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.
Sales momentum in the UK and South Africa has been good in H2 leading to slightly better outturns than we had expected in both countries. In the UK (+13.6% actual, -0.2% LFL) Merlyn has implicitly achieved slightly higher revenue in H2 versus H1 while referencing ‘new listings’ back to the H1 results suggests that Abode also performed well in H2. The South African division (+3.7% actual, +7.5% in constant currency) saw underlying sales progress pick up slightly from already healthy H1 levels especially in the context of a sluggish local economy. With a degree of vertical integration, all three SA subsidiaries are likely to have contributed here. We note that group net debt ended the year slightly lower than we had previously modelled (ie £36m versus £40m); no further guidance was given on profitability and we have assumed in our adjusted FY19 estimates that the debt reduction was a working capital effect at this stage.
We have increased our FY20 and FY21 earnings estimates by 3% following the post year end acquisition of RAP Plumbing Supplies (originally announced on 16 January) after the receipt of local regulatory clearances. This specialist plumbing products distributor increases the exposure to the trade channel, provides an additional potential outlet for other group products and complements Tile Africa’s retail presence. The initial c £9.7m consideration has been funded from cash generated by local operations and represents a c 5.2x EBITDA entry multiple.
The company’s share price is up c 7% and at the top end of its YTD trading range (though slightly lagging the FTSE All Share Index + c11%) after recently regaining December levels following a softer Q1. Overall, the rating is little changed from our last note and on a 6.9x P/E and 5.1x EV/EBITDA (adjusted for pensions cash) for the year that has just closed (or 6.3x and 4.7x, respectively, for FY20), management is still not being given the credit for the strategic progress and earnings development being delivered – with little assistance from underlying markets – in our view.