Norcros - FY20 outturn affected by COVID-19
The developing coronavirus pandemic has affected year-end trading for Norcros, with an indicated c £4m impact on EBIT. Operational shutdowns mirroring those of its customers have been undertaken and, as elsewhere, actions to preserve cash are being taken. The company has up to c £110m headroom under existing banking facilities representing a strong year end liquidity position. Forward guidance and our estimates for FY21 onwards have been withdrawn pending greater clarity on the scale and duration of the lockdown conditions being widely enacted currently.
02 Apr 20
COVID-19 trading update
The year-end trading update unsurprisingly highlights the recent impact of lockdowns in the UK and SA, where operations have been temporarily suspended and cash conservation measures taken. It points to a reduction in FY20 guidance from a consensus EBIT of £35m to £31m and withdrawing its FY21 guidance until greater clarity is gained. This results in a 13.4% reduction in our forecast EPS to 28.1p. The company has a strong balance sheet with good liquidity, its shares have reduced more than the average, with a March 2020 P/E of just 4.6x. It will take time and greater clarity of the effect of the pandemic on FY21 trading for the share price to return to previous levels.
02 Apr 20
Sector Note - finnCap Industrial Technology quarterly sector note - Q1 2020 (Issue 16)
Torquing points: It is impossible not to discuss the current pandemic and its effects on the industrial technology sectors. It often appears the share price reactions have been indiscriminate. Without doubt Q2 will experience a very severe contraction in the UK and across Europe and the US. It really is a perfect storm: lockdown will affect order flow and also the flow of raw material inputs and distribution of finished goods. Investors must now look for those who will prevail. The pandemic, first in China and now worldwide, has placed a focus on companies’ supply chains. Companies that have demonstrated a diverse and robust supply chain will inevitably be better placed to be flexible and responsive to changing geographic disruption. In an increasingly risk-averse market, businesses with net cash or fluid working capital positions will be more robust. Companies must now focus on cash generation and effective mitigating actions such as salary furloughs and dividend cuts. Indeed, a growing number of companies have already suspended their dividend payment.
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01 Apr 20
Norcros - Overseas challenges reduce estimates
Some pressure on local South African profitability and transitory effects of disrupted China supply lead us to reduce our Norcros earnings estimates by 5–8% following a trading update. Management remains firmly in credit for achieving outperformance versus local markets and we expect this to be a recurring feature. The company’s share price has retraced to pre UK general election levels now and its P/Es remain in single digits on our revised estimates.
27 Feb 20
Trading update and coronavirus impact
The group has announced a trading update highlighting continuing tough UK and weaker SA market conditions. It also signals little short-term impact of the coronavirus so far, but with supply chain disruption likely to affect trading in the spring/summer period. It flags guidance to below previous market expectations. We therefore cut our EPS forecast for FY20 by 6.4% and for FY21 also by 6.4%. We lower our price target from 340p to 318p, based on a target P/E of 9.0x for 2021, which is undemanding and offers significant upside as confidence returns.
20 Feb 20
Sector Note -
So where do we go in 2020? In our opinion, UK smaller companies remains an attractive area of growth with some really outstanding business but, as usual, careful stock-picking is required. In 2020 this could be more the case than usual: while market median growth remains robust at +5.5% (sales) and +13% (EBIT), earnings momentum is at the lowest level we have seen and there does not appear to be any economic tailwind yet. This, coupled with the market trading on elevated multiples (14.6x EBIT and 17x Earnings), means that extreme care needs to be exercised. As a result, the main theme for our ‘11 for 20’ stock picks is ‘undiscovered value’. These are companies where we believe there is some significant element that is yet to be fully appreciated by the market, be it unjustified low valuation versus peers, M&A potential or ability for the company to exceed market expectations. Happy New Year! Raymond Greaves – Head of Research – firstname.lastname@example.org – 020 7220 0533
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07 Jan 20
Sector Note -
Election implications for the Industrial sector: The Conservative Party’s now stable working majority provides clarity, with the withdrawal agreement expected to be rapidly enacted. Status quo in most policy areas, except a stark change from a promised fiscal stimulus through higher spending on public services and investment programmes, which could kick-start activity. We see a recovery in consumer confidence boosting activity in the DIY and housing sectors, and greater infrastructure expenditure will also boost a number of construction-related industrials. While the sector participates in a Boris Bounce, we regard the recent strength of sterling cautiously, affecting international competitiveness and reducing the translation of overseas earnings, although it helps to reduce the price of imported raw materials. The renewed threat of a no deal Brexit has resulted in sterling giving up much of its gains.
