Norcros plc (NXR)
In meeting expectations for FY24, Norcros has demonstrated business resilience in the face of challenges in both of its primary markets. A positive cash flow performance has also left year end pre IFRS16 gearing below 0.9x underlying EBITDA. In our view, neither virtue is reflected in the company’s valuation and the 1 May Capital Markets event should help to shed more light on the company’s strategy, market positions and medium-term prospects.
Underlying EBIT in line with consensus estimates, cash flow positives
A pre-close update flagged FY24 expected revenue of c.£390m and underlying EBIT in line with market expectations (being a consensus of £42.7m). At the H124 stage, group revenue was -4.1% LFL at constant currency so -6.1% for FY24 overall indicates some business resilience in generally unhelpful markets. UK margins improve further: Coming in 4.7% lower than FY23 on a reported basis infers divisional revenue of c.£282m. On a LFL basis (adjusting for the exited Norcros Adhesives activity and an additional two months’ contribution from Grant Westfield) the flagged full year -3.3% outturn compared to -0.8% at the interim stage, confirms that market conditions remained tough in H2. No specific operating company performances were referenced but a y-o-y improvement in EBIT margin (from FY23’s record 12.6%) is likely to have come from a combination of favourable mix and the elimination of Adhesives’ prior year loss, in our opinion.
South Africa load shedding abates, revenues stabilise: Around half of the 24.1% y-o-y reported revenue decline here (inferring divisional revenue of c.£110m) was due to adverse £/ZAR translation effects. In local currency, the LFL reduction of 12.3% was not materially different to H1 (-11.0%). Load shedding was noticeably less intense in H224 though company comments suggest that consumers are unlikely to come back in step with more reliable electricity supply. (NB we believe that there have been no load shedding days yet in FY25.) Net cash inflows: Norcros ended FY24 with c.£37m net debt (pre-IFRS16) versus c.£50m a year earlier (and c.£47m at the H124 stage). This £13m y-oy reduction is also c.£7m better than we had anticipated. We believe that a H2 working capital inflow is likely to have been the primary positive variance versus both H1 and our own expectations.
Valuation: Still in Value territory
After a strong Q4 2023, Norcros shares had performed in line YTD prior to a recent dip. Valuation multiples on our existing estimates remain in Value territory (EV/EBITDA more so using company flagged rather than our modelled net debt position). Our fair value of 233p / share (very close to the H124 NAV / share) is also unchanged and represents c.32% upside in a re-rating scenario.
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