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.
Norcros has followed a very creditable FY19 financial performance with a Q120 trading update containing flat underlying revenues enhanced by a maiden contribution from the newly acquired RAP/House of Plumbing business in South Africa. Domestic sales are ahead year-on-year in both main markets, but UK exports are providing a degree of drag on underlying top-line progress. The FY19 results themselves showed good growth (Edison norm PBT c +27% y-o-y, EPS c +8% and DPS c +8%) derived from new and existing businesses. There were variable company performances across the portfolio but exposure to trade channels was generally more advantageous (especially in the UK, where the DIY shed sector struggled). The group’s market share positions, channel breadth and relative strengths in new product development and marketing together with a strong balance sheet all represent virtues in underlying markets that are flat at best. We make no material changes to estimates following the full FY19 results and AGM.
Norcros’s share price has rallied by c 20% year-to-date, but currently stands at similar levels to a year ago. Over this time period, management has delivered FY19 earnings slightly ahead of our expectations while our FY20 and FY21 estimates have nudged up slightly. So, there has been a small rating compression from already modest levels and, for the current year, the P/E is now just 6.7x with an EV/EBITDA (adjusted for pensions cash) of 4.9x and we anticipate a rising prospective dividend yield of 4.2% well covered by earnings. Our three-year EPS CAGR (to FY22) of 5.3% is steady rather than strong, but appropriate given current market conditions. Further earnings enhancing acquisitions during our estimate horizon are highly likely in our view.