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18 Dec 19
Norcros - Strength in diversity
The nature of a portfolio business is that all parts do not necessarily move forward at the same rate. Norcros’s double-digit progress in H120 included some notable company performances enhanced by an acquisition, which together more than offset pockets of softer trading elsewhere. The group is rising to the challenge of some tricky market conditions and this is starting to be reflected in its rating.
02 Dec 19
Initiation of coverage – significantly undervalued growth
Norcros continues to grow despite challenging market conditions, with management achieving growth through a successful record of acquisitions as well as market share growth from new product developments and other gains. The bathroom hardware market remains fragmented, with huge scope for market consolidation, often gaining from competitor distress. The shares trade on an unwarranted and significant discount to the peer group, despite its lower retail exposure, better track record and stronger balance sheet. Fundamentally, we see strong scope for a rerating. Buy.
18 Nov 19
Norcros - Maintaining forward progress
Sustained UK progress is the headline message from the H120 update in our view. Low single-digit growth here is not eye-catching but is certainly better than underlying markets. Management expectations and our own estimates are unchanged and consistent delivery against these benchmarks should be reflected in an improved rating in our view.
18 Oct 19
Norcros - On track for expected progress in FY20
The Norcros management team is delivering against expectations and maintaining a stable outlook even though certain underlying markets have their challenges. In contrast to its market positions, the company’s rating is anything but premium as the building materials and, perhaps, buy and build strategies appear to be out of favour with investors. The track record is very good – as is the prospective dividend yield – and greater recognition of this is warranted in our view.
09 Aug 19
Cenkos: Building & Construction
Due to a change in Analyst role, Cenkos Securities plc has suspended coverage of the following stocks (see table 1). Our previous recommendation and forecasts can no longer be relied upon.
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31 Jul 19
Where’s the Value?
Warren Buffett once said that as an investor, it is wise to be ‘fearful when others are greedy and greedy when others are fearful’. Fear is not in short supply right now.
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02 Jul 19
Norcros - Making good organic and acquisitive progress
FY19 ended in line with management’s expectations following a good H2 sales performance. Momentum here is to be supplemented by the post year-end acquisition of RAP Plumbing Supplies, which enhances earnings estimates by c 3%. Norcros is executing well against its strategy but the rating suggests that this is being overlooked by the market.
26 Apr 19
Small Cap Feast
Techniplas –global producer and support services company providing highly engineered and technically complex components, making the supply chain to original equipment manufacturers more efficient. FYDec17 rev $515m. Loungers plc—the operator of 146 café/bar/restaurants across England and Wales under the Lounge and Cosy Club brands, announces its intention to seek admission on AIM, offer TBC, expected late April. SDX Energy plc—a North Africa focused oil and gas company, announces its intention to complete a Canadian plan of arrangement under section 192 of the Canada Business Corporations Act and will have shares de-listed from the TSX-V and admitted to trading on AIM. Expected 28 May 2019, anticipated market cap of £76m
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10 Apr 19
Norcros - Growing and investing
Norcros continues to deliver a progressive trading performance ahead of local market conditions and in line with management guidance. Its share price has risen this year, significantly outperforming the FTSE All Share Index, but the company’s rating remains in single-digit P/E territory. It seems that re-rating will be a gradual process but there is plenty of evidence to suggest that this can continue.
