Despite generating solid growth over the past four years while its core markets have been in decline and recently announced plans to double revenues over the next five years while ramping up returns, shares in Norcros (NXR), a manufacturer of shower fittings, bathroom accessories, floor tiles and glue, trade at just 0.4 times forecast sales for the current financial year and at less than eight times expected earnings. For a company with a credible growth strategy and the potential for cyclical upside, that looks far too cheap.
- Revenue targeted to double in five years
- South African business now profitable
- Vado acquisition earnings enhancing
- Growing market share
- Property leases remain a drag
- Poor weather related start to the new year
As well as the target of doubling revenue by 2018, Norcros plans to generate around half of group turnover from outside the UK, and achieve a pre-tax return on capital employed of between 12 and 15 per cent, compared with about 9.5 per cent now. This will be achieved by bolstering organic growth with acquisitions, such as this year's purchase of Vado which operates in the middle to high end segment offering bathroom attachments both inside and outside the UK. Norcros paid £12m up front for Vado and is committed to up to £4m of performance-related payments. The acquisition looks a very good fit with the rest of the company and last year generated revenue of £25.6m and pre-tax profits of £2m.
Meanwhile, impressive organic growth has helped Norcros grow both sales and underlying profits over the past four years despite the market for showers and tiles declining by as much as 30 per cent from its peak. Norcros's strong brands, high service levels and relatively sound finances have been winning it market share and progress should become more apparent as the market troughs out. And signs that the property market may be returning to health are encouraging. Meanwhile broker Canaccord Genuity is forecasting that underlying operating margins will rise from 6.2 per cent last year to 7 per cent over the next three years.
Helped by strong growth at Norcros's market-leading Johnson Tiles business, UK revenue was up 5.1 per cent last year to £122.8m, although higher energy costs and fewer high-margin shower sales meant operating profit fell 4.8 per cent to £11.9m. Outside the UK, the South African division - which accounts for almost two-fifths of sales but less than a tenth of profit - pushed constant-currency turnover ahead by 19.3 per cent, and despite a 26 per cent rise in energy costs, the division turned the previous year's operating loss of £0.5m into a profit of £1m.
| NORCROS (NXR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 15.5p | MARKET VALUE: | £90m | |
| TOUCH: | 15.5-15.75p | 12-MONTH HIGH: | 18.25p | LOW: 10.5p |
| FWD DIVIDEND YIELD: | 3.1% | FWD PE RATIO: | 8 | |
| NET ASSET VALUE: | 11p | NET DEBT: | 50% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 170 | 3.40 | 1.20 | 0.36 |
| 2011 | 196 | 10.2 | 1.60 | 0.36 |
| 2012 | 200 | 10.7 | 1.80 | 0.42 |
| 2013 | 211 | 11.7 | 1.90 | 0.46 |
| 2014** | 239 | 14.5 | 1.96 | 0.48 |
| % change | +13 | +24 | +3 | +4 |
Normal market size: 15,000 Matched bargain trading Beta: 0.47 *Underlying PBT and EPS figures **Canaccord Genuity estimates | ||||
It is not only the core business that benefits from improved property market sentiment. Planning consent has been obtained on a surplus property in Highgate Park, Tunstall, and a conditional sale contract has been signed with supermarket chain Morrisons. Norcros should be able to book a £2.6m profit on the deal by the end of August.
There is still plenty to do, however, not least because the rotten weather so far this year and destocking by some clients has left the UK market weaker than expected in 2013. And with the pressing effects of higher energy bills, a cost reduction programme could involve 75 jobs being lost, which management reckons will result in a £1.5m exceptional charge. Profits in the year to March were also dented by a £3m charge relating to legacy leases on three remaining properties owned but not used by Norcros, although this buys the company around two years in which it hopes to sell the leases or install a tenant. And there was another £0.9m charge relating to Vado acquisition expenses. Meanwhile, a recently closed defined-benefit pension scheme, which is in deficit to the tune of £30m, is an issue.
