Small Cap Value Report (24 Jul) - NXR, GTC, SID

Good morning! Norcros (LON:NXR 16.5p) have issued an IMS covering their Q1 trading. They have a 31 March year end, so Q1 obviously covers Apr-Jun.

The first thing that stands out is that the constant currency figures are much better than the sterling figures. This is because about 40% of their business is in South Africa, and the Rand has depreciated significantly against sterling in the past year. Looking at the exchange rate chart, in Q1 of 2012 there were about 13 Rand to £1. In Q1 of this year, it had weakened to between 14-16 Rand to £1.

A range of factors are mentioned, which mainly create a mildly negative impression, however with trading statements I have found that the key things to focus on are: look through the detail and focus only on what the overall impact on profits against expectations is. Secondly, one needs to consider what the outlook is. Thirdly one needs to consider how the shares are currently rated - so cheap stocks tend to absorb negatives with barely a flinch, as expectations are low, whereas highly rated shares tend to get pole-axed by negative news.

Any factors which seem to be one-offs (e.g. the impact of de-stocking by UK customers in April - although I would like to know why they de-stocked) do not concern me, as that should not have any lasting impact on the business. It's more important to evaluate what's likely to happen in the future, and spot the key trends, rather than obsess over the detail of minor problems in the past. That's a general point, not just about Norcros.

The overall impression of this IMS is that H1 is not going to be great, but that cost cutting at Johnson Tiles will benefit H2. The most important sentence by far is the last one, where they say (with my bolding):

 

Even though the second half weighting of cost reduction benefits in Johnson Tiles UK will mean that profitability will be more heavily weighted to the second half than normal, the Board remains confident of the outcome for the full year.

 

Normally I don't like second-half weighting comments, as it usually means management are in denial about having a bad year, and are hoping that sales will improve in H2, which usually they don't. So it can be a deferred profits warning. However, in this case as the H2 improvement is coming from planned cost-cutting, that is a predictable factor, so should be safe to rely on.

 

If I had to guess, I would say that today's statement is likely to trigger a short term wobble in the share price, as more jittery investors obsess over the negative points in the statement, but I doubt it will go below 15p because the outlook is fine. The rest of the outlook statement says:

 

Our South African business continues to make progress despite the weaker Rand, delivering double digit constant currency revenue growth.

The outlook for the UK housing sector is improving and should lead to increased activity in our markets.

Whilst short term destocking in the retail sector has impacted performance in the first quarter, there are some early signs of improving trends in our UK trade sector performance in the quarter.

 

 

 

Looking at valuation for Norcros (LON:NXR 16.5p), the broker consensus forecast shown on Stockopedia is for 2.05p this year (ending 3/2014) and 2.08p next year (ending 3/2015). At just over 16p, that puts these shares on a PER of around 8, which is strikingly cheap compared with similar companies, which have PERs in some cases of about double that of Norcros.

The lack of growth in EPS from this year to next year is because the tax charge is normalising, as carried forward tax losses are still being utilised this year. So that masks underlying growth from e.g. the acquisition of Vado, which is reported as going well in today's IMS.

Here is the three year chart, as you can see the shares have done very well in the last year:

The downsides on Norcros (LON:NXR 16.5p) are that it has a huge pension fund, although it's very mature (average pensioner age is 76), and whilst the deficit is large in absolute terms, it's fairly small as a percentage of the fund's assets. So as interest rates normalise, the deficit should reduce, in common with most final salary schemes. The £2m p.a. overpayments are about 10% of EBITDA, so do not strike me as a major problem.

Norcros also had last reported net debt of £31m, which looks manageable, but as it's about 30% of the market cap, it is material to the valuation of the shares.

Personally I won't be adjusting my long position in these shares, and remain of the view that the upside is attractive at this valuation. As always, this is NOT any kind of recommendation, it's just my personal opinion, and please always DYOR (do your own research).

 

 

 

 

Getech (LON:GTC 70p) continues to release positive newsflow, with an RNS today stating that a pilot has converted into a commercial project, with £500k income over three years. Whilst the figures are small with Getech, a lot of it has dropped through to the bottom line in the past. Broker forecasts have tended to lag behind profit growth, meaning that the forward PER doesn't appear cheap, however it has in the past been based on pessimistic forecasts. So once the actual figures come through, the share price stops looking pricey.

This company intrigues me, as it seems to be on a roll - they licence seismic data to oil exploration companies, it's a spin-off from Leeds University. I'd certainly be interested in views from readers on this company, if any of you have looked at it. I hold a few shares in it, but don't really understand the sector, so bought on the basis of positive newsflow, and repeat broker upgrades, combined with a sound balance sheet, and a reasonable valuation (I bought at about 57p from memory).

As a general point, these reports are not intended as monologues, they are intended to start a debate on the companies mentioned here. So please do feel welcome to agree/disagree and add any additional facts or opinions you have about companies discussed in the comments section below. It's fine to disagree with me of course! I always feel it's more important to listen to the opposite stance than just seek out people whose views you agree with. Plus of course it's fine to disagree - that's what makes a market!

 

 

 

 

Breaking news on Silverdell (LON:SID [no price - suspended at 13p]). They look to have made a significant step towards salvaging the situation, as an announcement in the last few minutes states that the subsidiary which was in Administration, has been bought out by another solvent part of the Silverdell group for a consideration capped at £8m. Employees & customers are being moved across.

This supports my view all along that the group was never insolvent, but that some sort of disastrous administrative mistake seems to have occurred which resulted in Kitsons being put into Administration. HSBC are supporting the recovery, and in my opinion there will almost certainly be a discounted fundraising of new shares (my guess would be at 4-5p perhaps?) to repay some of the bank borrowings, and reassure customers & staff.

Having been a top finance man myself in a similar sized business, I know that it's the responsibility of the FD to make sure that things like this never happen.

 

 

That's it for today, I got a bit side-tracked this morning, so missed a few companies like CH Bailey, Colefax, Synectics, and Security Research. If any readers want to post something about their results in the comments below, then please be my guest.

See you same time tomorrow morning, I have to dash as going to an investor lunch in London.

Regards, Paul.

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