Small Cap Value Report (Wed 12 Apr 2017) - NXR, D4T4, COM

12th Apr '17 by Paul Scott

39 comments 18450 reads

Good morning! It's Paul here.

There are only 4 companies reporting today which are of interest to me, so I'll handle that on my own. Graham's having the day off.

I intend reporting today on;

Norcros (LON:NXR) - in line trading update, and upbeat commentary

D4T4 (LON:D4T4) - trading update - positive (ahead of expectations), and confident outlook

Comptoir (LON:COM) - recently floated small chain of restaurants. First full year results as listed company.

(sorry, I didn't get round to looking at Carrs)

Norcros (LON:NXR)

Share price: 168p (up 10.5% today)
No. shares: 61.3m
Market cap: £103.0m

Trading update - for the year ended 31 Mar 2017.

A refreshingly simple description of the group in today's update;

...the market leading supplier of innovative branded showers, taps, bathroom accessories, tiles and adhesives...

Trading looks solid;

Group underlying operating profit1 for the year is expected to be in line with the Board's expectations reflecting a robust performance and demonstrating the Group's resilience.

It always pays to check the footnote, which in this case says;

1 Underlying operating profit excludes IAS 19R administrative expenses, acquisition related costs and exceptional operating items

The pension fund administrative expenses are non-trading costs, but I dispute whether they should be ignored. After all, the pension fund isn't going away any time soon, so these are costs the company must bear, and for many years to come.

Acquisition-related costs and exceptional items are OK to adjust out, providing they're not used as "soft codes" to absorb a multitude of other costs, which can happen at some companies. I'm not suggesting anything of that sort goes on at Norcros, it's more a general point.

I've mentioned it before, but a new CEO of a different company once told me how he asked what the profit for the year was likely to be. His FD replied, "Whatever you want it to be - exceptionals will take up the strain!" So we should always question the underlying & exceptional adjustments.

Overall, I'm happy with the accounting at Norcros, which seems fairly sensible.

Other points from today's update;

UK division performed much better in H2 (LFL sales +8.3% in H2, versus -5.0% in H1 - that's a good turnaround)

Acquisitions doing well (crucial, as the group is growing by acquisition)

UK tile business is being restructured, resulting in a £2.3m…

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jonno

12th Apr '17

If Norcros continues to deliver creditable results in a challenging market it will eventually re-rate or be acquired. Large pension deficits are not necessarily a barrier to a potential suitor as was shown when Aga was acquired, although I acknowledge that the Aga brand has more kudos than say Triton.

Rising bond yields as alluded to by "leyymgb" above are positive for companies such as Norcros, Alumasc and Wincanton with significant pension deficits, subject of course to trading remaining in-line.

Jonno

Paul Scott

Hi Sootysnipes,

Paul you are going against everything you were so bullish on re NXR. What happened to your philosophy of just taking the super divi whilst waiting for the re-rating to happen.

I can only suggest you re-read the article above, where I point out the ultra-low PER, decent dividend yield, successful buy & build strategy, etc.

However, as I also clearly point out, those factors don't seem to have impressed the market much over the last couple of years, due to worries about the pension deficit, S.Africa, etc.

Maybe read the article a little bit more slowly next time, and digest what it's actually saying?

Paul.

jonesj

Here is another Norcross chart.

Andrew L

13th Apr '17

Norcros - I think the issue here is that underlying trading has been pretty rubbish for a number of years. The main two UK divisions - Johnson Tiles and Triton Showers - have fared poorly. The company has made a number of acquisitions which have to date worked out well. The key reason why the stock went up, perhaps, is that like-for-like sales on a constant currency basis were up 4% in the fiscal year to March 2017. This is the key underlying metric. This figure has been pretty weak in previous years with the company pointing to a host of excuses. Things like PE etc are one thing but the reality is that this can be lowered through takeovers. It is underlying trading that is key. It is easy as investors, in my view, to focus on the numbers and forget to ask whether the underlying products are any good and winning in the market place. Triton Showers seems like a faded brand to me but popular in hair dressers. Electric showers and power showers aren't where the domestic market is going. The tile market isn't really brand driven and is very fragmented. However, Norcros has used its base to buy into successful bathroom and kitchen product businesses.

