Norcros (NXR)

You might be wondering why I’m publishing December 2012′s share of the month on 13 January 2013, well the reason is that I originally wrote this article on Boxing Day, but then managed to completely destroy my own website, so it was lost. Having reconstructed the website (and put in place proper automatic backup systems), it’s now time to re-write that article.

Usual disclaimers apply. These articles are categorically NOT share tips. They are explanations of where I see value, as long-term positions in a value and PAS-based portfolio. Nothing written here should be construed as investment advice. I hold shares in Norcros. Please be sure to check all facts & figures yourself. Please let me know if you spot any errors in this article, and I will correct.

It’s a share which has been in the model portfolio here since 13 Nov 2012, when we bought some at 12.96p.

 

Norcros (NXR)

Share price at 13 Jan 2013:  15p     Shares in issue: 580.4m     Market Cap: £87m      Fully Listed

Net Debt: £20.2m (at 30 Sep 2012)      Year-end: 31-Mar     Pension Deficit: £22.3m (at 30 Sep 2012)

Freehold Property: £28.2m (at 31 Mar 2012)

Download 2012 Norcros Annual Report     Website: www.norcros.com

Activities: Maker of Triton showers, Johnson Tiles, and Norcros Adhesives. Mainly UK, but also South Africa.

3-year chart;

 

Norcros achieved a high PAS score (PAS is the system this website is based on), and is also a value share that passes my personal investing criteria (I hold shares in Norcros as part of my long-term personal portfolio).

It refinanced in Dec 2009, and has since weathered the economic downturn well.

Current year market consensus is for 1.9 EPS (y/e 31 Mar 2013), however in my opinion those forecasts look low, given that Norcros achieved an increase in EPS from 0.9p to 1.1p at the Interims to 30 Sep 2012. Therefore a figure of around 2.2p EPS is probably more realistic for this year. Put that on a PER of 10-12, and you are looking at a share price of 22-26p. This compares favourably with the current share price of 15p.

Norcros has £20.2m in net debt at the last reported balance sheet date, 30 Sep 2012. This does not concern me, as it represents only 1.1 times EBITDA, and is well within the £51m bank facilities available until Oct 2015.

It also has a pension deficit of £22.3m, which whilst unhelpful, is more than offset by freehold property of £28.2m. I tend to offset freehold property and pension deficits in my analysis, since one is a long term liability, and the other a long term asset.

So look 2 years forwards (my typical investing timescale, although it can be much longer – e.g. I’ve held IndigoVision shares for 9 years), and the likelihood is that net debt could have been repaid in full from cashflow, and earnings are likely to have risen from the eventual economic recovery.

Norcros has improved its competitive position in recent years, with some competitors falling by the wayside, which helps explain why its earnings have been pretty resilient. That and the usual cost-cutting that most companies have undertaken in recent years.

We like dividends here at Small Cap Value, and Norcros obliges with a yield around 3%, not to be sniffed at. It looks safe too, and is well covered.

Norcros has market-leading brands, and with operational gearing in an economic recovery, could see EPS rise to say 3p, which means it’s not fanciful to look forward to a share price of 30p+ in the longer term.

I have summarised (what I see as) the key financial information on my standard format spreadsheet here.

We seem to be in a bull market for smaller caps, so it seems likely that the market may factor in more optimistic assumptions for Norcros and other companies. No economic recovery is yet priced-in, so if it’s cheap on current earnings in a downturn, it may look very cheap once earnings begin rising.

As always please do your own research, and given that the shares have already risen quite a lot, think carefully before rushing in to buy.

I would also add that NXR often has a hideous bid/offer spread, so a decent broker is essential to get you the best price, especially if buying in size.