19 Dec 18
Norcros - Positive progress in H1
The Norcros H119 pre-close update reiterated management’s expectations for progress in FY19. Trading newsflow was similar to that reported in Q1 – with a good uplift to UK EBIT anticipated for H119 and a growing South African top-line – albeit with an implicitly slightly quieter second quarter. Brand presence, coupled with product and channel diversity, appears to be supporting ongoing progress in variable market conditions. Our estimates are unchanged and H119 results are scheduled for 15 November.
18 Oct 18
Small Cap Feast
Summerway Capital investing company established to acquire companies or businesses which the directors of the Company believe have the potential for strategic, operational and performance improvement so as to create shareholder value. Offer TBC, market cap TBC expected 19 October Admission is being sought as a result of the proposed RTO of Cambian Group plc following completion of the acquisition by CareTech a leading provider of specialist social care services, supporting adults and children with a wide range of complex needs. No raise, market cap TBC expected 19 October. PetroTal (TAL.TO) - The exploration and production company focused on oil assets in Peru is seeking a secondary AIM quotation before the end of 2018. Path Investments— First acquisition of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Seeking £10m raise. Due early Oct Green Man Gaming—pure play e-commerce and technology company in the digital video games industry. revenue CAGR growth of 26.7% in the last three years to £47.5m. Due Mid October 2018. EBITDA Profitable. Offer TBA Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is exploring its options in relation to a potential move to the AIM market of the London Stock Exchange which, if it were to proceed, would likely take place over the next few months.
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11 Oct 18
Norcros - Good start to the year
FY19 has started well for Norcros and management expectations for full-year progress are unchanged. The maiden Q1 contribution from Merlyn has more than offset Johnson Tiles’ (JT’s) revenue reduction and other operations collectively continue to show good growth. As before, we maintain that a positive re-rating is likely.
30 Jul 18
Explicit growth aspirations
Variable underlying markets did not prevent Norcros from delivering both organic and acquired progress in FY18. Moreover, a new target of almost doubling revenue by 2023 has been set with ROCE sustained above 15%+. Share price movements suggest that the market is starting to give credit for management’s achievements. Performance will be measured against the strategic plan and we believe that a further re-rating is likely.
29 Jun 18
Organic and acquisitive earnings growth
In Norcros’s first half, the company delivered improved profitability, made significant organic business investment and completed an earnings enhancing UK acquisition. Merlyn is a highly complementary business and a logical addition to the business portfolio. Taken together, we raised our current year EPS by c 4% and by c 7% and c 9% in the following two years, with dividends nudged up also. The share price has performed well on this newsflow but Norcros still represents good value, in our view.
02 Jan 18
Smartest player in the smallest room
Norcros PLC (LON:NXR) is a market leader in supplying innovative branded showers, taps, bathroom accessories, tiles, and adhesives. The company operates a multi-brand strategy, with operations primarily in the UK and South Africa. In this report we highlight some of the key features of the investment proposition.
30 Nov 17
EPS enhancing acquisition raises PT to 290p
Norcros continues to use its balance sheet to finance EPS enhancing acquisitions and generate returns in excess of its cost of capital. Following the acquisition of Merlyn for £60m, we have upgraded our FY18 and FY19 PBT estimates by 9% and 28% to £26.4m and £32.8m respectively and our price target from 260p to 290p. With Merlyn’s premium product range, we forecast FY19 group EBIT margins to expand from 8.9% to 10.3% and that despite 18.3m new shares in issue, the acquisition will enhance the FY19 EPS. With Norcros trading on a FY18 PE rating of 6x and offering a dividend yield of 4%, we reiterate our buy recommendation.
28 Nov 17
After eight years of consecutive revenue and EBIT growth, the resilience demonstrated by Norcros is not reflected in its share price. The following remain in its favour: 1) the strong balance sheet will continue to finance an acquisition strategy and growth; 2) 43% of revenues are sourced overseas, giving insurance against any downturn in the UK; 3) forecast Lfl revenue growth in South Africa of over 5% and 4) it trades on a FY18 PE rating of 6x and offers a dividend and free cash flow yield of 4% and 10% respectively. We initiate coverage, following the recent positive trading update with a buy recommendation and price target of 260p, representing 45% upside. Even then, the FY18 PE rating is still only 8.8x.
