Norcros — UK margins up materially, South Africa stabilising

Norcros (LSE: NXR)

Last close As at 04/03/2024

GBP1.84

6.50 (3.67%)

Market capitalisation

GBP160m

More on this equity

Research: Industrials

Norcros — UK margins up materially, South Africa stabilising

Norcros’s compelling investment case was underpinned at the half year where underlying operating profit was down less than 3% despite material revenue pressure. Group operating margins rose 60bp, the UK business reported record underlying profits and Norcros continued to take market share in both the UK and South Africa. We believe that Norcros’s key strengths are underappreciated and that legacy issues, notably the pension deficit, have been resolved. We retain our estimates and value the shares at 246p, implying c 50% upside.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

norcros03

Industrials

Norcros

UK margins up materially, South Africa stabilising

Interim results

Construction and materials

4 December 2023

Price

163p

Market cap

£145m

ZAR23.1/£

Net debt (£m) at 30 September 2023

46.6

Shares in issue

89.3m

Free float

98%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.5

12.2

(10.3)

Rel (local)

9.1

11.5

(9.3)

52-week high/low

223p

136p

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

FY24 trading update

April 2024

FY24 preliminary results

June 2024

Analyst

Andy Murphy

+44 (0)20 3077 5700

Norcros is a research client of Edison Investment Research Limited

Norcros’s compelling investment case was underpinned at the half year where underlying operating profit was down less than 3% despite material revenue pressure. Group operating margins rose 60bp, the UK business reported record underlying profits and Norcros continued to take market share in both the UK and South Africa. We believe that Norcros’s key strengths are underappreciated and that legacy issues, notably the pension deficit, have been resolved. We retain our estimates and value the shares at 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

4.3

6.1

03/23

441.0

41.8

37.4

10.2

4.4

6.3

03/24e

411.7

36.7

31.5

10.2

5.2

6.3

03/25e

412.0

37.9

32.5

10.2

5.0

6.3

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

H1 pressures, but strategic progress evident

H1 revenue declined 8.3% y-o-y at the headline level to £201.6m, but was down only 4.1% on a constant currency, like-for-like basis. Underlying operating profit was down only 2.7%, largely reflecting the decline in revenue, but the underlying operating margin rose 60bp to 10.6% despite the revenue pressure due to strategic management action that included the closure of the adhesives operation and the 50% capacity reduction at Johnson Tiles. Underlying PBT declined 9.0% as interest costs rose and diluted EPS slid 12.4% to 15.6p. An interim dividend of 3.4p was declared, flat year-on-year. Strong cash generation contributed to the reduction of net debt, from £58.9m a year ago to £46.6m. The net debt to EBITDA ratio at the half year was 1.0x, which implies material headroom.

Compelling investment case underlined

Norcros’s successful growth strategy has remained consistent and largely unchanged for many years, focusing on the development of leading market positions with strong brands in highly fragmented markets. Its capital light structure and targeting of the more resilient mid to premium section of the repair, maintenance and improvement (RMI) market reduces volatility. The strong focus on new product development and its 25% ‘vitality’ rate (sales of products launched in the last three years), coupled with its leading supply chain, implies it is winning market share from smaller competitors. One new product example is the Triton Envi shower, a behind-the-wall digital shower with strong environmental credentials.

Profit forecasts and valuation maintained

While we have reduced our FY24 and FY25 revenue forecasts by c 7–8%, we have maintained our profit estimates and therefore our valuation of Norcros. Our P/E based valuation implies a value of 236p/share based on our diluted underlying FY24 EPS estimate, while our DDM implies a value of 255p/share. The average is 246p, implying c 50% upside. Norcros is trading at the lower end of its long-term consensus forward P/E range on 5.4x (Edison forecast P/E: 5.2x), suggesting that a lot of negativity is priced in. As and when we begin to see recovery in the UK and/or South Africa, the company may well attract a higher multiple.

New record for UK profits despite tough markets

Norcros’s H124 results highlighted the resilient nature of Norcros. Although total revenue declined 8.3%, underlying operating profit was down just 2.7%, benefiting from strategic management actions (described below), which resulted in the achievement of record UK operating margins. We are maintaining our FY24 and FY25 profit estimates, though we have reduced revenue estimates, reflecting current trends. Norcros is a leading player in its field and, with the stock trading on a P/E of just 5.2x, we believe there could be significant upside from the current depressed price level. Furthermore, one of the key historical issues faced by Norcros, that of its historically large pension deficit, remains well under control as the fund has been in an accounting surplus for the last two years.

