Small Cap Value Report (13 Jun) - NXR, CAP, UTW

13th Jun '13 by Paul Scott

8 comments 14433 reads

Good morning! It's results day for Norcros (LON:NXR) today, a share that I've been keen on (and held in my personal portfolio) for about a year. As you can see from the 3-year chart below, it's been in a steady up-trend for the past year, and in my view the shares remain under-priced on a PER basis, and ignore the growth potential of the business.

Having had a quick skim of the results, the key underlying EPS figure (which excludes exceptional items) has come in ahead of market consensus forecasts (of 1.8p) at 1.9p, so that's a good start. Underlying profitability is up 9.3% from £10.7m to £11.7m, but the tax charge is getting back to normal, after a nil charge last year (due to utilisation of prior year losses), hence EPS being flat against prior year at 1.9p.

So at 16p the shares are on a distinctly undemanding now historic PER of 8.4 . As was demonstrated in the excellent Charles Stanley note in Mar 2013, its peers are on ratings of about double that, so it remains a puzzle why the market is so pessimistic in its valuation of Norcros.

The final dividend has been raised by 8.9% to 0.305p per share, which together with the interim dividend of 0.155p gives a total for the year of 0.46p (up 9.5% vs. prior year) yielding a helpful 2.9% at 16p per share.

The most interesting bit in the results is the announcement of their new growth strategy, where they are targeting "a faster and focused growth strategy to scale up the size of the Group organically and by acquisition should be pursued".

There is also clarity on the pension fund. Whilst the deficit has increased (as expected, due to exceptionally low discount rates due to low Bond yields), to an accounting basis of £30m, and a higher actuarial basis of £62.4m, which sounds scary but the bottom line is that the overpayments are agreed at £2m p.a. So I view this as a drag on cashflow of about 10% of EBITDA, which is hardly the end of the world, although clearly should be taken into account when valuing the company by perhaps shaving 1 or 2 off the PER, or whatever alternative method you prefer.

The market has opened now, and I…

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shanklin100

13th Jun '13

Hi Paul

I guess this section of the RNS has adversely affected the SP first thing today.

"Whilst our South African and Australian businesses have traded in line with expectations in the first two months of the current year, demand in our UK markets has been weaker than expected reflecting the unseasonally cold weather and destocking by key customers. Early action has been taken to mitigate the impact of this and of higher energy costs and weaker exchange rates, including a cost reduction programme at Johnson Tiles UK which could involve up to 75 redundancies. It is expected that this will result in an exceptional charge in the region of £1.5m in the current year, with the resultant savings being more heavily weighted to the second half of the financial year."

Cheers, Martin

Paul Scott

Hi Martin,

Yes indeed, they did mention the UK was slow, but I tend to look at the business as a whole, so to my mind it's the overall trading picture (which is fine) that matters, not what individual parts of the business are doing.

I think when the market opens down 100 points, people tend to latch onto the negative points within individual announcements.

In my view Norcros (LON:NXR) shares will be back up to 16-17p as soon as the FTSE bounces.

Cheers, Paul.

Hi Paul

I tend to agree with you although its a shame NXR put the statement about UK trading so far down the RNS.

Cheers, Martin

SevenPillars

I think I made a comment when Norcros was discussed earlier in the year that it would be interesting to see how companies like this reported after the unseasonally cold period in early Spring. I also mentioned that it was possible people would stay at home which would be good for various utility companies as they would be using more gas, electricity, etc.

This has to some degree played out as companies like Centrica reported very good numbers and the share price went up on the back of it, whereas those on the High Street, or those that supply them have often reported numbers less then expected. We like to have a joke about companies blaming the weather, but the reality is that there is some truth in it. People aren't likely to go out and spend on Summer stuff if it's cold and snowing in April! It wasn't that difficult to see that the DIY season would get a hit from this as people stayed at home and the utilities clearly got the benefit of this.

Watch out next year though if we have a mild Spring or early Summer weather, as Like for Like numbers will probably better for the likes of Norcros, but potentially much worse for utilities like Centrica.

Fair points. The other thing is that personally I tend to disregard any temporary or transitory factors.
So we know that the weather this Spring was indeed truly awful, worst in 50 years or something, therefore to my mind it is a reasonable excuse for businesses such as garden centres, DIY stores, clothing retailers, etc, to say that they were affected somewhat by this. Hence personally I wouldn't change my perception of the long-term value of any business just based on this type of extreme weather factor.

However, one needs to carefully check it against what other comparable companies are saying. Remember when Debenhams blamed bad weather for poor sales a few months ago, when John Lewis simultaneously reported good sales?!

In the case of Norcros (LON:NXR) I'm more excited by the upside on the low valuation, and the new more rapid growth strategy, than I am concerned by temporary factors such as sluggish UK demand. That said, if they are laying off 75 staff, then it sounds like a more permanent reduction in demand? Generally, the Norcros businesses have been remarkably resilient in the past 4 or 5 years, given difficult economic conditions. Which gives good potential upside once the UK economy is growing more normally. Might even be a catch-up period, where the replacement cycle on electric showers (5-7 years) gives a more rapid rise in earnings?

tads

Hi Paul
Have you spoken to Vianet today?

Cheers

Mike

14th Jun '13

Paul

Somewhat ironic that you should mention John Lewis, as today there is a report about their "sales blip" as they suffer a sales drop.

One of the reasons given was;

"Sales had been expected to fall in the week to 8 June, compared with a year earlier, because in 2012 there was an extra bank holiday, a later half term and gloomy weather, which all encouraged shoppers into stores.

With warm weather finally hitting large swaths of the UK in the first week of June, customers also stayed clear of the high street to enjoy the sunshine, the company said."

http://www.guardian.co.uk/business/2013/jun/14/john-lewis-sales-drop-level

Even the best will put some blame on the weather, even the sunshine it would seem!

bankerbasher

15th Jun '13

"The drop in Norcros (LON:NXR) this morning doesn't make any sense, as the results were better than expected, and the only new information is positive (the faster growth strategy). So if they come off any more, I shall be buying more."

Hi Scott, many thanks for your write up, looking at the chart you can see that NXR painted a OKR (outside key reversal) which is usually a negative, this happened in the summer of 2011 and took the stock from 18p to 9p ish over a year. I wonder if the pension deficit issue could be a drag in a falling market. Just a thought!
Best of luck with it.

Small Cap Value Report (13 Jun) - NXR, CAP, UTW

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Paul Scott

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