Small Cap Report (14 Feb) - NXR, VP., RNO, TSTL

Thursday, Feb 14 2013 by

Norcros (LON:NXR) issues a planned IMS (Interim Management Statement) covering the 18 week period to 3 Feb 2013 (which is the bulk of H2, since their year-end is 31 Mar 2013). They are the maker of Triton showers, and Johnson Tiles & adhesives, with operations in the UK and S.Africa. I am an enthusiastic holder of Norcros, and believe the company has excellent value & recovery characteristics, especially when you work out how strong normal cashflow is, once one-off factors are stripped out, and the large depreciation charge added back.

There seem to be a lot of positives in today's IMS. Group revenue is up a surprisingly large 15.1% in the 18 weeks in constant currency terms, but that dropped to a still impressive 10.8% in reported sterling terms (the difference being due to a weaker S.African Rand). Not bad going when they describe conditions as "subdued", so clearly NXR is gaining market share strongly - a very good sign in my opinion, as that effect is likely to be multiplied once the economy recovers.

The outlook statement says that they, "should continue to make progress in line with market expectations for the current year". Market expectations are for 1.9p EPS, but that forecast hasn't changed throughout the last year, as can be seen by this snippet from the Stockopedia StockReport on Norcros:


I particularly like the 5 graphs above which enable you to instantly understand key long-term trends in Revenue, Profit, EPS, and valuation.

As the 1.9p EPS forecast hasn't changed for a year, and given today's strong IMS, I would have thought that NXR is likely to out-perform this target. Their interim results showed underlying EPS up from 0.9p to 1.1p, and given that they achieved 1.9p underlying EPS for the last full year, it doesn't make sense to forecast unchanged EPS for this year, given that they were 0.2p ahead at the interims, and trading strongly in H2.

So I suspect that the full year results to 31 Mar 2013 are likely to be ahead of the 1.9p forecast, although perhaps they want to keep something in the back pocket until preliminary results are announced in mid to late Jun 2013?

The pension deficit at Norcros should also now be reducing, given that Gilt yields have risen in recent months, and in any case they own more in freehold property than the deficit on the pension fund, so it's a red herring in my opinion. Furthermore, net debt is only 1.1 times EBITDA, so could be cleared within say 2 years, and they have ample headroom on borrowing facilities. There might even be some acquisitions?

In my view Norcros could be looking at, with operational gearing and an economic recovery (which is already underway, based on Mervyn King's suprisingly upbeat commentary yesterday), EPS rising to say 3p in the next year or two, and a PER of 12 would be justified, therefore that implies a share price upside to 36p in (say) 2 years, compared with 16p now. Hence why this share is a long-term hold in my personal portfolio. It also throws off a 4-times covered dividend yielding 2.75%, forecast to rise to 3% next year, so a satisfactory income while we wait for the shares to (continue to) re-rate. All rather pleasing, I'm happy to leave this in my portfolio for the foreseeable future.


VP (LON:VP.) issues an IMS covering the same period as Norcros's, i.e. H2 to date (with a 31 Mar year-end). They are a niche equipment hire company, and I was impressed with management when they presented at a recent investor evening organised by Equity Development. Incidentally, the slides from the companies who presented that evening (for VP Group, Tracsis, and Regenersis, all interesting companies) can be viewed on ED's website here, and are worth a look.

VP is a boring, steady company that consistently performs & raises its dividend, and is reasonably priced. So ideal for tucking away in a pension fund for 5 years or more, in my opinion. As you would expect, their IMS today is reassuring, saying that full year profits are expected to be in line with market expectations.

Here is the same snippet of info on VP Group:


VP has also, "secured a number of LNG contracts in the Asia Pacific region which will contribute in the new financial year". At 338p the shares are on a forecast PER of 10, and dividend yield of 3.6%, so still quite attractively priced. There is some debt of course, as there always is with tool hire businesses, and I'm never quite sure how to treat debt in valuation terms. Do you add it all to mkt cap, and look at EV? Or do you treat is as a revolving item, and providing it's within sensible limits, then ignore the balance sheet amount, and just account for the interest cost, then value the shares on a PER basis only?

Hmmm, not sure, but I lean towards the latter. A moderate amount of debt is necessary to buy the equipment that they hire out, and is covered by the asset value, so it's really only the interest cost that matters. So a multiple of 10 times EPS looks quite good value to me, for a well managed niche business with fairly good profit margins.


