The nature of a portfolio business is that all parts do not necessarily move forward at the same rate. Norcros’s double-digit progress in H120 included some notable company performances enhanced by an acquisition, which together more than offset pockets of softer trading elsewhere. The group is rising to the challenge of some tricky market conditions and this is starting to be reflected in its rating.
Company normalised PBT and EPS grew by 14.1% and 12.9%, respectively, in H120 with a 10.7% uplift in the interim dividend. Management had already given a good pre-close steer regarding revenue performance, and with one exception (Triton) UK retail segment growth was remarkably strong and there was significant outperformance in UK trade also among the smaller portfolio companies, while UK exports were generally weak. JTSA delivered positive revenue (and profit) growth in South Africa anchoring a flat like-for-like performance from existing operations there, enhanced by a maiden contribution from House of Plumbing (acquired 1 April). This deal nudged net debt up to c £41m at the end of H1 after positive underlying cash inflow effects.
There is no disguising the economic uncertainty and challenges currently present for different reasons in the UK and South Africa, Norcros’s primary markets. Individual company strategies – with new product development and share gains common threads – backed by group benefits are geared to outperformance and there has been clear success in these regards. Our underlying revenue and operating profit estimates have not changed materially following the H120 results and the 4–5% downward pre-tax earnings adjustments across all estimate years are effectively attributable to the inclusion of IFRS 16 effects for the first time.
The upward trend in the Norcros share price since February has been justified by the H120 results and, having risen by c 28% year-to-date, now sits at a 10-year high. As a result, the company’s rating is beginning to look more conventional now (FY20 P/E 8.0x and EV/EBITDA adjusted for pensions cash of 5.6x). That said, initiatives around the group indicate that the company is aiming and expecting to outperform its markets – which admittedly have challenges – rather than waiting for an upturn to occur. Additionally, the company’s cash flow credentials leave it well placed should further acquisition opportunities arise.