Norcros is going cheap

Ten years of consistent growth with premium brands means Norcros is totally undervalued at just 7 times earnings, argues Mark Watson-Mitchell.

The market can be very tricky to fathom at times. It can pump up the value of new issues into the stratosphere, only for those values to be blown to pieces within months, just like the massively overpriced Aston Martin.

Then there are companies that have been impressively consistent performers that are trading on sub-market ratings.

One such example is Norcros (LON:NXR), the bathroom and kitchen products company. In my view, it is totally undervalued currently, trading on 7 times historic earnings and yielding nearly 4%.

In the UK, the group, which employs over 2,000 people, is headquartered in Wilmslow, Cheshire. It has seven complementary businesses, with premium and market leading brands: Triton Showers, Merlyn, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives.

Down in South Africa the group has four complementary businesses: Tile Africa, Johnson Tiles South Africa, TAL and House of Plumbing.

Its high-quality product and innovative ranges include shower enclosures and trays, electric and mixer showers, bathroom valves, bathroom furnishings and accessories, kitchen and bathroom taps, kitchen sinks, ceramic wall and floor tiles, pourable floor coverings, tiling tools, tile and stone adhesives and ancillary products.

The group not only designs its innovative products but also manufactures them and supplies to the residential, commercial, hospitality and retail sectors both in the UK and in South Africa. It is the market leader in several of its sectors.

Across the group its businesses have built up a long and successful track record of serving developers, consumers, retailers, wholesalers, architects and designers.

With 80,465,383 shares in issue, the group is valued at just under £170m. The board controls 1,629,952 shares, just over 2% of the equity, which considering their salaries is a low percent stake.

However, the group has very good institutional holders, including Canaccord Genuity (13.24%), Miton Group (10.63%), JO Hambro Capital (9.87%), FIL (7.54%), Artemis Fund Managers (7.45%), Prudential (5.03%), SVM Management (4.98%), Invesco (3.14%), Standard Life (2.31%), Hargreaves Lansdown Assets (2.10%) and Schroder Investment (1.99%).

Those shareholders must have been pleased with the latest figures. In June the group reported its results for the year to end-March, showing the tenth year running of growth.

For the 2018/2019 year, revenue increased from £300.10m to £331.00m, with pre-tax profits almost doubling from £13.50m to £25.40m. Earnings came out at 32.10p, with the dividend of 8.40p per share.

At the July AGM the company issued a trading update for the first quarter of the current year, showing ongoing advances despite the uncertain economic and political environment. It remains confident that the group will continue to win market share and progress still further during the rest of the year.


The estimates for the current year are for £34.50m pre-tax on the back of £358.95m of revenue. That should put earnings up to around 34p per share and a dividend of 8.9p per share.

The 2020/2021 trading year could see £375m of sales and £36.95m pre-tax profits. Earnings could shoot up to 35.25p per share and the dividend be increased to 9.55p.

The group’s portfolio of businesses is very well established, it services a broad customer base and benefits from leading market positions and strong brands. Its operating synergies and its economies of scale across its product manufacture and supply are impressive.

It has a very strong balance sheet and the last year saw a £12.1m reduction in group net debt to just £35m.

For scores of other companies in the manufacturing and retail sector such premium strength would command premium ratings.

I feel that its shares are easily worth 50% more than current price of 214p. At which level they are trading on a miniscule 6.57 times historic earnings, 6.21 times for the current year, 5.98 times prospective and yielding a weighty 3.9%. These shares are totally undervalued. My target price by the end of next year is easily 321p.