Norcros — Sure-footed progress

Norcros (LSE: NXR)

Last close As at 28/02/2024

GBP1.79

−1.00 (−0.56%)

Market capitalisation

GBP160m

More on this equity

Research: Industrials

Norcros — Sure-footed progress

In a pre-close statement, Norcros flagged a positive H122 trading period. Outperformance of strong renovation markets in both the UK and South Africa is being attributed to relative supply chain, channel breadth and balance sheet strengths that are supporting share gains. Revised management expectations are ‘significantly’ higher and we have increased our previous PBT forecasts by 10–11%.

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Industrials

Norcros

Sure-footed progress

H122 pre-close update

Construction & materials

18 October 2021

Price

332p

Market cap

£268m

ZAR20.0/£

Net debt (£m) at end September

1.0

Shares in issue

80.8m

Free float

98%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.1

7.4

90.8

Rel (local)

5.9

4.4

52.1

52-week high/low

336p

170p

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

H122 results

11 November 2021

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Norcros is a research client of Edison Investment Research Limited

In a pre-close statement, Norcros flagged a positive H122 trading period. Outperformance of strong renovation markets in both the UK and South Africa is being attributed to relative supply chain, channel breadth and balance sheet strengths that are supporting share gains. Revised management expectations are ‘significantly’ higher and we have increased our previous PBT forecasts by 10–11%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/20

342.0

27.1

26.1

3.1

12.7

0.9

03/21

324.2

29.0

29.1

8.2

11.4

2.5

03/22e

380.1

34.6

33.4

9.0

9.9

2.7

03/23e

392.0

36.0

34.7

9.8

9.6

3.0

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.

Double-digit revenue growth and good H1 margin

Expected H122 group revenue of c £200m is 15% higher (+18% in local FX) than the pre-COVID H120. Based on an indicated £21m EBIT – which we believe is a record first half for the group – a 10.4% margin compares favourably to historical H1 levels. In the UK, l-f-l revenues were 18% ahead of H120 (+40% y-o-y), with Triton (showers) and Merlyn (shower enclosures) continuing to perform very well and taking market share. South African operations also saw l-f-l revenue progress of 20% in local currency terms (+11% in sterling) versus H120 with retail-oriented Tile Africa again leading the way. Norcros successfully de-geared during the COVID-affected FY21 and, despite prudently rebuilding inventory levels and paying the FY21 final dividend, it was still modestly cash positive at the end of H122.

Management guidance and estimates raised

Notwithstanding some well-rehearsed and widely heard market challenges (such as supply chain strains, cost inflation and normalising demand), Norcros management is flagging strong revenue momentum and has raised guidance to ‘significantly ahead’ of its previous expectations. Our FY22 EPS estimate has increased by c 12% (with a revenue adjustment slightly above this and modestly lower margins). This largely flows through into FY23 also (c 10% EPS uplift); on this basis, growth rates beyond the current year are c 4% now. We will revisit this with the H122 results announcement, but some caution – after a strong trading period with a few market uncertainties – seems appropriate at this stage.

Valuation: FY22e P/E still below 10x

Norcros’s share price responded favourably to the H122 update and is now up c 65% ytd. Our estimates have also risen strongly over this period, although there has been a partial re-rating to an FY22e P/E of 9.6x and EV/EBITDA (adjusted for pensions cash) of 6.3x. That said, the performance of the business in difficult markets over the past two years, its leading and enhanced market positions and ongoing opportunities to develop both organically and via acquisition suggest a proactive management approach committed to growth and market outperformance.

Exhibit 1: Financial summary

£m

2015

2016

2017

2018

2019

2020

2021

2022e

2023e

2024e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Cont.