Group margins up despite issues in South Africa

H1 revenue declined 8.3% y-o-y at the headline level to £201.6m, driven down by a combination of modest revenue growth in the UK and weaker demand in South Africa. Revenue was down only 4.1% on a constant currency, like-for-like basis, but was up 11.3% versus H120 (a pre-pandemic period) in total terms. Underlying operating profit was down only 2.7% y-o-y, largely reflecting the decline in revenue, but was up 23% versus the same period in CY19 (fiscal H120). The underlying operating margin rose 60bp y-o-y to 10.6%, despite the revenue pressure, as the benefits of management action to exit the underperforming adhesives business and the 50% capacity reduction at Johnson Tiles were felt. The inclusion of the higher margin Grant Westfield business was a further positive.

Underlying PBT declined 9.0% as interest costs rose due to the higher average levels of net debt during the period reflecting M&A financing and higher interest rates, and diluted EPS slid 12.4% to 15.6p. An interim dividend of 3.4p was declared, flat year-on-year. Net debt was reduced from £58.9m a year ago, reflecting the acquisition of Grant Westfield, to £46.6m. Net debt stood at £49.9m at 31 March 2023. The net debt to EBITDA ratio at the half year was 1.0x, which implies material headroom to the committed £130m revolving credit facility.

Exhibit 1: H1 results summary, last five years

£m

H120

H121

Y-o-y % chg

H122

Y-o-y % chg

H123

Y-o-y % chg

H124

Y-o-y % chg

Total revenues

181.2

135.3

-25.3%

200.9

48.5%

219.9

9.5%

201.6

-8.3%

Operating profit (underlying)

17.4

12.8

-26.4%

22.0

71.9%

22.0

0.0%

21.4

-2.7%

Underlying operating margin

9.6%

9.5%

-

11.0%

-

10.0%

-

10.6%

-

Underlying PBT

15.6

10.7

-31.7%

20.9

96.2%

19.9

-4.8%

18.1

-9.0%

Profit before tax (post exceptionals and other)

13.3

3.4

-74.4%

17.7

420.6%

14.0

-20.9%

11.7

-16.4%

EPS - diluted underlying (p)

15.1

10.6

-30.2%

20.0

89.8%

17.8

-10.9%

15.6

-12.4

Dividend per share (p)

3.1

0.0

-100.0%

3.1

N/A

3.4

9.7%

3.4

0.0%

Underlying net cash/(debt)

(41.1)

(7.3)

N/A

1.0

-113.7%

(58.9)

N/A

(46.6)

N/A

Source: Norcros, Edison Investment Research

UK profits hit record, South Africa hit by power outages

In the UK, which now accounts for 71% of revenue, Norcros generated revenue of £143.9m, up 0.8%. On a like-for-like basis, and excluding Grant Westfield (acquired in May 2022) and Norcros Adhesives, which was closed, revenue slipped just 0.8% with lower volumes almost completely offset by price increases. In particular, the key brands of Triton, Merlyn and Grant Westfield performed well, driven by new product launches, excellent stock availability and great customer service, although Vado was negatively hit by delayed new product launches. RMI demand remained the key driver of revenue. Export revenue increased driven by demand from Ireland, France and the Middle East.

H1 operating profit rose 14.7% or £2.4m, to £18.7m, a record level, and implied that margins rose 160bp to 13.0% in the period. The growth reflects the efforts made to improve the brand portfolio.

Exhibit 2: UK – H1 revenue, operating profit and margin

Source: Norcros, Edison Investment Research

The South African business, which makes up 29% of revenue, fell 25% in absolute terms and declined by 11% on a constant currency basis, as higher levels of energy rationing hit consumer confidence and demand. The ‘loadshedding’ has had a minimal impact on Norcros’s own operations and retail stores as they have been equipped to operate during these periods of interruption. Despite the headwinds, Norcros maintained its market share gain momentum by focusing on product development and customer service in the region.

TAL, the leading adhesives business in the region, was able to grow market share, as did House of Plumbing despite flat revenues in a challenging market. Johnson Tiles and Tile Africa were both affected by market slowdowns, particularly in the new housebuilding sector. The market turbulence mentioned resulted in a decline in operating profit, from £5.7m to £2.7m, which implies a decline in margins from 7.4% to 4.7%.