There seems to be a problem with the news announcements this morning, so I'm having to scrabble around to find news on different websites. Also this means I can't put in the usual links to investegate, which is annoying, but I'll add them later this evening when the glitch has been corrected.


Shares in industrial chains group Renold (LON:RNO) are down 24% to 21.5p at the time of writing, on an IMS for the 4 months to 31 Jan 2013. Underlying group revenue is down 8.7%, and they have cut some costs. Operating profit in H2 will be, "broadly in line with the first half".

They achived 0.8p EPS in H1, so that implies a full year figure of 1.6p EPS, against market forecast of 2.73p, so that's a fairly significant profits shortfall. So the current price is about 13.4 times this year's likely earnings, not really cheap, unless you think they can drive profits back up?

They are conducting a review of operations, which usually ends up with closures, job losses, lots of exceptional costs & write-downs. So it looks potentially messy to me, and an industrial chains maker just doesn't interest me. Also they have too much debt, and a whacking great pension deficit, and doesn't pay dividends, so it looks a very unappealing share to me, and I'll make a note not to bother looking at it again, as it's a waste of time from my point of view.


Tristel (LON:TSTL) an infection control & hygiene products, has also warned on profits, its shares being down 24% to 22p. Their endoscopy business has seen a, "sharper than expected decline", and this has resulted in an underlying loss of £0.6m for the 6 months to 31 Dec 2012. However, they do say that they are confident of a profitable full year outcome to 30 Jun 2013, so that implies H2 will make profits of at least £0.6m.

This could be a good entry point if you like the business, as the outlook statement says that they, "look forward to a strong second half, and further growth in 2014 and beyond".

I don't know Tristel well enough to be able to comment any further, but it looks worth another look, with the market cap down to £8.8m, and the problems of H1 apparently being temporary - that is generally the best time to catch a falling knife, i.e. if you are confident the problems that triggered the fall are passing. It's all about looking fowards, and not obsessing over hiccups which all businesses (especially smaller ones) inevitably face.


A lot of friends are saying to me that they're nervous about the market overall, given that we've had such a good bull run, especially in smaller caps, for the last 6 or 7 months. I agree that we're probably overdue a correction in the short term, but as Mervyn King said yesterday in his latest speech on the state of the economy, we are now in a, "slow but steady" economic recovery. In particular, he noted that underlying GDP growth in the UK was actually 1.2% in 2012, for manufacturing & services, and that the only reason the headline figure was flat is because of a sharp contraction in the construction sector, which is a factor that is not likely to repeat in 2013. Indeed, with housebuilders now in rude health, it could go the other way (Mervyn didn't say that last bit, I did!).

So it is entirely logical that the market is now starting to price in future growth, as opposed to worrying about further contraction. It's just a question of sorting the wheat from the chaff, and holding good stocks that are likely to out-perform, in my opinion, and top-slicing things that have risen a lot, and ditching things that have got ahead of themselves.

I'm trying not to open any new positions, as I'm already geared, and want to see that gearing come down because markets have been so buoyant - this is vital to be able to withstand any corrections, without being forced to close geared positions (spread bets & CFDs). Generally gearing is a nightmare, but in a bull market it can dramatically enhance the returns. However, as I discovered in 2007-8, it can also cause disaster in a bear market, especially if you are in large geared positions, in stocks where liquidity dries up.

Hence why these days I am careful not to over-size individual positions, and usually don't buy more than about 5-10 times the normal market size, as at least that way you can get out if something goes wrong, either with the company, or the economy overall.

Right, gotta dash, see you same time tomorrow & every weekday.

Best wishes, Paul.

(of the companies mentioned today, Paul has a long position in NXR, and no short positions)


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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Norcros Plc (Norcros) is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. It is focused on showers, taps, bathroom accessories, tiles and adhesives. The Company operates through two segments: the United Kingdom and South Africa. The Company is managed divisionally, with the seven operating divisions across the United Kingdom and South African segments. Its United Kingdom segment include divisions, such as Triton Showers, Vado, Johnson Tiles and Norcros Adhesives, and South Africa segment include division, such as Johnson Tiles South Africa, TAL and Tile Africa. In the United Kingdom, it offers a range of bathroom and kitchen products both for domestic and commercial applications. It offers showering, bathroom controls, tiles and fixing solutions. The Company serves consumers, architects, designers, retailers and wholesalers across the globe. more »

