The Norcros share price (LON:NXR) today slipped over 10% in early trade as the bathroom specialist warned that profits for this financial year would be under expectations:
In the bigger picture, the Norcros share price has had a stellar year: starting 2019 at under 200p, it recently surpassed the 300p region last month. They are also solid dividend payers and any long-term holders would no doubt have seen a lot of value returned. The fall today wipes out about a month’s gains.
It is quite interesting that we have another warning based on the coronavirus in quick time. Many companies were quick to reassure, but this week Tekmar warned on profits with their supply chain hit. It is likely that today’s will not be the last.
What’s gone wrong at Norcros?
The RNS is entitled ‘Trading Update and impact of the Coronavirus’ – sounds ominous. But there is a fair amount of good news baked in. We start with this:
The Group has continued to win market share in its major markets despite conditions remaining challenging since its interim results were announced in November.
In the UK we have continued to benefit from share gains in the domestic market, with overall year on year revenue growth similar to what was achieved in the first half albeit with our export performance remaining subdued.
No figures are mentioned but from the interim report, that growth was 1.3% like for like and 5.2% overall. Worse news for South Africa:
In South Africa we have seen no market improvement in the second half of the year, with activity levels in the construction sector in particular markedly lower at the start of our fourth quarter. In response to reduced demand we are evaluating a number of initiatives which will reduce costs and improve profitability
SA has become a significant market for Norcros, with revenues rising in the last year to almost a third of revenues, and may surpass that this year due to acquisitions. Onto the coronavirus:
The Coronavirus has had little short term impact to date as our UK based stock levels have been sufficient to satisfy customer demand. However, based on the slower than anticipated return to full production at our China based suppliers we do now envisage that the supply chain disruption is likely to have some impact on the seasonally important remainder of this financial year and early next. The situation however remains fluid and is being closely monitored and actively managed.
In all, this does not sound too bad but there is a profit warning sneaked in:
The Board continues to remain confident that the Group’s leading market positions, strong brands and financial strength will deliver further growth although in the short term it is now expected that underlying profitability for the year to 31 March 2020 will be below market expectations albeit ahead of last year.
This seems very vague: net profit was expected to jump from £19.4m to £25.1m, so this gives a wide range of interpretations.
Norcros: A solid performer so far
Norcros trade under a variety of brands, some of which may be quite recognisable. They specialise in bathroom and kitchen products for both residential and commercial purposes. Brands such as Triton and Vado have good reputations in industry.
In recent times the Group has been highly acquisitive, taking on a number of complimentary brands. Croydex, Merlyn and Abode have been bought in the last few years and on the South African side, House of Plumbing was acquired in 2019.
These acquisitions have helped power what seems like a good performance so far. The Norcros annual report claims a tenth consecutive year of growth. On their own measures of adjusted profits this is correct, although there have been plenty of exceptional, acquisition related costs which has hit the statutory figures in recent years:
Acquisitions have taken their toll on the balance sheet: they have not come cheap. Despite the years of good profits, the net debt position has slipped away from £14.2m in 2015 to £35m in the last annual report. The net debt will undoubtedly be higher in the next year because of the House of Plumbing acquisition. Despite this, the balance sheet is not too intangible heavy and is dominated by PPE, receivables and inventory.
There is also a material pensions deficit (£31.6m) which also needed £2.6m of contributions from last years profits. The impression is that management are running quite a tight ship, financing acquisitions and paying out dividends from the current operations. And it appears that there may be room for this to go on: their funding headroom comprises a £120m facility plus £30m accordion, of which approximately £60m is drawn down.
So there is no real question whether the profit warning presents a threat to current operations. The cash balance was £27m at the last annual report (which may have gone down a little since), and the company is still profitable.
Does the Norcros share price represent a buying opportunity?
Despite today’s fall, the Norcros share price is still expensive compared to this time last year. And todays RNS was not particularly clear: many words, fewer numbers. With only two months to go until their year end, either it should be the case that they have a good idea of where the numbers will end up, or Coronavirus indeed presents an unknown threat.
I do fear it may be the latter: many of the Norcros businesses explicitly state that they are sourced in the Far East. Unlike more generic spare parts it may not be as easy to switch sources to Europe (as Tekmar have stated they are doing) and as such they may be at the mercy of the factories. At the moment it seems difficult to quantify the impact, and the gut feeling is that many Chinese factories may simply assure people that everything is under control in order to save face.
It is the case though that coronavirus should be a temporary factor and will clear itself up at some time in the future. In my opinion I think this is a solid enough company which has forged out a decent niches for itself. However, I think a lot of that was realised in the share price gains of last year. At the current price I feel it is a fair one and would wait for an update with some more numbers in before purchasing. 4/5.
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