Housebuilding is quiet: the number of new homes built last year fell to the lowest level since lockdown. Kingfisher, owner of B&Q and Screwfix, has flagged that Britons’ home renovations are down, too; the cost of living crisis is putting pricey DIY projects on hold. Both of these factors have been bad news for Norcros, one of the UK’s biggest suppliers of bathroom products.
Shares in the Cheshire company, whose best-known brands include Triton electric showers, Vado taps and Croydex bathroom fittings, have suffered as a result. Norcros surged above 300p in October 2021, but have since sunk to about 217p. That’s nearly 20 per cent better than at the start of this year, but the share price still seems to undervalue Norcros’s growth, acquisition success and long-term prospects. The company is changing hands at just 6.4 times forecast earnings for this year — half that of rivals in the sector, such as Travis Perkins, which have higher overheads but not all the benefits of Norcros’s brands loyalty.
Analyst Tom Fraine at broker Shore Capital reckons the company could “comfortably justify” a price-earnings ratio “in the teens”.
In truth, that’s unlikely to happen imminently — this stock is a longer-term play — as the UK’s persistent macroeconomic problems will continue to hold back Norcros this year; revenues for the 12 months to April 2024 are expected to be £390 million, about 11 per cent down on the previous year. And there is also continuing turmoil at the firm’s South African arm, which provides about a third of turnover: it is suffering as the country’s power outages hit its manufacturing.
However, Fraine believes these are “temporary difficulties” and that the South African business has “delivered strong growth in recent years and is materially under-appreciated by investors”. The country itself is, very slowly, ending the monopoly of its state electricity provider and opening up to private entities, which is expected to improve reliability — eventually.
For now, Norcros’s net debt is falling — it now stands at £37 million, from £49 million a year ago — which gives it the option of buying more growth-spurring companies. Its active M&A strategy has included selling off cash-hungry Johnson Tiles last month and spending £80 million two years ago on wall panels business Grant Westfield, which provided about 10 per cent of total Norcros sales in the year after purchase. The firm’s generous 5 per cent dividend yield is close to three times covered by free cashflow, and its cash generation is strong. Norcros’s pension fund, whose deficit was deterring potential investors, was in a net surplus for the first time in years at its last annual results, and remains so.
Norcros is a well-run business with diversification across countries, products and price ranges. When the housebuilders and DIYers do pick up tools again at a pace, this company is poised to benefit.
Long term, buy Norcros.
