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 Forward guidance and our estimates for FY21 onwards have been withdrawn pending greater clarity on the scale and duration of the lockdown conditions being widely enacted currently.
Widespread customer shutdowns in the wake of the coronavirus spread have been the catalyst for similar actions from Norcros operations in the UK, Eire and South Africa. Manufacturing activities have ceased for the time being with significantly scaled down distribution-related capacity remaining in place for now. It is anticipated that announced government support measures will be accessed as appropriate.
As a consequence of the impact on March trading, pre-IFRS 16 EBIT guidance for FY20 has been revised to c £31m (IFRS 16 lifts reported EBIT by c £0.6m on an annual basis) versus market consensus of £35m previously. To reflect this, we have reduced our group revenue and EBIT estimates by £10m and £4m. This EBIT adjustment effectively bridges the difference between our previous year-end core (pre-IFRS 16) net debt expectation and the c £40m now flagged by management. This is well within c £150m existing banking facilities (ie £120m RCF and £30m accordion, both to November 2022). At this stage, the company has not ruled out a final dividend payment (though many others have) but implicitly flags that it is under active review, along with other cash preservation actions.
Management has suspended forward guidance and we have withdrawn our previous estimates for FY21 onwards pending greater clarity on the duration and shape of business recovery from the COVID-19 pandemic. Under normal conditions, gross profit margins are understood to be similar for the UK and SA divisions (in the 35–40% range). Individual companies operate under a range of business models and therefore the way in which they are affected will vary through their ability to flex costs and manage their supply chains effectively. The subsectors served (including housebuilders, trade/merchants, specialist and DIY retail) will also have differing supplier requirements once the business recovery phase begins. Operating companies need to be well positioned to facilitate a currently indeterminate return path to normal trading.