Norcros: An interesting value proposition with an FX kicker

14th Oct '16 by Edmund Shing

7 comments 7217 reads

Norcros (LON:NXR): a maker of bathroom fittings and appliances, including Triton showers, Croydex bathroom furniture and taps. Glamorous stuff!

Market cap. now only £88m, with the share price sliding from a 208p peak in December 2015 to just 145p today. Clearly Norcros has suffered sentiment-wise from its gearing to the housing and home improvements market.

But there seems to be a lot of value in this stock today, at least judging from the Stockopedia data (93 Value rank):

Valuation: With a forecast P/E rating of 5,4x almost in line with a 5.2% forward dividend yield, this is a stock that pretty much satisfies Lord Lee's rule of thumb of companies with a dividend yield equal to or above the PE.

Cash flow: Digging into the free cash flow generation of Norcros, I was pleasantly surprised. Yes the company has net debt, resulting from making a number of acquisitions which have obviously added to the top-line. But looking forward, free cash flow generation pre-acquisition spending and pre-dividends looks like it could be around £10m per year, i.e. a free cash flow yield of over 11%.

So not only does the dividend look pretty secure barring disaster, but the debt should be paid down fairly quickly too.

Growth: this is coming largely from the UK acquisitions Croydex and Abode (+14%), with like-for-like sales growth sharply mixed between the UK (-5%) and the South African (+10%) businesses.

Source: Norcros, 11 October 2016

The 11 October trading update looks solid:

"Group underlying operating profit in the first half is expected to be
in line with the Board's expectations."

Profitability: a Return On Equity of 26% looks set to be maintained going forwards, while an EBITDA/total assets ratio of over 30% is good (they don't give a gross profit figure).

Net debt has already fallen £4.5m to £28m now from the Mar-17 year end level of £32.5m, highlighting the company's commitment to paying down debt.

FX: There was a small FX headwind (average £/ZAR c 19.7 vs 19.3 in H116) in H1 '17, but with the current £/ZAR exchange rate at ZAR17.3, this swings back into the company's favour heavily given the recent depreciation of sterling.

Summary: All in…

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Tortoise investor

14th Oct '16

Part of the reason it's priced lowly is because of the pension deficit. I think this is manageable but others don't. See Paul Scott's recent entry and the comments section.

Edmund Shing

This is a fair comment. But I get the feeling generally that people are running scared over the pension deficit issue, which ha only been exacerbated by the recent (post-Brexit vote) collapse in UK corporate bond yields. Which are now, by the way, backing up again, thus in theory reducing the net present value of these future pension liabilities and thus reducing the funding gap...

They are paying £2.5m per year to close this gap over the long-term, which seems reasonable to me. The next triennial review of the pension scheme should be in March 2018, so there is time... Who knows where bond yields will be by then?
Edmund

SLAPHEAD

Shaping up to be a classic 'if only'.....once they're gone ......

dfs12

Completely agree with this analysis. Sentiment is due a reversal as price looks as though it has dropped into total bargain territory.

Best indicator of a turning point... when I'm totally fed up and about to admit defeat and sell a holding that has drastically underperformed. However, usually only works when I have actually sold (just thinking about it doesn't have the same results sadly!) Bad news is I've decided to keep these!

Zipmanpeter

Key is to try to understand why there has been such consistent selling. Broker forecast albeit only 2 are not going down yet. Margins will suffer a bit if as is likely sterling weakness on imports cannot be fully passed on (but look out for better exports - Board are looking to increase non-UK sales as natural hedge; depreciation of sterling lets them do this without the risk of buying in Europe.

Stated Board aim is to grow more including by acquistion. Expect debt to be paid down and then more add on buys that will likely dilute the pension issue

So why so low? Is there a big seller in the market. Are the Directors exiting positions? Without evidence of that I I am inclined to add to my already large position in my portfolio as dividend is well covered and >5% !!

Housemartin2

15th Oct '16

Sure the Pension Deficit is a problem but for me and it may be for others, it is the South African business. Most of the growth is coming from there and this is an increasingly unstable country. It is this uncertainty in a significant part of the business (c30% of Revenue) that may be a major part of the SP underperformance. This is not something about which the company can do much.
I view the acquisitions as a way of diluting this effect but there was an interesting post on Paul Scott's Small Cap Value report on Tuesday to the effect that Norcros was ( in the posters practical experience) reducing the quality of the acquirees products. An interesting if disappointing take if correct.
I am a long term holder

The uncertainty in SA has been going on for some time and yet Norcros is growing strongly there. I'm personally not worried.

Norcros: An interesting value proposition with an FX kicker

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Edmund Shing

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