Norcros breezes through China crisis

For a business that imports most of the tiles, showers and bathroom suites it sells from China, Norcros (NXR) has coped with supply chain upheaval and the associated cost inflation pretty well.

The company reported a 24 per cent increase in underlying operating profit, driven mainly by a 22 per cent increase in revenue, although its operating margin edged up by 10 basis points to 10.5 per cent.

Cost inflation was passed through by increasing selling prices, and although it had to tie up more working capital in the business by buying more stock, this allowed it to maintain product availability and service levels.

Norcros chief executive Nick Kelsall said having 30 people on the ground in China, dealing with 120 suppliers, helped to make sure its products were “at the top of the list and on the right boat”.

Sales in the first two months of its current financial year are 1 per cent higher than a strong period last year and 25 per cent up on pre-pandemic levels. However, industry forecasts suggest the post-pandemic boom in home improvements is unwinding.

Kelsall said its exposure to UK consumers is fairly limited – around 15 per cent of its UK business, so less than 10 per cent overall. He is also confident that it can offset any weakness through market share gains, with the company reiterating its target of hitting £600mn of revenue by 2025 while sustaining a return on capital employed (ROCE) of at least 15 per cent (last year’s underlying ROCE was 23.9 per cent).

The market backdrop has created some nervousness – Norcros' shares are down 20 per cent year-to-date. Given its strong track record, broker Shore Capital said the shares are undervalued at at six times forecast earnings, with a dividend yield of 4 per cent. We agree. Buy.

Last IC View: Buy, 12 Nov 2021