Norcros holds up in tough conditions

The word 'resilient'” appears nine times in building products company Norcros’s half-year results announcement.

That’s fair enough. Given the hit to valuations most companies in the sector have faced, attempting to reassure investors that things aren’t all that bad seems like a reasonable strategy. Norcros grew revenue by a tenth, and despite facing higher costs on several fronts, its decline in underlying pre-tax profit was fairly modest.

Its exposure to the South African market, where it makes around 35 per cent of earnings, has been viewed as a drag in the past but now offers diversification benefits given the grim forecasts for the UK’s economy.

And the acquisition of Grant Westfield – a manufacturer of wall panels used in bathrooms and kitchens – for £80mn in May has gone well so far. Chief executive Nick Kelsall said the business has been “integrated seamlessly and is trading strongly”.

Following the deal, net debt has risen to £84.3mn, from £15.4mn six months ago. The company says it has plenty of headroom, though, with a £130mn credit facility in place for another three years.

A 3 per cent rise in Norcros's shares following the announcement showed the market was happy enough. And given we liked these shares six months ago at 250p, we should love them at 180p. They trade at just over five times broker Peel Hunt’s forecast earnings of 34.1p per share.

It’s difficult to ignore the wider market environment, though. But Norcros’s relative strength has been based in part on a pivot in recent years from retail to trade customers, meaning it has been less affected by the bursting of the post-pandemic home improvements bubble. Yet the increasingly dire forecasts for the housing market mean a slowdown looks likely there, too. Move to hold.

Last IC View: Buy, 250p, 9 Jun 2022