Supply chain strife plays to Norcros's strengths

There are many reasons why this should have been a tricky trading period for kitchen and bathroom products supplier Norcros (NXR).

The company sources most of its goods from China, where many importers have faced disruption and higher shipping costs. 

Chief executive Nick Kelsall told the IC last month that the cost of shipping a 40ft container had increased from $1,500 before the pandemic to a peak of $20,000. Yet he argued that supply chain challenges "have played to our strengths”. “We’re a big business and we have the scale and infrastructure – particularly in China, where we have 30 people on the ground.”

Norcros's first-half revenue grew 48 per cent year on year to £201m and was 11 per cent higher than the same pre-pandemic period in 2019. Underlying operating profit was up 72 per cent year on year and 26 per cent on 2019.

Excluding leases, the company finished the period with net cash of £1m, compared with net debt of £17.3m a year ago. Its cash balance was lower than the £10.5m held at the end of March, though, as it stocked up on inventory and paid out last year’s 8.2p dividend. It is now reinstating a half-year dividend of 3.1p.

Divisions making market share gains included Merlyn – its shower enclosures and trays business that won contracts from more housebuilders – and shower maker Triton. The company's South African operations, which generate 35 per cent of group sales, saw revenues climb 20 per cent.

Norcros’s UK tiles arm, Johnson Tiles, fared less well as the company discontinued lower-margin lines to focus on more fashionable, higher-value products such as smaller format and brick-effect tiles. Its half-year revenue was up 26 per cent on last year, but down 18 per cent on 2019.

The group’s underlying operating margin grew to 11 per cent, from 9.6 per cent in 2019.

Maintaining this progress could be difficult, given inflationary cost pressures and a gradual slowdown in spending on home improvements – the UK’s Construction Products Association forecasts market growth of 13.7 per cent this year will moderate to 6.3 per cent in 2022. Higher energy prices and other inflationary inputs will also put pressure on profits. The company remains confident of meeting full-year expectations, though.

Broker Peel Hunt said that despite a 10 per cent increase over the past month, Norcros's share price is "too cheap". At just over nine times forecasted earnings, it's hard to disagree. Buy.

Last IC View: Hold at 234p, 14 Nov 2019