The Norcros H119 pre-close update reiterated management’s expectations for progress in FY19. Trading newsflow was similar to that reported in Q1 – with a good uplift to UK EBIT anticipated for H119 and a growing South African top-line – albeit with an implicitly slightly quieter second quarter. Brand presence, coupled with product and channel diversity, appears to be supporting ongoing progress in variable market conditions. Our estimates are unchanged and H119 results are scheduled for 15 November.
A c £19m maiden H1 revenue contribution from Merlyn with above UK average divisional margins is likely to be a key trading highlight when the interim results are reported. While Johnson Tiles’ revenues will be lower y-o-y – reducing B&Q sales exposure – a recovery to profitability, following its restructuring should also provide a boost to EBIT. Apart from these specific features, organic revenue growth from the other UK portfolio companies collectively was c 2.5% in H1. Trade remains the most resilient sub-sector, especially in the residential new build supply chain while retail channels have been more challenging (eg in DIY with Homebase) and export markets variable.
South Africa continues to deliver good revenue growth rates, achieving +7.1% progress in H1 in local currency (or +3.9% in sterling) all organically. Johnson Tiles SA has had a busy period enhancing processes to improve production yields and effectively raise capacity, while at the same time growing revenues including thirdparty product. Implicitly, the Tile Africa retail operations and TAL Adhesives must also be making some top line progress. We note that the rand has weakened against sterling since the beginning of the year; the H1 average rate was broadly in line with our modelled £/ZAR 17.5 assumption but we may need to revisit this when the interim results are reported if the current £/ZAR 18.7 level persists.
The Norcros share price has outperformed the FTSE All-Share Index by c 20% ytd having risen by c 12% over this time period. Nevertheless, the company’s FY19e P/E and EV/EBITDA multiples (adjusted for pension recovery cash) are still only 7.0x and 5.1x respectively. A triennial DB pension scheme review is underway (based on a 1 April 2018 valuation). Norcros can comfortably meet its existing funding obligations and we consider that this is unlikely to change. Therefore, this should not be a drag on valuation.