Norcros keeps the lights on in tougher market

Norcros (NXR) has proved its durability in recent years, with the bathroom products distributor managing a double-digit increase in operating profit over a five-year period that has thrown lockdowns, freight rate hikes and severe supply chain disruptions at it.

The latest obstacle it is grappling with is the series of rolling blackouts under way in South Africa, where it generates about a third of sales and a fifth of operating profit. More frequent outages meant demand moderated in the second half of last year as people diverted home improvement spending towards energy back-up and storage methods.

Overall, underlying numbers came in ahead of analysts’ expectations, with the 13 per cent increase in operating profit driven largely by higher revenue and a small uplift in margin, from 10.5 to 10.7 per cent.

Statutory operating profit dropped by around a quarter, though, to £27.5mn. It was weighed down by £8mn of acquisition costs and nearly £10mn of exceptional items, including a £4.8mn restructuring charge following the closure of a UK adhesives arm that “didn’t really have pricing power”, according to new chief executive Thomas Willcocks. 

A £5mn hit was also taken to the carrying value of Johnson Tiles’ UK business based on “uncertain short-term demand” for locally produced tiles. Willcocks is now planning “a full portfolio review” of all of Norcros’s business lines.

The company's shares are now flat year-to-date and down a quarter over the past 12 months. Although they look like a bargain at just five times FactSet’s consensus earnings forecast, weakness in end markets means full-year numbers “look under pressure”, according to broker Peel Hunt.

Although Norcros expects to continue making market share gains, these can only take you so far. Hold.

Last IC View: 180p, Hold, 9 Nov 2022