Norcros Share Discussion Threads

[norcros] 13/6/2019 08:42

Great results given the economic and political uncertainty in their two main markets.

Free cash flow excl. a £2.1m working capital increase comes in at £25.5m (already including the £2.6m pension deficit contribution and the £1.9m exceptional restructuring costs). Market cap is barely over £160m, resulting in a FCF yield of almost 16%. I realise the share price evolution over the last few years is frustrating, but I urge you to be patient. The cash this company generates is very real and is allocated intelligently. A rerating cannot be avoided forever. Ultimately, either the share price has to double or free cash flow has to halve. At the current share price, you get a 4.5% dividend yield just for being patient.

[thorpematt] 12/6/2019 09:18

So the pension contributions rise slighty in order to close the defecit by 2025. I felt for a while now that that concern was a little overdone particularly given the dilution effect caused by the acqusition program.

The divi has risen again and the cover is very healthy indeed.

The next set of accounts will utilise IFRS16 (leases for the unfamiliar) and some guidance is given in these results.The affect is limited with assets being listed at £27m on balance sheet. Technically that will show as both an asset and a debt, but again there was an improvement on debt too this last 12 months.

That large banking facility for the Merlyn acquisition has I note been extended untll 2022... I suspect therefore an additional acquisition or 2 in the offing over the mid term.

All in all I though pretty solid.

[edmundshaw] 12/6/2019 08:46

PER of 6 still... There is a not of caution about Brexit, that seems to be damping enthusiasm...

[this_is_me] 12/6/2019 08:12

Not so good for the pensioners who have died.

[edmundshaw] 12/6/2019 08:01

Nice results. I really think Norcros is due a rerating, the price has barely moved from three and a half years ago, yet EPS gains have been good.

Actuarial deficit of the pension down nearly a third. Interesting that it is due to real mortality rates and not interest rates, so better news than expected for the fund, as interest rate rises have stalled...

[this_is_me] 12/6/2019 07:36

Yes, it all looks good for long term holders.

[1nf3rn0] 12/6/2019 07:15

Yes, debt reduced (could be debt free in 2-3 years, although expect there will be more acquisitions). Pension deficit also coming down, and earnings and revenue growth are solid. In a normal environment we'd be in line for a strong up day!

[spangle93] 12/6/2019 07:09

Headline figures are impressive, at least



· Tenth consecutive year of growth

· Underlying operating profit up 25.5% at £34.4m (2018: £27.4m)

· Group operating profit was £25.1m (2018: £19.6m)

· Underlying ROCE at 18.2% (2018: 18.0%)

· Full year dividend increased by 7.7% to 8.4p

· Strong cash generation - net debt reduced by £12.1m to £35.0m

[kazoom] 11/6/2019 19:54

Nice balanced write up Leo.

If you hadn't said so at the start, it would have been hard to guess that this is a top 5 holding for you!!

I sold out a couple of years ago and have only watched them in passing, given the potential cyclical downside, what is the attraction?

[leoinvestoruk] 11/6/2019 19:05

I posted this results preview to my blog earlier:

Norcros are due to issue their full year results tomorrow. As this is a top 5 holding I expect to be covering them in tomorrow’s 7:59 cut.

Background
==========

Norcros describes itself as a “market leading supplier of high quality and innovative bathroom and kitchen products”. UK / Irish brands include Triton showers, Merlyn shower enclosures / trays, Vado taps / showers, Croydex toilet seats / bathroom furnishings, Abode sinks and taps, Johnson Tiles and Norcros title adhesives. In South Africa they own some physical showrooms as well as supplying tiles and tile adhesives. The revenue and profit split is 2/3rds UK, 1/3rd South Africa.

Business has generally been going well the last few years with underlying profits growing and a series of acquisitions. Risks are exposure to consumer spending, the construction cycle, South Africa and volatile currencies, plus significant levels of debt and a large pension scheme that is in deficit.

It is perhaps understandable then that they are valued at a PE ratio of under 6 despite good medium / long term EPS growth.

Debt
====

The company follows a pattern of progressively reducing debt to a comfortable level and then making an acquisition, that although on a relatively cheap valuation, struggles to add value to shareholders because it must be funded by shares issued at a lowly rating and/or debt that reduces Norcros’s rating further. The most recent acquisition was funded by a mixture of debt and a placing / open offer at 172p.

Debt has moved as follows recently (compare with market capitalisation of around £160m):

£m Note
Sept 2017 20.8
March 2018 47.1 Increased due to acquisition
Sept 2018 53.5 Seasonal increase
March 2019 36 (Guided)
Accordingly they could probably pay off debt (at least at year-end) within three years if they wanted to. However this is unlikely to happen as they have set themselves a strategic target to double revenue within 5 years.

Pension Scheme
==============

The strategy of growing the business by acquisition has been justified in the past partly to balance the size of the business versus the pension scheme.

