Small Cap Value Report (7 Oct 2014) - NXR, ULT,NFC, BVXP, SNTY, LTC, SNT

7th Oct '14 by Paul Scott

16 comments 26229 reads

Good morning! I've been so busy reading & digesting results & trading statements this morning that I've not got round to writing anything yet! Plus I have a conference call starting at 10am with a company that has reported today, so this report will be a little later than usual - I'll keep updating it until about 2pm today, so feel free to refresh the page later to see the new sections added. Lots to report on today! (I thought this week was meant to be quiet!!)

Norcros (LON:NXR)

Share price: 15.88p
No. shares: 594.9m
Market Cap: £94.5m

This is a bathroom fittings and tile manufacturer. Its operations are split about 60:40 between the UK and S.Africa on a turnover basis, but profitability is more like 90:10 in favour of the UK. To a large extent I feel their S.African operations dilute the quality of what is a very good UK business, and personally I would like to see the S.African operations sold, as the shares would command a better rating if it was just a UK business, in my opinion.

Turnover for vanity, but profit for sanity, and all that.

As you can see from the two year chart below, the share price has been relentlessly declining in 2014;

This price movement didn't make any sense at all to me. The company confirmed it was trading in line with expectations on 23 Jul 2014, and that has been confirmed again today with another update. So presumably the price seems to have drifted down on general negative sentiment - after all, we have been in a bear market for small caps since Mar 2014.

I never make decisions on price movements, but always on an assessment of fundamental value. Hence with the newsflow neutral, this share has become a stronger hold for me as the price fell. That is particularly the case because the price has been falling on very little volume - suggesting that weak holders were just getting bored and moving on. Whereas in other cases, share price falls on larger volume are more worrisome - since that suggests more serious investors are getting cold feet.

Trading update today - I am very pleased to see that the company has adopted best practice of opening the announcement with an unambiguous statement, then with the detail below.

Performance in the first half is in line…

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m_uller

7th Oct '14

hi paul

what are their options to get the pension fund off their back?

dosh

Hi Paul,
Well after the relentless grind downward this since January 2014 it’s good to see the Norcros board putting out a statement with a more positive feel. I honestly feel that if I were standing next to the Norcros FD looking out of the window on a sunny day my opinion would be “nice day” but the FD would comment “it’s going to rain sometime”.
Nice to see the first line of the trading statement saying ” Performance in the first half is in line with full year market expectations” rather than have this important comment hidden underneath all of the other comments.
I am happy to continue holding as I agree there is good value within the business supported by a yield or around 4%.
Certainly one to be patient with and I don’t see it rushing back to the mid 20’s within a couple of weeks but happy to sit tight.
Paul, any thought on the dividend and free cash flow which has been negative in two of the past four years despite increasing the dividend?

AnonymousUser39518

Paul can you look at DRV after their trading statement today?

Sully8786

Hi Paul,

Any views on Bioventix (LON:BVXP) and or ST Ives (LON:SIV) ?

Both put out Prelims this morning. Thought Bioventix stood out for me and not so sure re St Ives.

Grateful for your thoughts if you get 5 :)

Regards,

Sully.

Camtab

Paul,
If you have time I would love to hear your comments re pure wafer. For transparency I hold these at about the level they have rebounded to today, but i really like them, so beeee kind please. What do I like? They have expanded production, improved their balance sheet from a few years back when they got into trouble. Their products compete with in particular Japanese companies but seem a bit more innovative (currency issue). Price to book 0.87 appreciate some of the assets would be hard to sell. Dividend coming on tap. Sorry not my thoughts I am interested in…….promise I won't come back in a defensive mode if you don't like!
Guy

Funderstruck

Paul;
Just got round to listening to your excellent Scott/ Stredder stock discussion; Extremely interesting & informative, very educational for an investor getting to grips with Fundamentals & what actually to look for amongst all that data; (as is your daily blog) particularly for me as for years have relied on TA for my selections. Now moving down to include the sub £200m cap stocks where this stuff is essential. Do please make it a regular feature.
Just one small point , I could hear you perfectly all way through but at the beginning David was virtually inaudible but that improved progressively.
Thanks for taking the time.

Crusty

Re Norcros. I see that Sharescope, presumably based on the three analysts following Norcros, show reported pre-tax profits of £5.8m for the year to March 2014 and forecast profits of £14.33m over the following 12 months. But the eps for these two periods are given as 1.99p and 2.01p respectively. Very strange unless there has been a large dilution.
However, what catches the eye even more than that is the r&d spend, which was over 40% of pre tax last year. Normally this would be regarded as a good thing if there was evidence of benefits coming through. I would have liked to have read in the update: "...Your board is pleased to report that the drive towards best in class has resulted in improvements in quality across the whole range of plumbing products, such that we are able to double the statutory customer guarantee and progress towards making Norcross showers, taps and ancilliary items the most sought after by professionals and specified by end customers."

Perhaps I missed it, but I doubt it.

Crusty (no holding)

jonesj

The Norcross company announcements might be a model of clarity, but their product specifications are not. I spotted the water saving shower heads. After clicking on the "Specifications" there is no flow rate figure of any description, never mind a proper pressure v flow rate graph.

Never mind, it looks cheap. Shall have to research the company.

Just remembered the poor service when I had a shower mixer valve fail under a 5 year guarantee.
They wouldn't sent me a new thermostat, even though it could be the only possible cause of the failure. After I made an appointment a few days later & waited in for 4 hours, their technician arrived & confirmed it was the thermostat. However, HE DID NOT HAVE THE CORRECT PART ON THE VAN. So I had to wait in again.
Needless to say, when the other mixer valve failed, I just bought one with a different brand.

Companies need to do more to build sustainable customer support for their brand. Firstly, a simple shower mixer valve should never fail after 2 years. If it does, they need to fix it efficiently & quickly.

