r21442
27 Oct 2016
An IC tip of the week 28-Oct Spot the odd one out; profits at shower and bathroom accessories specialist Norcros (NXR) have nearly doubled in the past three years, the dividend is up over 50 per cent, and from a peak in September 2014, the share price has nearly halved. This leaves the shares priced at five times forecast earnings and offering a nearly four-times covered prospective yield of over 5 per cent this year.Clearly, investors are spooked. The list of bogey men includes a large and fast-rising pension deficit, mixed trading in the UK exacerbated by Brexit angst, currency headwinds and a decline in cash conversion last year. All this does little to foster faith in Norcros's acquisitive-growth strategy. However, on closer inspection, we think there are reasons to be sanguine.Last year the pension deficit rose by £12m to £56m and falling bond yields mean it's likely to be higher when interims are released on 17 November. However, comfort comes from a recently agreed 10-year plan that increases Norcros's annual recovery payments by only £400,000 to £2.5m-plus CPI. Furthermore, the scheme is mature with two-thirds of members already pensioners with an average age of 77, so pension payouts should already be peaking. Falling public sector spending and a weak DIY market have led to a 5 per cent fall in first-half UK like-for-like sales, although sales linked to new build and housing transactions remain strong. More importantly, though, the success of the three noteworthy acquisitions over the past three years should help mitigate concerns. For example, bathroom accessories specialist Vado, bought in March 2013, has delivered 10 per cent sales growth a year and operating profits growth of 23 per cent a year. Last year's acquisitions of shower accessories specialist Croydex and kitchen accessories group Abode are also doing well. Meanwhile, other parts of the business are benefiting from self-help and UK underlying operating margins jumped from 9.2 per cent to 10.6 per cent last year. There's also cause for cheer about the group's South African business, which accounts for half of sales on a constant currency basis. The rand's weakness has masked strong underlying growth over recent years, but this has started to go into reverse. First-half revenue rose 8 per cent or 10 per cent on a constant currency basis, and last year margins were up 120 basis points, to 5.6 per cent. The group remains on the acquisition trail and is sticking by its 2018 sales target of £420m. The strong performance by Vado and Croydex means the group's underlying return on capital employed of 18.3 per cent already outstrips a target of 12 to 15 per cent. Acquisitions and a drop in cash conversion due to stock-building to support the growth of Vado, Croydex and South Africa, meant net debt rose from £14.2m to £32.5m last year. However, this has now dropped to about £28m and a £100m debt facility provides plenty of acquisition fire-power.We feel too much attention is being given to Norcros's scary headlines, and while there are risks, we think the shares look far too cheap overall. Buy.
casabanker
25 Oct 2016
Re: Rand weakening Yes indeed, many items are made in the far East so they will cost more. The extra upset for the Rand is due to political differences and lack of stabilising policy. I am still holding on here but if a recession takes hold, it will be a long haul for NXR I suspect. Casa.
Hardboy
24 Oct 2016
Re: Rand weakening The South African economy is heavily linked to commodities, so it has been weak for some time. As for the Rand, it's hard to believe any currency has done worse than the £ in the last 4 months. I suppose Norcros import quite a few items from outside UK & SA, so the weakness will affect their margins.
casabanker
24 Oct 2016
Rand weakening The Rand and the South African economy is weakening apparently. Thye Finance Minister, a steadying influence in the Government, seems to be losing the battle with the PM over excessive and unwise expenditure. Casa.
Hardboy
11 Oct 2016
Re: Pension deficit Great post casa. I confess I'd forgotten about the pension deficit, which is a concern, and one of the things which almost put me off investing originally. But you're right - a well covered yield of 4.5% & a PE of under 6 screams "cheap." I had seen this morning's update as positive, so am surprised and disappointed at the market reaction.
casabanker
11 Oct 2016
Pension deficit Apparently, NXR has a big pension scheme that, of course, is showing a big deficit. The Company, however, is cash generative and is paying an extra £2.5m each year to service the fund. The average age of the pension fund is 77 so the demands on the scheme will become less of a problem over the next ten years. In the meantime, the extra payments made by NXR are not extraneous and the dividend is not under threat as it is well covered. This maybe the reason for investors using the proverbial bargepole against NXR share purchase. The South African part of the business is doing very well and making up for a slightly lacklustre UK performance. The UK business will come under price pressure due to the gbp weakness as most of the products are made in the far east. If the business is performing as expected, the forward EPS is about 27p, giving a PER of about 5.4. I think NXR is being treated very harshly by the market. There are many Companies with much bigger pension deficits than shown here. This Company has improving dividends and, at these price levels, will soon be yielding 5%. Not bad while we wait for this to be discovered imo.Casa.