This time last year the pension scheme had liabilities of £448m and an accounting deficit of £48m (compared to Norcros’s market capitalisation of around £160m). This was down from the previous year and my modelling show it should be down again this year, maybe to around £35m, although this is very sensitive to the assumptions they choose to use.

The triennial actuarial valuation and outcome of the pension trustee negotiation is due around now, and could possibly be mentioned in tomorrow’s preliminaries. Unfortunately this valuation is at an effective date of April 2018 when the deficit was slightly higher than three years before and furthermore the accounting and actuarial assumptions used last time were unusually similar. It is likely that the triennial valuation will produce a higher deficit, potentially significantly so – my modelling shows £75m – £100m vs £73.5m last time. At the upper end of this range the trustees are likely to demand increased recovery payments and perhaps restrictions on dividends. It is also possible that the pension protection fund will require higher premiums than last year, given their higher debt levels.

Trading Statement
=================

They last updated the market with a FY trading update on 10th April which I briefly covered on my blog. Like-for-like UK had recovered from the first half and South Africa continued to grow well, albeit suffering a currency hit. Due to a recent acquisition they reported revenue to be 10% ahead overall, guided profit inline and debt reduced.

Conclusion
==========

This is a financially geared business which could be disproportionately affected by a turndown in trading. Tomorrow I will primarily be focusing at their outlook statement, but also ready to react to any news on their pension or further acquisitions.

[boneshaker2] 30/5/2019 16:12

Doesn't appear to be much interest in this one, only one trade so far today 98 ! And the last post on here was 30 days ago.It seems to range a lot between 194-204 mark and a fair size spread as well.

[thorpematt] 30/4/2019 23:22

The market MAY be waking uo to this one a bit. I think the "issues" the company had are now in many ways historic, but sometimes investors are slow to recognise transitions-made.

There are of course challenges to the business and climate but nothing that hasn't been in place for some while. I can't help but think that the value on offer here is an opportunity not to be missed.

[edmundshaw] 10/4/2019 10:26

Decent update. EPS underlying this year should be north of £3 so we seem pretty solid value here. And prospective dividend of about 7.5p, so yield getting quite useful...

[salchow] 10/4/2019 08:02

The chart has been showing support around 190 since December and I was a little concerned about a break below. Hopefully, these acceptable figures will support a move up over future months.

[podgyted] 10/4/2019 07:31

Good update, especially like the massive reduction in debt.

Quality company.

[this_is_me] 10/4/2019 07:27

It looks like a solid performance for the year with management continuing to react sensibly in all circumstances.

[lbo] 27/3/2019 15:13

As per the interims last November 'Wolseley are extending the Merlyn product offering'Our UK businesses achieved revenue of £109.9m (2017: £94.3m), representing growth of 16.5% in the six-month period to 30 September 2018. This includes a contribution of £19.5m from the Merlyn business (acquired November 2017). On a like for like basis (excluding revenues from Merlyn), total revenue was 4.1% lower than the prior year. https://www.wolseley.co.uk/brands/merlyn/

[edmundshaw] 27/3/2019 14:59

"Ferguson has been overhauling its UK arm, axing branches and quitting unprofitable wholesale business in an attempt to turn around trading"

Sounds like they need to restructure their businesses in the UK.

Not sure how comparable their UK business is with Norcros', but anyway, Norcros overseas trading is mainly in South Africa and Ireland...

[lbo] 27/3/2019 12:28

https://www.youinvest.co.uk/articles/investmentarticles/169240/ferguson-raises-fears-us-slowdown"For the first half, it looks like the villain of the piece was the UK, where sales fell again on an underlying basis in the second quarter.

[lbo] 26/3/2019 18:45

It continued to struggle in the UK amid difficult markets, with constant currency sales tumbling 10.4% and trading profits slumping 16.7%

[edmundshaw] 26/3/2019 17:45

But LBO, Ferguson chief executive John Martin said the slowdown was the result of a cooling Canadian housing market and lower levels of inflation. From that link!

We do not trade in Canada!

[lbo] 26/3/2019 16:01

https://www.telegraph.co.uk/business/2019/03/26/sales-slowdown-spooks-ferguson-shareholders/

[this_is_me] 25/3/2019 08:18

No hassle or management time wasted on the acquisition. It looks like a good move.

[edmundshaw] 20/2/2019 21:18

In a decent market the PER of six point something looks very cheap. Numis analyst Christen Hjorth had a 300p price target last year which would reset the PER to around 10, and that was before the last set of interims with EPS of 13.9p, and before the South African acquisition (the S.A. business is doing very well). Norcros also has a very strong balance sheet (gearing sub 1 before the acquisition), and growth in profits every year for 9 years - probably about to become ten.

I think the upside is limited, yes, but to around 300p or so! We have some way to go...