One potential area of upside for Norcros in my view is the fast growing South African business. This has a retail outlet selling tiles and bathroom products. It means that Norcros has emerging market exposure and appears to be making a success of it.

Above weak long-term Norcros chart is because they listed just before the downturn.

Comptoir - I think I have been past these places. There is nothing wrong with them but they didn't tempt my palate. I think it is too much of a niche concept like "The Real Greek." Looking at the website and the photos include homous, pita bread and falafel. The main courses are Wraps or Tagine or things from the Grill. Not sure I can really see it being a hit with UK consumers. Although there is a move towards healthier lifestyles. The restaurants do look bright and fresh.

Zipmanpeter

I am a (patient) holder of Norcros (LON:NXR) but have to recognise 4 substantial risks ranked , in my estimate, in order of risk adjusted impact on share price:

i) POLITICAL - South Africa (30% revenue) COULD go off a cliff (eg Zuma stops capital repatriation or kills the rand)
ii) RECESSION/BREXIT - UK market COULD go into a deep recession AND have pound fall hit and thus hit both topline (deferred large discretionary spending on items like showers, higher import costs not passed on)
iii) PENSION - COULD require bigger contributions to fund (post BHS political meddlng)
iv) ACQUISITION - stated ambition is £400Mn by 2018, will Mgt be over confident and make a mistake on a new big acquisition at a risky time

So you can see why share price has held back. However, with debt falling by £8Mn to £24Mn, self help measures being put in place consistently I remain of the view that the share price ultimately will re-rate - perhaps 50% higher than now within the enxt 12months if nothing goes wrong. What is needed are triggers for what is a deeply dull group. I would suggest that this might be a combined acquisition and profit upgrade (with H1 results ??) since there are soft comparatives in H1 and the decks will have been cleared for an acquisition. Mgt ambition was £400Mn by 2018.

A second trigger could be a takeover bid - entering classic conditions for a US led swoop since the pension issue would disappear (or at least be hidden) if absorbed into a bigger group

All while being paid good divis to wait. Lacking the skils to dive in and out the market, the risk/reward ratio seems in favour of staying put for at least another year.

Richard Cockbain

Profit warning as part of an update from Gattaca £GATC this morning:

http://tools.morningstar.co.uk/t92wz0sj7c/stockreport/default.aspx?tab=3&vw=story&SecurityToken=0P000090T2%5D3%5D0%5DE0EXG%24XLON&Id=0P000090T2&ClientFund=0&CurrencyId=GBP&story=384822627683685

It reads as if there are some issues around timing but nothing which is too dramatic. I am encouraged that they are seeing improvements in demand recently as if the Brexit overhang is finally being shaken off. I see this as a buying opportunity (I do not hold currently) but will await Paul's commentary and insight which I hope will follow later on.

Ramridge

Re Norcros (LON:NXR) For an investor coming fresh to Norcros with no previous baggage, I fail to see why he would buy now as IMO the risk reward is still unfavourable.
- Net gearing incl pension deficit stands at a whopping 557 ( in the StockReport, look at the box bottom right-hand corner titled "Other Ratios"). This is a lot higher than other notorious pension-challenged companies such as BT (308), Rolls Royce (345) and Tesco (183)

- the share price graph looks like a rollercoaster, only for those with a strong stomach
- Broker eps forecasts suggest a below sector average growth of 2.5% (2017) and 8.2% (2018)

As far as being a potential takeover target, I think the BHS scandal and the hardening attitude of the Pension Regulator will make anyone think twice before putting in a bid.

There are lots more tasty fish in the pond.

Rusty2

Not so sure about Gattaca (LON:GATC), if they are struggling now what will happen if things do start to get worse, other recruiters don't seem to be suffering so much, in fact most have not reported any problems with Brexit. I agree it's not too dramatic and is why the share price has bounced off the lows around 240p. I will await Paul analysis with interest.

andrea34

Thanks for a good report Paul.

Agree with all your comments, especially NXR - I initially sold a holding at a loss years ago, then bought back in when I thought they looked better value (after the consolidation) but the price continues to drift and stagnate. Personally I feel it's one to hold for income rather than anything else, I don't think the business they are in will ever warrant much of a re-rating, and the constant Rand devaluation is ever-present.