Revenue

 

 

222.1

235.9

271.2

300.1

331.0

342.0

324.2

380.1

392.0

404.0

Cost of Sales

 

 

N/A

N/A

(171.7)

(190.4)

(206.8)

(217.5)

N/A

N/A

N/A

N/A

Gross Profit

 

 

N/A

N/A

99.5

109.7

124.2

124.5

N/A

N/A

N/A

N/A

EBITDA IFRS16

 

 

24.3

28.0

31.6

34.7

42.2

38.8

39.9

45.0

46.6

48.3

Op Profit (before SBP)

 

 

18.3

22.5

25.2

28.3

35.6

32.2

34.7

39.5

40.9

42.3

Net Interest

 

 

(1.2)

(0.9)

(0.9)

(1.1)

(1.8)

(1.6)

(1.5)

(0.6)

(0.6)

(0.5)

Other financial - norm

 

 

(3.1)

(3.1)

(3.6)

(2.8)

(2.9)

(3.5)

(4.3)

(4.3)

(4.3)

(4.3)

Other financial

 

 

2.1

(0.2)

(4.2)

(4.5)

2.3

0.9

(3.0)

(1.0)

(1.0)

(1.0)

Intangible Amortisation

 

 

(0.3)

(0.9)

(1.2)

(2.2)

(3.5)

(3.7)

(3.7)

(3.7)

(3.7)

(3.7)

Exceptionals

 

 

(4.8)

(2.0)

(3.8)

(4.2)

(4.3)

(9.3)

(3.8)

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

14.0

18.5

20.7

24.4

30.9

27.1

29.0

34.6

36.0

37.5

Profit Before Tax (company norm)

 

 

15.8

20.4

22.9

26.3

32.6

28.8

30.6

36.2

37.6

39.1

Profit Before Tax (statutory)

 

 

11.0

15.4

11.5

13.5

25.4

15.0

18.5

29.9

31.3

32.8

Tax

 

 

(3.0)

(2.4)

(3.0)

(3.6)

(6.0)

(4.1)

(3.5)

(6.9)

(7.2)

(7.5)

Other

 

 

0.1

0.0

0.0

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

23.0

25.5

27.7

28.8

30.0

Profit After Tax (statutory)

 

 

8.1

13.0

8.5

9.9

19.4

10.9

15.0

23.0

24.1

25.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Avge Number of Shares Outstanding (m)

 

59.2

60.6

61.1

68.0

80.2

80.3

80.6

80.8

80.8

80.8

Avge Number of Shares Outstanding FD (m)

 

61.5

62.2

63.1

69.8

81.1

81.0

80.8

81.0

81.0

81.0

EPS FD - norm (p)

 

 

18.0

24.7

24.4

26.8

29.6

26.1

29.1

33.4

34.7

36.1

EPS FD - co norm (p)

 

 

21.1

27.7

27.8

29.5

31.7

28.2

31.1

35.3

36.6

38.1

EPS - statutory (p)

 

 

13.2

20.8

13.4

14.1

23.9

13.5

18.6

28.4

29.7

31.2

Dividend per share (p)

 

 

5.6

6.6

7.2

7.8

8.4

3.1

8.2

9.0

9.8

10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

N/A

N/A

36.7

36.5

37.5

36.4

N/A

N/A

N/A

N/A

EBITDA Margin (%)

 

 

10.9

11.9

11.7

11.6

12.8

11.3

12.3

11.8

11.9

11.9

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

 

8.2

9.5

9.3

9.4

10.8

9.4

10.7

10.4

10.4

10.5

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

78.3

93.4

98.8

147.9

138.0

150.8

141.2

141.1

140.7

140.0

Intangible Assets

 

 

26.9

44.7

44.8

98.9

94.9

96.5

93.6

89.9

86.2

82.5

Tangible Assets

 

 

37.6

38.2

43.0

45.0

42.3

49.6

47.6

51.2

54.5

57.5

Other Fixed Assets

 

 

13.8

10.5

11.0

4.0

0.8

4.7

0.0

0.0

0.0

0.0

Current Assets

 

 

100.4

119.4

165.3

165.1

169.5

188.7

171.0

182.8

199.8

217.8

Stocks

 

 

52.2

60.1

70.3

74.9

79.5

78.9

78.1

87.6

90.3

95.1

Debtors

 