19 Oct 17
Norcros’s H118 pre close update flagged group revenue and EBIT in line with management’s full year growth expectations. The period end net debt figure – after some exceptional costs – was also where we expected it to be. Both divisions are achieving good revenue growth without much help from their respective markets and profitability should follow. The rating is yet to give credit for the achievement of this self-generated progress.
18 Oct 17
Norcros has continued to deliver against our expectations and AGM comments reinforce expectations of progress. The strategy of building a larger complementary business portfolio has been executed well to date and the company retains the financial flexibility to continue this process. Such activity may provide a catalyst for a re-rating but there is already scope for this to happen in our view.
31 Aug 17
Solid H2 performance
An in-line year end update pointed to an improved H2 trading period for UK based operations and good ongoing progress in South Africa. Full details on underlying profit trends will come with the FY17 results but we feel that the business is performing well in its markets and this is not being fully reflected in the company’s valuation.
18 Apr 17
Good growth delivered and anticipated
H117 results contained a mix of individual trading performances which, in aggregate, delivered double-digit percentage y-o-y progress. Balancing business momentum, internal development actions and overall market conditions, we continue to expect good PBT growth and for this to translate to further share price strength in due course.
12 Dec 16
Full year on track
The H116 pre-close IMS echoed previous newsflow and group guidance for the full year is unchanged. Consistent messaging and expected progress are at odds with weak share price performance. While we appreciate some investor caution on UK earnings, a valuation approaching P/E and yield parity for next year overextends these general concerns in our view.
14 Oct 16
Progressing as planned
FY16 was a year of strategic and financial progress for Norcros, with improved profit contributions from both reporting regions and two acquisitions completed. Q117 trading is in line with previous FY17 group guidance and we expect further profit progress over our three-year forecast horizon. UK RMI exposure appears to be out of favour with investors currently, but acquisitions and other regional earnings are positive differentiators not reflected in the rating in our view.
09 Aug 16
AIMing for income
So what is the profile of a typical AIM quoted company? The market’s detractors may argue that London’s junior market is peppered with cash consuming companies that are not sufficiently advanced in their route to profitability nor corporate governance regimes to justify their listing. Supporters of the London Stock Exchange’s growth market would say that the Alternative Investment Market is the world’s most successful market for growing companies rewarding investors prepared to brave the risks of earlier stage funding, and driving innovation and job creation. Neither view suggests that AIM would be a fertile hunting ground for income generating stocks. However a glance at the FTSE AIM All Share constituents (Source: Fidessa) suggests that over 250 of its members or circa a quarter of the market’s members pay dividends.
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30 Jun 16
Higher revenues, EBIT margins, EPS and DPS represented a good first-half trading performance from Norcros. Moreover, each of the operating businesses contributed to this. With increased estimates in all three forecast years, single-digit valuation multiples already offer good value and there is potential for more.
24 Nov 15
Sound H116 progress
In H116, Norcros has seen good revenue progress from both divisions and we expect to see higher profit when results are reported on 12 November. In addition, we expect further y-o-y progress in H2 and full year expectations are unchanged. Our recent initiation note highlighted growth aspirations, which are yet to be reflected in the share price.
19 Oct 15
Enhancing strong market positions
Norcros has strong positions in the UK and South African bathroom fittings and related markets. Further development in conjunction with recent acquisitions supports our expected three-year EPS CAGR of 10%. Cash flow and financing headroom provide scope to enhance this and we do not believe that the pension position is restrictive. In our view, conventional earnings and cash-based multiples (FY16 P/E of 9.6x and 5.5x EV/EBITDA) do not fully recognise the prospects.
21 Sep 15