Norcros plc (NXR)
Market sentiment is rapidly re-focusing on earnings potential in an improving economic cycle. Norcros’ CMD was well-timed with this increasing willingness to consider mid-cycle earnings scenarios. With an essentially unchanged business and financial model, Norcros is targeting accelerators to boost organic growth in core bathroom and kitchen product groups to be supplemented by M&A activity. We can see a pathway to a higher valuation, but for now raise our fair value for the company to 257p per share.
Platform set for realising group potential
Norcros’ 1 May CMD reiterated the company’s four strategic pillars and added financial targets including organic, above market revenue growth and margin expansion. Leading market positions and scale at both company and group levels are the platform and new product development, sales channel cross-referrals and operational excellence are the key enablers. The targets are a natural extension from the current position in our view, with greater emphasis on bringing the wider benefits of group to individual company performance. We saw a committed and confident management team at both Board and operating company levels.
Strategy in action - exit from UK tile manufacturing
On 25 April, Norcros announced the proposed disposal of Johnson Tiles UK to the existing management team for an expected £1m (plus potential deferred consideration) with a related exceptional impairment charge of £15m. We have adjusted revenue estimates accordingly with profitability unchanged. This disposal has the impact of increasing the pro forma group EBIT margin by c.100bp and group ROCE by c.50bp. Both of which are positive steps towards the newly announced financial targets under the updated strategy referred to above.
Valuation: Increase in fair value, with potential for more
Norcros’ share price is approaching our existing 233p per share fair value (DCF based on current estimates). Applying wider peer group average earnings multiples would suggest a valuation of c.400p per share; we believe that this broadly equates to FY29 EBITDA consistent with the company’s strategic targets. However, given we are at the early stage of strategic execution and cyclical recovery with unchanged estimates, we have applied an average P/E rating for other sub-Midcap sector peers only: this generates an equivalent 280p Norcros share price. Taking a simple average of this and our DCF valuation suggests a fair value of 257p per share. We will re-appraise medium term DCF inputs when FY24 results are announced in June.
Read or download the full report here....