 

42.6

53.4

57.5

64.4

62.8

62.5

64.6

69.3

72.6

76.0

Cash

 

 

5.6

5.9

37.5

25.8

27.2

47.3

28.3

25.9

36.9

46.7

Current Liabilities

 

 

(60.0)

(67.6)

(105.7)

(89.8)

(85.1)

(79.2)

(104.1)

(104.1)

(106.6)

(109.2)

Creditors

 

 

(58.6)

(64.8)

(74.8)

(81.3)

(81.3)

(79.1)

(104.1)

(104.1)

(106.6)

(109.2)

Short term borrowings

 

 

(1.4)

(2.8)

(30.9)

(8.5)

(3.8)

(0.1)

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(67.4)

(97.6)

(101.8)

(118.6)

(96.7)

(155.9)

(59.7)

(57.3)

(54.9)

(52.4)

Long term borrowings

 

 

(18.4)

(35.6)

(29.8)

(64.4)

(58.4)

(83.6)

(17.8)

(17.8)

(17.8)

(17.8)

Other long-term liabilities

 

 

(49.0)

(62.0)

(72.0)

(54.2)

(38.3)

(72.3)

(41.9)

(39.5)

(37.1)

(34.6)

Net Assets

 

 

51.3

47.6

56.6

104.6

125.7

104.4

148.4

162.4

179.0

196.2

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

16.2

18.5

25.5

23.5

35.3

34.8

60.0

29.8

42.5

42.0

Net Interest

 

 

(1.3)

(0.9)

(0.9)

(1.1)

(1.8)

(3.5)

(3.2)

(2.4)

(2.4)

(2.3)

Tax

 

 

(0.5)

(1.0)

(1.9)

(4.9)

(4.6)

(5.3)

(3.5)

(7.0)

(7.8)

(8.1)

Capex

 

 

(1.4)

(6.6)

(8.0)

(7.7)

(5.5)

(4.8)

(2.8)

(9.0)

(9.0)

(9.0)

Acquisitions/disposals

 

 

3.3

(23.6)

(2.7)

(59.1)

(2.1)

(9.2)

0.0

0.0

0.0

0.0

Financing

 

 

0.2

0.1

0.0

30.1

(0.9)

(0.8)

0.3

(0.8)

(0.8)

(0.8)

Dividends

 

 

(3.1)

(3.6)

(4.2)

(5.0)

(6.4)

(7.0)

0.0

(9.0)

(7.5)

(8.0)

Net Cash Flow

 

 

13.4

(17.1)

7.9

(24.2)

14.0

4.2

50.8

1.6

15.0

13.8

Opening net debt/(cash)

 

 

27.4

14.2

32.5

23.2

47.1

35.0

36.4

(10.5)

(8.1)

(19.1)

IFRS16 Finance leases

 

 

0.0

0.0

0.0

0.0

0.0

(3.8)

(4.3)

(4.0)

(4.0)

(4.0)

Other

 

 

(0.2)

(1.2)

1.4

0.3

(1.9)

(1.8)

0.4

0.0

0.0

0.0

Closing net debt/(cash)

 

 

14.2

32.5

23.2

47.1

35.0

36.4

(10.5)

(8.1)

(19.1)

(28.9)

IFRS16 lease liabilities

 

 

 

 

 

 

 

(25.1)

(24.2)

(24.2)

(24.2)

(24.2)

Source: Company accounts, Edison Investment Research

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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.

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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 2021 Edison Investment Research Limited (Edison).

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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.

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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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Smiths News — Predictable cash flows and growing dividends

Smiths News has successfully performed a turnaround of the business that has seen it return to a core newspaper and magazine distribution operation. While the print sector is declining, revenue is predictable and management has a clearly demonstrable cost-saving track record such that cash flow is strong and profits are broadly flat, post COVID-19. This means that debt is being paid down and dividends are likely to become an increasing feature. We value the business at 77p, twice the current price.

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