Hardboy
11 Oct 2016
Pre Close Trading Statement Is reassuring. Reported turnover up 8.8%. That's not too shabby. South Africa sales up 10%. Profit will be in line with management's expectations. (Why do companies always use phrases like that without stating what their expectations are? Doh!) Debts at very manageable levels. In fact it all looks like things are going pretty much according to plan; so why it is so undervalued on fundamentals I still do not understand. The one slight concern is that Q2 does look a bit weaker than Q1; and they are the first company reporting that I've read to report "softening" of UK markets since Brexit. It is frustrating for existing shareholders like me who bought at a higher price, but for potential buyers, even if it remains out of favour, it's worth buying for a fairly secure 4.5% yield.
The Dutchman
07 Oct 2016
Re: ?? I've topped up twice this week, but overall it's not a big holding.
casabanker
07 Oct 2016
Re: ?? BUTEBOY. Maybe the weak gbp is causing a problem but I am clutching at straws. NXR is behaving as though it is a value trap but without the obvious issues such as falling turnover and profit levels. The balance sheet is alright and profit levels at the last report are good here and excellent in SA. I have topped up and averaged down so many times that my holding is around 9% of total portfolio value. I agree, though, this looks like a screaming buy at 146.In my opinion, this is a value stock that is under most investors' radar and could do with a good dose of PR. I will 'phone Neil up later this morning, lol.Joking aside, I have sent an e-mail to Money Week, asking if they could feature NXR in one of their round table meets.Casa.
BUTEBOY
07 Oct 2016
?? I know the market is never wrong.....What am I missing??...down another 1% today,but very tempted to start topping up in small chunks...am I wrong??
The Dutchman
05 Oct 2016
Re: Trading Update Given the share price weakness in the last month one fears that results wont be good.Other building suppliers ( Polypipe is another holding) have also been weak. I cant help feeling that with interest rates of near zero people should be spending on their bathrooms and kitchens rather than keeping the cash in the B Socy, or taking cash out of the B Socy and buying more shares. I bought a few more yesterday at 149 and may top up further at these levels it's not a big holding for me.
Hardboy
05 Oct 2016
Re: Trading Update The dividend is usually well covered, so unless profits have disintegrated I expect we'll see a small hike. That won't be announced till the Interims in Mid November, but we should get a pre close trading update any day now.
casabanker
05 Oct 2016
Re: Trading Update The interim dividend is due in early January and ex-dividend in early December so it will be interesting to see if the trading figures are continuing to be in line or above expectations. I am expecting the divi to be approximately 2.5p. I hope I am not disappointed. If earnings have increased, NXR will be on a PER of less than 7 which makes it amazingly overlooked. Casa.
Hardboy
30 Sep 2016
Trading Update They usually issue a trading update early in October. let's hope we get one this month & it's positive.
casabanker
29 Sep 2016
Re: SP "I do not understand the continued weakness". Neither do I, Hardboy. As you may have read one of my previous posts, the CFO doesn't either. NXR looks to be a classic value stock, low PER, strong balance sheet, increase profits, good improving dividends and their markets quite buoyant. What's not to like? Oh yes, the sp. I have topped up a number of times, so much so that my holding is now a little too high. Maybe the house brokers need to up the profile of NXR. Maybe it's the third of the business in South Africa that's holding this back. It's rather ironic if it is as that part of the business is doing very well, certainly at the last report. I am tempted to buy at 150. It has touched this level a few times recently and then bounce up. I am surprised to see it reach this level again.Casa.
