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.
Excluding Merlyn and JT, l-f-l revenue growth from the bulk of the UK operating base (ie companies accounting for c 70% of FY18 sales) was +5.2% in Q1. This was sequentially below that seen in the prior year but against comments elsewhere in the UK RMI space (eg ERA/Tyman, Kingfisher/B&Q) it represents a strong relative performance. As previously flagged, JT has lost share at B&Q following supplier consolidation and, until the annual effect works through in H219, this will dilute overall UK l-f-l revenue development. JT has substantially implemented a cost-reduction plan to counter this effect. More positively, Merlyn (acquired in November) appears to have bedded in well to the Norcros portfolio, having performed ‘strongly’ in the year to date.
At +8.9% l-f-l, we believe that South African revenue growth in Q1 has nudged up from rates seen in FY18. Given constraints on manufacturing capacity at JTSA and an unhelpful macroeconomic backdrop (eg negative GDP/construction growth in Q1), ongoing high single digit organic progress for Norcros remains a commendable performance. Noting some risks, the OECD is forecasting rising GDP growth in 2018 (to 1.9%) and 2019 (2.2%) and monetary easing. Consumer confidence readings are also markedly better than a year ago, so the prospective general business environment could be considered to better than that seen so far in 2018.
The share price has settled back a little from post-FY18 results highs (230p) in June but remains well ahead on 12-month and year-to-date bases. We reiterate our earlier observation that management’s growth aspirations are somewhat above current market expectations and, as the two converge, a positive re-rating is the most likely outcome in our view. On unchanged estimates, the current FY19e P/E and EV/EBITDA (adjusted for pension recovery cash) are little changed from our longer June note at 7.5x and 5.4x respectively.