I hope they have improved on this. As it is, I'm not sure how much the brands would be worth.

Suppose it's a cheap enough company valuation if the housing market doesn't blow up in the next couple of years.

BrianGeee

8th Oct '14

Paul, in the way you avoid overseas companies listed on AIM, I avoid Energy Efficiency companies. The benefits of employing their product or technology is almost always subjective and difficult to measure. It is therefore often too tempting for management to exaggerate the benefits to both customers and investors. In the case of Sabien Technology (LON:SNT), it has the added issues that it's something that should not be difficult to replicate for competitors or boiler manufacturers.

iwright7

BG, One AIM Energy effeciency company you should look at more closely is Energy Technique (LON:ETQ) who have a 9 F Score and excellent RS in what has been a weak small cap market. The reason they are doing well is they are producing boring looking energy efficient "fan coils" adopted by the likes of Marks & Spencer, Sainsbury's, Tesco, New Look, Boots, ASDA, John Lewis, Lloyds and TK Maxx and they are now finding their way into high end London residential properties. ETQ sales are up over 25% and are results to date are "ahead of management expectations". The downside is a wide price spread.

I hold a few in my SIpp

Ian

I do hold Energy Technique (LON:ETQ), but I wouldn't describe them as an energy efficiency company - they're an old school metal bashing manufacturer of coils for large air conditioners and they also produce heat curtains. They've obviously done very well over the last couple of years, but the future is still interesting, with their attempts to start a franchise operation overseas. Heat-exchangers are costly to export, so it makes sense to have local manufacture. Those responsible for designing the large buildings going up in the the middle eastern oil states have apparently had a bad time with the quality of far eastern sourced heat exchangers, so Diffusion (the coil subsidiary of £ETQ) are proposing sharing designs with a franchised local company, to give the specifier the peace of mind of using what is effectively market leading product, sourced locally. The company has engaged a US consultant to work on this new venture - I met him at the AGM, but unfortunately forget his name.
Obviously it's now on a fairly racy earnings rating, but it seems a very capable management team, and as Paul said in his webcast, sometimes you need to pay up for Quality! Note that there are no broker estimates. The policy of the company (well really it's ex-head of IoD chairman) is not to waste money on parasites, and simply provide what they regard sufficient information to the market via quarterly updates.

Jedidiah

TUNG has had a pretty big drop in the last week .. anybody know why?

BG,

What attracted me to ETQ is not the overseas franchise model possibility, but their success in selling these more efficient fan coils. I did a bit of background research on this to understand it better and their ECO ACs are driven by low power 10V variable fan motors. In addition the fan coil market is predicted to grow at 10-15%/annum, so even if the overseas franchise model fails there is growth in their main market. So whilst they may be metal bashers, they are selling energy efficiency with green credentials!

djpreston

jonesjeff

I would certainly agree with you on the life of a mixer valve - these things should be built to last. Unfortunately, this is somethign that Ive come across with Triton in the past - they are cheap(er) and cheapful but reliability (IMO) has been compromised as a result, especially when compared to Mira (mixers and electrics) although they are more expensive, the improvement in quality and reliability is worth it I feel.

Then again, I could be biased - I used to build the old Mira electrics when I was 16 (dad was their MD).

D ;-)

valueinvestorshouse

hi guys, I thought I would throw in my thoughts on Norcros (LON:NXR) as I think there are some more reasons for what seems a low relative PE valuation. Paul, I know you are a fan of this stock - I hope you don't mind me putting the following arguments forward:

First, the overall returns on assets, capital and equity are not too exciting (5%, 7% and 16% quoting after FT) and if you assume compounding of value at these levels it doesn't bode well for growth - unless something dramatically changes in the business economics but I can't predict that.

Add to the above the fact that between 2010 and 2013 the company generated virtually no cash flow after capex which hardy covered maintenance requirements assumed to be equivalent to depreciation. In 2014 the company generated around 6.8m of cash after capex, which again was short of the level seemed enough to cover maintenance. So two issues here - poor cash generation in the first place (more on this below) but also what seems to me just a nominal investment which may not be enough to support the growth story (unless there is a lot of spare capacity which can be easily deployed - I haven't analysed the stock in detail, so please correct me if I am wrong).

Back to weak cash flows. It stood at 6.8m for 2014. Let's be optimistic and assume it doubles to 12m after capex - I have already given them 100% growth assumption on 2014 which doesn't quite reconcile with the latest update so let's not bake in any more uncertain growth to the following valuation: based on 10x free cash flow (10% wacc in other words) the above gives as an estimated 120 enterprise value and an estimated market cap of: 120 minus 31 LT debt minus 21 pension fund deficit = 68m. So that is almost 30% downside to the current market cap based on the above assumptions (which of course are based on some of my high level subjective opinions).

Now, last point - I am not optimistic on the pension deficit. If you go to note 23 (page 84) you will see that majority of the plan assets (300m out of 380m) are invested fifty-fifty into bonds and absolute return funds (hedge funds?). I am sceptical in the ability of either 'absolute return funds' or a portfolio of bonds to deliver sustainable returns beating inflation given the current interest rate environment. So, in my opinion, there is a risk to the deficit in the long run and I would therefore not be keen on ignoring it in the valuation - hence it is included in the example approach above.

Hope my point of view gives the valuation story in a different light. I might be completely wrong with some of my back of the envelope assumptions but I hope I flashed out some different angles which explain the apparent PE-based cheapness of the stock.

I have no position in the stock. Just bored this evening at home.....

cheers.

Small Cap Value Report (7 Oct 2014) - NXR, ULT,NFC, BVXP, SNTY, LTC, SNT

Norcros (LON:NXR)

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Paul Scott

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