I topped up on D4T4 yesterday after the froth dissolved at 160. The price went as high as 190ish a few months ago on no real news so hoping it will get there again on this positive update, also hoping the revenue dip is due to a shift in product mix and the hinted delays are a one off.

COM, total farce, the kind of company that gives IPOs a real bad name :-(

peterg

Regarding Comptoir we were very pleased when the new Exeter branch opened, since we enjoy Lebanese food, and have enjoyed eating at Comptoir in London in the past. It's been pretty full both times I've been and looked busy a few times I've walked past - so I wouldn't assume it's a brand that can't do well outside London.

Peter

pwozzy

Paul's comments are on Graham's post today

http://www.stockopedia.com/content/small-cap-value-report-13-apr-2017-pzc-srt-gatc-179808/

hayashi22

I can't imagine Comptoir doing well in Barnsley where people like to spend £3 max on a kebab with 'everything on'.

muckshifter

As a matter of interest, the most popular restaurant, in a small West Yorkshire town I know well, is Lebanese, so Paul, you may be underestimating the level of "palate" sophistication in the more primitive parts of the country.

OK thanks, have read it now.

simonp56

Just to mention something that follows on from one or two of the comments above, my son returned for Easter from Bath University on Monday & said that the previous day he'd gone to Comptoir's with his girlfriend and her parents and they'd all thought the food delicious.
Mind you he wasn't paying for the food so being a student that might have influenced his opinion!!
But he said it in the tone of voice that implied "it was much nicer than I would have expected" and we replied in a tone of voice that implied "Lebanese - curious" so I can see this is consistent with it taking longer than with other brands for profitability to build even if the food is good.
I can imagine that next time we are in Bath or elsewhere and see a Comptoir's, we might well give it a go.

Even so, I still agree it is absolutely ridiculous to treat post-opening wage costs as being anything other than ordinary expenses.

This is my first posting so I would just say in passing thank you to Paul & Graham for this excellent daily report that is always so well written & very helpful in assessing investments, as indeed often are the comments from readers.

darlocst

14th Apr '17

The 4th ranked restaurant (tripadvisor) in Durham is Lebanese. Its busy every night of the week & so popular they have opened a separate takeaway branch and a second restaurant last year.

So I firmly don't agree that lebanese food won't work outside of London.

15th Apr '17

Hi darlocst,

You have to be very careful about conclusions of a retail chain, from one site.

Sites that "look busy" are usually on massive rents, and need to be busy all the time to just breakeven.

Whereas, surprisingly, sometimes the most profitable sites can be ones which seem quiet during the week, but do good trade over the weekend, and are on really low rent/rates & only need staffing properly at the weekend.

Hence why I normally ignore scuttlebutt like this - e.g. we heard here recently that Fulham Shore sites were supposedly quiet - but they put out an in line update a few days ago.

Regards, Paul.

Hi darlocst,

Going back to the M.Eastern themed food - the UK has thousands of kebab shops. The one nearest me is amazing - fantastic food - Turkish. So it's nice kebabs (grilled - shish) - and felafel, hummus, same sort of thing as Lebanese.

The trouble is, a good kebab shop is cheap! So why would I pay £14 for small plates, when I can have a massive chicken shish kebab + chips for about £6? With salad & chilli sauce?

The Comptoir (LON:COM) offering seems pretty close to upmarket kebab shop, to me.

Bottom line is this - they opened loads of new shops, and EBITDA dropped. That tells me everything I need to know - it's a crap roll out.

Regards, Paul.

V4Value

17th Apr '17

Hi Peter,

I went to Comptoir recently with my wife and friends in Spinningfields, Manchester. The food was excellent and we all had the Shisha pipes which made for a novel experience!! Unfortunately it was very quiet for a Saturday night and the only reason we went was because everywhere else was full. Compare to Australasia where you have to book two weeks in advance. Great food, but is that enough??

V4Value

JASPERTHEDOG

5th Jun '17

Paul,
just to mention that Comptoir bought their factory towards the end of the period for £1.6m and have now announced its sale and leaseback for £2.7m, which seems sound sense!

Small Cap Value Report (Wed 12 Apr 2017) - NXR, D4T4, COM

Norcros (LON:NXR)

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Paul Scott

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