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.
Norcros delivered good growth in revenue (+12.2%) and operating profit (+30%) in its H119 results, with strong contributions in the UK from Merlyn and Triton and a return to profitability following restructuring at Johnson Tiles. Outside the UK, while all three operating companies grew local currency sales, short-term profitability was held back by investment activity at Johnson Tiles South Africa. Behind these headlines, some common operational themes were the relative strength of trade sector customers and a breadth of new product activity across the group. A 7.7% uplift in the interim dividend provided a good marker of management’s confidence in the expected full-year outturn. While net debt increased to £53.5m during the first half, this was largely a seasonal effect.
A period of uncertainty in the UK and fragility in South Africa requires monitoring but expansion – albeit at relatively low levels – is anticipated in both economies. The H1 trading performance especially among the larger businesses and specific operational progress at both tile companies provides support for an unchanged estimate outlook, in our view. In the event, we have nudged up our UK expectations in all years, but incorporating a slightly stronger sterling/weaker rand assumption offsets this by lowering our expected contribution from South African operations. We also expect a significantly stronger free cash flow performance in H2 leading to end FY19 net debt down to c £40m.
The Norcros share price has been above that seen at the start for almost the whole year so far, trading above 200p for the last five months. Consequently, it is now up c 16% for the year (versus an FTSE All Share Index down by c 12%). Nevertheless, on our robust underlying estimates, the company’s rating is still at single-digit levels (FY19 P/E 6.8x, EV/EBITDA adjusted for pensions cash 5.1x) with earnings growth expected in all three years.