Exhibit 3: South Africa – H1 revenue, operating profit and margin

Source: Norcros, Edison Investment Research

Despite the tough market conditions, Norcros continues to take market share and should benefit from the national roll out of House of Plumbing in South Africa. We anticipate it should also begin to see the market stabilise as energy constraints become less of an issue.


Valuation suggests c 50% upside

Following the H124 results, we have essentially maintained our profit estimates and therefore our valuation of Norcros. Our P/E based valuation implies a value of 236p/share based on our diluted underlying FY24 EPS estimate of 31.5p/share, while our dividend discount model (DDM) implies a value of 255p/share, and if we take the average of the two, we arrive at 246p, implying c 50% upside. Norcros is trading at the lower end of its long-term consensus forward P/E range on 5.4x (Edison forecast P/E: 5.2x), suggesting that a lot of negativity is priced in. As and when we begin to see recovery in the UK and/or South Africa, the company may well attract a higher multiple.

Simple forward P/E multiple valuation implies 236p/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 reached briefly post COVID-19 and again in 2022, 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 7.4x.

Exhibit 4: Norcros – forward P/E ratio (x)

Source: Refinitiv

If we apply the 7.4x forward P/E multiple to our estimate of FY24e diluted underlying EPS of 31.5p, we arrive at a value of 236p/share, implying c 45% upside to the share price. Arguably, this method gives little credit for future potential acquisitions, which are part of the company’s strategy and may be forthcoming.

Exhibit 5: 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

236

252

284

Source: Edison Investment Research

Dividend discount model implies a valuation of 255p

Our DDM valuation of 255p lends support to the P/E valuation above of 236p/share. We have maintained the base dividend of 10.2p/share, which is more than three-times covered by diluted and underlying earnings. 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 estimate. We remind readers that dividends grew 10.7% pa between 2015 and 2019, which further supports our dividend growth assumptions.

Exhibit 6: 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

1020.0

Source: Edison Investment Research

Exhibit 7: Financial summary

£'m

2021

2022

2023

2024e

2025e

2026e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

324.2

396.3

441.0

411.7

412.0

417.2

EBITDA

 

 

39.2

47.0

52.3

49.3

49.8

50.3

Normalised operating profit

 

 

33.8

41.8

47.3

43.2

43.7

44.2

Operating profit - Underlying

33.8

41.8

47.3

43.2

43.7

44.2

IAS 19R Pension scheme expenses

(1.4)

(1.7)

(1.6)

(1.7)

(1.7)

(1.7)

Impairment and acquisition related costs

(3.7)

(4.8)

(8.4)

(8.2)

(8.2)

(8.2)

Other

(3.8)

0.9

(9.8)

0.0

0.0

0.0

Reported operating profit

24.9

36.2

27.5

33.3

33.8

34.3

Net Interest

(6.4)

(3.2)

(5.8)

(7.9)

(7.2)

(6.4)

Profit Before Tax (norm)

 

 

27.4

38.6

41.5

35.3

36.5

37.8

PBT - 'Underlying'

 

 

30.6

39.3

41.8

36.7

37.9

39.2

Profit Before Tax (reported)

 

 

18.5

33.0

21.7

25.4

26.6

27.9

Reported tax

(3.5)

(7.3)

(4.9)

(7.9)

(8.2)

(8.6)

Profit After Tax (norm)

23.9

31.3

36.6

27.4

28.3

29.1

Profit After Tax (Underlying)

25.1

31.5

36.9

28.8

29.7

30.5

Profit After Tax (reported)

15.0

25.2

16.8

17.5

18.4

19.2

Net income (normalised)

23.9

31.3

36.6

27.4

28.3

29.1

Net income (Underlying)

25.1

31.5

36.9

28.8

29.7

30.5

Net income (reported)

15.0

25.2

16.8

17.5

18.4

19.2

Basic average number of shares outstanding (m)

81

81

88

89

89

89

EPS - basic normalised (p)

 

 

29.65

38.70

41.53

30.70

31.65

32.62

EPS - diluted normalised (p)

 

 

29.58

37.99

40.89

30.00

30.92

31.87

EPS - Diluted, 'underlying' (p)

 

 

31.06

38.23

37.43

31.53

32.45

33.41

EPS - basic reported (p)

 