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Vp plc is a United Kingdom-based company engaged in equipment rental and offering associated services. The Company operates through six segments: Hire Station, Torrent Trackside, UK Forks, Groundforce, Airpac Bukom and TPA. The Hire Station segment is a provider of small tools, climate, lifting, safety, survey and press fitting equipment. The Torrent Trackside segment is a supplier of rail infrastructure portable plant and related trackside services. The UK Forks segment is a hirer of telescopic handlers and associated equipment. The Groundforce segment is a rental provider of excavation support, piling, pipe stoppers, air pressure testing, pumps, trenchless technology and temporary bridges. The Airpac Bukom segment provides specialist compressed air and steam generation services. The TPA segment supplies temporary access solutions, including equipment rental and installation of portable roadways and walkways, among others. more »

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Renold plc is a United Kingdom-based company engaged in delivering engineered and power transmission products and solutions to its customers across the world. The Company operates through two segments: Chain and Torque Transmission. The Chain segment manufactures and sells power transmission and conveyor chain and also includes sales of torque transmission product through Chain National Sales Companies (NSCs). The Torque Transmission segment manufactures and sells torque transmission products, such as gearboxes and couplings. The Company's products include transmission chain, conveyor chain, leaf chain, smartlink, gears, couplings, and freewheels, among others. The applications of conveyor chain include theme park rides, water treatment plants, cement mills, agricultural machinery, mining and sugar production. more »

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7 Comments on this Article show/hide all

ericb 14th Feb '13 1 of 7

Thanks Paul

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Funnymoney 14th Feb '13 2 of 7

Tristel appears to be on a tightrope between its declining endoscopy business and a new business area. With the former declining more rapidly than expected and the latter not up and running properly (e.g. problems in China) I would say it is very early days to be getting optomistic.

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Ramridge 14th Feb '13 3 of 7

Re. Nervousness about the share market over 2013/ 4. Mervyn King may be sleeping a little better now, but he is about to pass on the baton to Mark Carney. Mr Carney from all accounts is not so averse to letting inflation rise to over the current target of 2%. Basically he is likely to put the breaks on QE and let inflation rise. So the prospect to me is rising inflation. If you accept this premise then what should us humble private investors do? The strategy then ought to be to look for "equities that sell essential products and have a degree of pricing power". That means largely the following sectors, Oil & Gas Producers, Utilities, Telecomms, Tobacco and maybe Food. Over the next weeks I am going to be re-balancing my portfolio in this way, especially looking for 'bargain' small caps in these sectors.
As always readers DYOR.
Regards, Ram

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Funnymoney 14th Feb '13 4 of 7

Or even "optimistic"!

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Paul Scott 14th Feb '13 5 of 7

In reply to Ramridge, post #3

Hi Ram,
Mervyn King was explaining that inflation is slightly higher than the 2% target because of factors which are unrelated to underlying demand in the economy - so it's cost-push inflation from higher-priced commodities, higher import prices (from sterling devaluation), and Govt decisions like green taxes on energy, and higher student loans.
So his argument is that it would be madness to take action which will suppress the economy, in reaction to inflation caused by factors other than excess demand, and I totally agree. It's far more important to get the economy moving, and inflation will just be whatever it will be, and provided it doesn't accelerate over (say) 5% then we should be fine.

The 1970s inflation was caused by a spiral of rising wages & prices, feeding on each other. We're not in that situation now at all, due to a largely non-unionised private sector workforce, and globalisation. So when inflation rises, peoples living standards go down, because wage rises lag behind. Therefore inflation will actually trigger mechanisms to reduce inflation, by sucking demand out of the economy.

A lot of the old rules have gone out of the window at the moment, for the time being anyway.

Regards, Paul.

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Ramridge 14th Feb '13 6 of 7

In reply to paulypilot, post #5

Paul - I sincerely hope your reading of the tea leaves is right. I am afraid my sense tells me otherwise. That's why I have so to speak bought a tin hat from the local Army Surplus store and will re-jig my portfolio as explained in my earlier post.
Anyway, your daily reports are straight and without b.s. - you have had my thumps up a number of times. Splendid.
Regards, Ram

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Paul Scott 14th Feb '13 7 of 7

In reply to Ramridge, post #6

Hi Ram,
Nobody ever went bust banking a profit, so I would never criticise anyone for taking some money off the table after a good run in the markets.
Cheers, Paul.

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About Paul Scott

Paul Scott

Paul trained as an accountant, then spent 8 years as FD for a ladieswear retail chain.He became a professional small caps investor in 2002 to date.Paul writes a small caps report for on weekday mornings. He joined Fundamental Asset Management Ltd as a research associate in 2014, as part of their Small Cap Value Portfolio team. more »


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