

(1.9)

(4.9)

(4.6)

(6.0)

(5.6)

(6.0)

Capex

 

 

(1.4)

(6.6)

(8.0)

(7.7)

(5.5)

(10.0)

(10.0)

(10.0)

Acquisitions/disposals

 

 

3.3

(23.6)

(2.7)

(59.1)

(2.1)

(9.7)

0.0

(2.4)

Financing

 

 

0.2

0.1

0.0

30.1

(0.9)

(1.0)

(1.0)

(1.0)

Dividends

 

 

(3.1)

(3.6)

(4.2)

(5.0)

(6.4)

(7.0)

(8.0)

(8.2)

Net Cash Flow

 

 

13.4

(17.1)

7.9

(24.2)

14.0

3.5

17.5

13.7

Opening net debt/(cash)

 

 

27.4

14.2

32.5

23.2

47.1

35.0

35.0

21.5

IFRS16 Finance leases

 

 

0.0

0.0

0.0

0.0

0.0

(4.0)

(4.0)

(4.0)

Other

 

 

(0.2)

(1.2)

1.4

0.3

(1.9)

0.5

0.0

0.0

Closing net debt/(cash)

 

 

14.2

32.5

23.2

47.1

35.0

35.0

21.5

11.8

IFRS16 lease liabilities

 

 

 

 

 

 

 

(27.7)

(23.7)

(19.7)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Norcros and prepared and issued by Edison, in consideration of a fee payable by Norcros. Edison Investment Research standard fees are £49,500 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.

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Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

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1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

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This report has been commissioned by Norcros and prepared and issued by Edison, in consideration of a fee payable by Norcros. Edison Investment Research standard fees are £49,500 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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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BlackRock Latin American Investment Trust (BRLA) has been managed by Sam Vecht and Ed Kuczma since late December 2018. They have created a more concentrated portfolio comprising their highest-conviction ideas in the region. The managers are employing gearing in a more tactical way, which they report has proved successful in both up and down markets, and they have been more active in adding to and trimming positions when deemed appropriate. As a result of the changes made, BRLA now has higher stock-specific risk, but lower country and sector risk. The managers say the success of the strategy was evidenced in the trust’s strong relative performance in Q419. They are constructive on the prospects for Latin America in 2020 based on an expectation of higher economic growth, low interest rates and the potential for a weaker US dollar.

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