 

18.61

31.15

19.06

19.61

20.56

21.53

Dividend (p)

8.20

10.00

10.20

10.20

10.20

10.50

Revenue growth (%)

(-5.2)

22.2

11.3

(-6.6)

0.1

1.3

EBITDA Margin (%)

12.1

11.9

11.9

12.0

12.1

12.1

Normalised Operating Margin (%)

10.4

10.5

10.7

10.5

10.6

10.6

BALANCE SHEET

Fixed Assets

 

 

141.2

158.8

226.8

215.7

205.0

193.4

Intangible Assets

93.6

90.3

167.1

159.5

151.9

144.3

Tangible Assets

28.0

29.0

24.8

27.6

30.8

33.1

Investments & other

19.6

39.5

34.9

28.6

22.3

16.0

Current Assets

 

 

171.0

200.7

216.2

214.3

218.5

220.9

Stocks

78.1

100.6

103.9

107.1

111.2

112.6

Debtors

64.6

71.1

83.3

78.2

78.3

79.3

Cash & cash equivalents

28.3

27.4

29.0

29.0

29.0

29.0

Current Liabilities

 

 

(104.1)

(110.8)

(112.7)

(106.1)

(106.2)

(107.4)

Creditors

(95.4)

(102.4)

(99.2)

(92.6)

(92.7)

(93.9)

Tax and social security

(1.0)

(2.7)

(0.9)

(0.9)

(0.9)

(0.9)

Other

(7.7)

(5.7)

(12.6)

(12.6)

(12.6)

(12.6)

Long Term Liabilities

 

 

(59.7)

(48.4)

(119.9)

(101.4)

(82.1)

(58.1)

Long term borrowings

(17.8)

(18.8)

(78.9)

(69.0)

(58.3)

(42.9)

Other long term liabilities

(41.9)

(29.6)

(41.0)

(32.4)

(23.8)

(15.2)

Net Assets

 

 

148.4

200.3

210.4

222.4

235.2

248.8

Shareholders' equity

 

 

148.4

200.3

210.4

222.4

235.2

248.8

CASH FLOW

Op Cash Flow before WC and tax

39.2

47.0

52.3

49.3

49.8

50.3

Working capital

21.8

(23.6)

(13.3)

(4.6)

(4.2)

(1.2)

Tax

(3.5)

(6.5)

(7.7)

(7.9)

(8.2)

(8.6)

Other

(2.0)

(0.9)

(2.5)

(0.9)

(0.9)

(0.9)

Net operating cash flow

 

 

55.5

16.0

28.8

35.9

36.5

39.5

Capex

(2.8)

(5.4)

(6.0)

(8.5)

(9.0)

(8.0)

Acquisitions/disposals

0.0

0.0

(78.3)

0.0

0.0

0.0

Net interest

(3.2)

(2.5)

(5.5)

(4.8)

(4.1)

(3.3)

Dividends

0.0

(9.1)

(9.2)

(9.0)

(9.1)

(9.1)

Other

(3.2)

(2.5)

14.6

(3.7)

(3.7)

(3.7)

Net Cash Flow

46.3

(3.5)

(55.6)

9.9

10.6

15.4

Opening net debt/(cash)

 

 

36.4

(10.5)

(8.6)

49.9

40.0

29.3

FX

0.6

1.6

(2.9)

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.5)

(8.6)

49.9

40.0

29.3

13.9

Source: Norcros accounts, Edison Investment Research


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United Kingdom

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Seraphim Space Investment Trust — Spacetech enjoying sustained secular tailwinds

Seraphim Space Investment Trust (SSIT) saw a 12-month share price decline of c 30%, while its NAV fell by only 7.1% in FY23 (to end-June 2023), shielded in part by the downside protection embedded in its investments via preference shares and only one down round out of 11 funding rounds completed by SSIT’s portfolio companies in FY23. Moreover, NAV/share rebounded by 3.9% in Q124, driven by FX gains and fair value uplifts on the back of new funding rounds (D-Orbit’s in particular). This resulted in a further widening of the discount to NAV to c 65%, which is now wider than for other listed venture capital (VC)/growth capital trusts and limited partner (LP) VC portfolios trading on the secondary market in H123. Both SSIT’s holding-level and portfolio-level liquidity look solid, with end-September cash of £29.7m (13% of NAV) and an average 18-month cash runway across its material holdings.

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