Norcros | Norcros Plc - Tiles And Taps On Two Continents.

Read article : Norcros | Norcros Plc - Tiles And Taps On Two Continents.

Norcros (LON:NXR)

Price  Mid Price 173p

Bid/Offer  170p  - 176p                              NMS 1,000

Market Cap  circa  £105 million

Enterprise Value circa £132 million

About the Company

A Company located both in the UK and in South Africa. Their products include showers, taps, bathroom accessories, tiles and adhesives. Six plants in the UK where Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesive are manufactured and designed. In South Africa, their products include Johnson Tiles, TAL and Tile Africa. 

Revenue has been growing with a target to double revenue, some of which has already been achieved with organic growth and through acquisitions.  

Reorganisation

In March 2017 the company began restructuring its UK tiles business involving the loss of 90 jobs which will likely incur an exceptional charge of £2.3 million.  Greater productivity is forecast which will lead to an anticipated payback time within next 12 months.

Borrowings

The Company has managed to reduce net debt from £32.6 million in 2016 to circa £24 million in 2017.

The Investment Case

The Company sells continuously at a lower p/e multiple of 7 times for good reason.

 The Bear Case x 5

1.  The large pension deficit that has increased to nearly £100 million that supports over 7,000 workers in retirement.

2. The South African connection provides a geopolitical and a currency risk, combined with the complexity of managing two businesses in very different places and in dissimilar markets.

3. Most of the business in Tiles and Adhesive compete on price and not necessarily the brand names. 

4.  If imported inflation creeps up without wage growth, then consumers will have less discretionary purchasing power to buy their range of premium products.

5.  The relatively large number of staff at 2,000 employees suggests a large wage bill which operates in a low operating margin environment.

The Bull Case x 5

1.  The pension deficit is caused by perpetual low-interest rates.  Any normalisation of interest rates by 2% upwards in future years will likely eliminate the deficit by itself. The company has £400 million plus in a pension reserve which needs to grow to £500 million over time. In the meantime, the company prudently will pay £2.5 million a year index linked to CPI to help reduce the deficit.  

The Company is just one of a few listed companies to take an adjustment to ultra low bond yields for pension calculation purposes.  Most companies presume a higher bond rate and show a smaller pension deficit. The increase in the pension deficit was very much self-inflicted but does show an ultra cautious management which is fine.  The change to the even lower bond yields was probably not needed, given the mature nature of their pension scheme. The average age of two thirds of its pensioners is now 77 years of age. 

2.   South Africa is an area where the company is long established and may be less likely to suffer stiffer price competition in that market.  The South African business under new management has been in turnaround mode with success clearly coming through.  There is a growing middle class to promote its premium taps and showers through its existing 37 retail tile outlets.  Other opportunities lie much further ahead to move into the more wealthier countries in Africa with their products.  The South African business is a positive for the company. Changes in currency valuation is a minor issue in the long run if profits continue to grow faster.  This year Sterling weakened against the Rand.

3.  Those in the trade recognise the quality of their adhesives for commercial tiling where turnaround times for drying are important. Their brand names may not be on many lips but in the trade, they are known.  As regards tiles manufactured in the UK, they benefit from sterling devaluation against foreign competitors which will help maintain margins.

4.  The company has a range of existing products to suit most pockets. The company spends money on R & D and has developed a crystal grip for wall tiles which does not use adhesives.  The company has developed different types of shower units to suit different foreign markets. For example it has a low pressure shower for the large Latin America market.  Norcos plc is not dependent on new build only.  One room in houses that is often modernised are bathrooms.  Glossy brochures with new designs and looks do encourage consumers to change existing bathrooms more often.  In any case, the normal bathroom wear and tear will further drive future revenues.  

5. The company has been acquiring other brands to add to its portfolio.  Difficult markets mean lower acquisition costs which is far better than buying at the top of the market.  A lot of the companies manufactured components are outsourced from Europe and China with just assembly done in the UK. 

Profit Forecasts

Earnings for this year are forecast at 26p eps for 2017and 28p eps in 2018. The shares offer a decent forecast dividend yield of 4.3%. The dividend will have doubled over the last 6 years.

Positioned for growth. 

Well invested with broad distribution channels supplying blue chip customers, e.g. B&Q, Screwfix, Plumb Center. 

Strong presence in social housing markets. 

Replacement cycle is a key driver of electric shower demand and Triton benefits from the largest installed base in the UK and Ireland.

Continuous new product programme and emphasis on design and product innovation UK growth opportunities in the trade sector, mixer showers and associated products 

Growth opportunities in overseas markets. Resilient business model and operating performance

Bear or Bull?

I'm often looking for shares that are dull, predictable, profitable, paying a dividend, and particularly cheap for reasons I think I understand.  On that basis, I have bought Norcos after the 10% rise. I consider the downside is limited and the share may provide a safe hideout versus many other overvalued stocks. Norcos will not suit investors who are seeking an immediate catalyst for change.  The share price will most likely gyrate up and down 25p from present levels for the foreseeable future.  Investors holding time will need to be measure in years rather than months.

My General View of the Stock Market

Markets look to be climbing a mudslide where the grip on reality is deteriorating and a slide back is always imminent.  The market is looking for disappointment and can easily find reasons at so many levels when it finally chooses to react.  The additional pumped in liquidity is simply keeping all types of asset classes highly valued.  Can stock markets go higher?  Yes, of course, particularly if central banks permit money to continue to be printed at even faster rates. 

Regards

Dearg Doom

Disclosure (I'm long the stock. No investment advice intended.)