Norcros plc (LON:NXR) is the topic of conversation when DirectorsTalk Interviews caught up with Tom Fraine, Equity Research Analyst – Industrials at Shore Capital. We asked:
Q1. What are the highlights from the H1 2023 results?
A1. The adjusted operating margin expansion was a particular highlight, which demonstrated Norcros’s resilience during tough trading conditions. Many peers have had downgrades to current year forecasts in recent months, so we were unsurprised to see a positive share price reaction following the release of the interim results as we held our FY24F forecasts for Norcros. Continued market share gains, a high weighting of sales from new products and a strong position being maintained in the premium end of the company’s markets were other key features of the results.
Q2. Looking ahead, why should investors consider Norcros?
A2. With a FY24F PER of less than 6x and and EV/EBITDA of c.4x, we believe Norcros is one of the most undervalued stocks in the Industrials sector, especially given the 18.5% ROCE it achieved in FY23A, well ahead of its 15% target. We anticipate that Norcros’s 5.8% dividend yield should be more than twice covered by free cash flow in FY24F and close to three times covered in FY25F. The company’s pension fund, which has been a key pushback from potential investors, was in a net accounting surplus for the first time in many years in FY22A and remains in a surplus. We believe Norcros’s South Africa businesses, which have delivered strong growth in recent years, are materially underappreciated by investors, despite recent, temporary difficulties. We believe the market share gains and the higher returns and margin profile, enhanced by the acquisition of Grant Westfield, indicate the group is a higher quality business than it was previously, and worthy of a much higher valuation.
Q3. What’s your valuation for the business?
A3. Our DCF and relative valuation analyses indicate >100% upside for the shares. We see scope for a double-digit PER and potential for earnings to increase materially as market conditions improve.
Norcros plc is a focused group of market leading businesses supplying innovative branded showers, shower enclosures and trays, taps, bathroom accessories, tiles and adhesives, with operations primarily in the UK and South Africa.
