Good morning!
Norcros (LON:NXR)
That bathroom fittings company has scored an own goal this morning with a gloomy trading statement which goes into great detail about how revenues are down. Then almost as an after-thought the final sentence reports on profitability;
Nevertheless, given the continuing improvement in the financial performance of our UK and South African tile businesses and the expected recovery in Vado export revenues as commercial projects complete, the Board remains confident that the Group should continue to make progress in line with market expectations for the current year.
They should have reported the other way around - i.e. stressed that full year expectations on profits are unchanged, as the opening paragraph. Then give details below on divisional performance. Also, the statement focusses far too much on turnover. I'm not particularly interested in turnover, it's profitability that matters! So what if the S.African rand has depreciated - we already know about that anyway. All that matters is how it affects group profitability - which as we saw in the last set of results, is minimal - because their S.African operation has its costs in rand too, so all we're looking at is the translation into sterling of profits, which are miniscule anyway.
In my view if Norcros can't bring their S.African operations up to a decent level of profitability, then they should dispose of them - to my mind all the S.African operations do (and they're significant at nearly 40% of turnover) is dilute the quality of the UK business, by lowering the overall group operating margin, and other quality measures like ROCE, etc.
So as expectations are unchanged, the broker consensus forecast of 2p normalised EPS for this year means the shares are on a remarkably low PER of about 8.6. The dividend yield is a useful 3.3%.
To recap briefly on the Balance Sheet - it has some debt, but a roughly equal amount of freehold property, so I have no issues with that. Debt is reasonable compared with EBITDA, the key measure that banks look at. Today's RNS also mentions that bank facilities of £70m have been renewed with a syndicate of 3 banks, at a reduced interest rate, another positive that got lost in the unnecessarily gloomy tone of today's statement.
There is a large pension fund, but its deficit is relatively small on an accounting basis, but a bit scary on an actuarial basis.…
