Readers will already know that I love to search out under-rated value propositions, and this group is one of those situations.
On the face of it the business may look boring, but I feel that there is some upside to chase.
I have profiled Norcros (LON:NXR) several times before but I sensed a change of investor views about the company after last week’s results, certainly sufficient enough for me to revise my thoughts.
The Business
Employing some 2,100 people, the Wilmslow, Cheshire-based group is a market-leading supplier of high-quality, sustainable bathroom and kitchen products with operations primarily in the UK and Ireland and South Africa.
It is a well-established business with a successful track record of serving consumers, architects, designers, developers, retailers and wholesalers.
In the UK and Ireland, it operates under six brands: Triton, Merlyn, Grant Westfield, VADO, Croydex, and Abode.
While in South Africa, the company operates under four brands: Tile Africa, House of Plumbing, TAL, and Johnson Tiles.
Strategic Disposal Of Lower Margin Operation
Almost a month ago the group announced the completion of its lower margin Johnson Tiles UK division, after which CEO Thomas Willcocks stated that:
“We are pleased to have completed this sale as planned.
At our recent Capital Markets Event we reiterated our strategic priorities, namely M&A, Organic Growth, Operational Excellence and ESG and we will continue to ensure that our capital allocation is aligned accordingly.
This sale will allow Norcros to focus on and accelerate the execution of our growth strategy.”
Over the medium-term the group’s strategy is that it will actively evolve its model from a ‘holding company’ to an ‘endorsed brand model’ enabling collective leverage of its scale and growth accelerators, thereby maximising value creation.
Recent Results
Last Thursday, 13th June, the group reported its Final Results for the year to end March 2024, showing lower sales and profitability while operating in a somewhat challenging environment.
With the results the CEO stated that:
“I am delighted with the performance over this period and excited by the significant opportunities that remain in the more resilient mid-premium market segments that we hold leading positions in.
Our strategy is building from a position of strength and scale as we actively leverage the customer and operational synergies within the Group.”
Current Trading
The company reported that group revenue in the two months to the end of May 2024 was encouragingly 2.2% ahead on a constant currency like for like basis, adjusting for Johnson Tiles UK and Norcros Adhesives (UK and Ireland +2.0%, SA +2.5%).
Group revenue was 2.9% below the prior year comparator on a reported basis.
Although market conditions are likely to remain uncertain, the group continues to make further strategic progress and the Board’s expectations for FY25 remain unchanged.
The Equity
There are some 89,614,920 shares in issue.
The larger holders include JO Hambro Capital Management (10.09%), FIL Investment Advisors (9.94%), Premier Fund Managers (9.03%), Canaccord Genuity Wealth (8.59%), Artemis Investment Management (6.68%), SVM Asset Management (4.96%), Allianz Global Investors (4.54%), M&G (4.31%), JP Morgan Chase Bank (3.81%), and Gresham House Asset Management (3.13%).
Brokers’ Views
Analyst Andy Hanson at Zeus Capital has a sum of the parts ‘fair value’ of 479p on the group’s shares.
Despite lower revenues for the year to end March 2025 of £366.7m (£392.1m) the analyst looks for a fractional improvement in adjusted pre-tax profits to £36.5m (£36.4m), but with slightly lower earnings of 30.8p (32.1p) and a higher dividend of 10.4p (10.2p) per share.
For the next year, 2026, he sees £376.8m sales, £40.1m profits, 33.5p earnings and a 10.6p dividend per share, followed by even better figures the year after.
Analysts Toby Thorrington and Andy Edmond at Equity Development have fairly similar results being projected for this year and next, while noting that based upon its fair value, other peer group metrics and strategic earnings potential they all suggest a share price above current levels.
They suggest that actions taken thus far and expected in the near term will need to be reflected in increased earnings momentum before the market attributes greater value to the strategy.
However, they do have a current ‘fair value’ of 253.5p on the share, while stating that their analysis of group strategy and potential earnings implications gives a prospective valuation in excess of 400p per share.
At Edison Investment Research analyst Andy Murphy continues to believe that the outlook is improving in both of the group’s core markets, the UK and South Africa.
While giving a 251p a share valuation, the analyst considers that the company’s shares are trading on an undemanding P/E rating.
My View
Clearly the group has endured some choppy waters of late, but it must be remembered that it has market-leading brands and is now improving its margins and efficiencies.
At the end of May the group’s shares were trading at 236p, since when they fel back to a recent low of 201p, which was scored last Friday.
They are currently trading a little firmer at 219p, at which level I consider that Norcros shares, on only a mere 7.1 times current year price-to earnings, are still significantly undervalued.
I now set a new Target Price of 260p.
(Profile 20.08.19 @ 214p set a Target Price of 321p*)
(Profile 20.06.24 @ 219p set a new Target Price of 260p)
(Asterisk * denotes that Target Price has been achieved since Profile publication)