Norcrod plc (NXR)
Norcros’ recent strategy relaunch should still be fresh in investors’ minds but the share price has taken a breather for now, awaiting further evidence of financial momentum. FY24 results clearly showed that UK portfolio management is already starting to bear fruit and collaborative actions taken should support further margin progress in due course. Our fair value, other peer group metrics and strategic earnings potential all suggest a share price above current levels.
Positive UK/Ireland and cash flow performance in FY24
FY24 revenue and EBIT came in just above indications in the pre-close update led by a firmer outturn from UK/Ireland operations. Reported EBIT margins were 13.6% in the UK (+100bp yoy), 4.4% in South Africa (-260bp) and 11.0% at group level (+30bp). The Johnson Tiles UK disposal completed post year end (20 May); UK and group operating margins for continuing operations in FY24 were 15.0% and 11.8% respectively. DPS was held at FY23 level (our estimate was a marginal increase in the final) and year end net debt (pre IFRS16) basis was in line at c.£37m after strong H2 cash inflow.
Ahead at the start of FY25, markets remain cautious
FY25 has started positively for Norcros suggesting outperformance in markets where wider commentary remains generally cautious. GDP forecasts for both of Norcros’ primary countries of operations show modest expected growth and with clarifications to come on the timing of interest rate reductions and post-election government policies (again in both countries) a conservative outlook is warranted at this stage we believe. We have made no material changes to our underlying revenue and EBIT expectations, save for adjusting to prevailing £/ZAR rates has a modest adverse effect on South African and therefore group revenue and EBIT estimates.
Valuation: Upside to fair value, with potential for more
Some of the gains following Norcros’ May CMD have retraced, though the company’s share price is still up c.16% year-to-date (versus c.5% for the FTSE All-Share Index). With no material estimate changes, our fair value is now 253.5p per share, down slightly due to peer group comparator effects. Our previous analysis of group strategy and potential earnings implications is unchanged with a prospective valuation in excess of 400p per share. Our sense is that actions taken thus far and expected in the near term will need to be reflected in increased earnings momentum before the market attributes greater value to the strategy.
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