As global economies recover, market sentiment is increasingly focused on the earnings potential of growth-ready firms. Norcros plc, a major player in the bathroom and kitchen products sector, is capitalising on this trend. The company recently held a Capital Markets Day (CMD), aligning with the market’s readiness to reassess mid-cycle earnings scenarios. With a strong, unchanged business model, Norcros is strategically poised to leverage growth accelerators in its core product groups, further enhanced by mergers and acquisitions (M&A). Equity Development has raised its fair value estimate to 257p per share, reflecting these positive developments.
At the recent CMD, Norcros reaffirmed its commitment to its four strategic pillars, introducing specific financial targets such as achieving organic revenue growth above market rates and expanding profit margins. By leveraging its significant market positions and scaling advantages across company and group levels, Norcros is focusing on new product development, sales channel synergies, and operational efficiencies as primary growth drivers.
The strategic decision to exit UK tile manufacturing, marked by the sale of Johnson Tiles UK, enhances the group’s earnings before interest and tax (EBIT) margin by approximately 100 basis points and return on capital employed (ROCE) by about 50 basis points. This disposal aligns with Norcros’ streamlined focus and strengthens its financial targets under the refreshed strategy.
Norcros’ financial performance continues to impress, with recent fiscal projections showing robust earnings and consistent dividend payouts. Despite an earnings contraction in FY24 due to strategic disposals and market conditions, Norcros anticipates recovery and growth in subsequent years. The company’s share price has responded positively, approaching the analysts’ revised fair value of 233p per share, with broader market comparisons suggesting a fair value closer to 400p per share under peer group average earnings multiples.
Norcros is intensifying its focus on environmental, social, and governance (ESG) criteria, which now form an integral part of its strategic framework. The company has set ambitious targets for reducing its carbon footprint and enhancing sustainability across its operations, aligning with broader industry and societal shifts towards environmental responsibility.
With a clear strategy for both organic growth and expansion through acquisitions, Norcros is well-positioned to capitalise on its strong market presence and operational efficiencies. The company’s management remains committed to driving shareholder value through strategic initiatives aimed at maintaining and extending market leadership in its core segments.
Norcros plc presents an attractive investment opportunity as it continues to navigate the post-pandemic market landscape with strategic acumen and operational excellence. Investors are advised to closely monitor the company’s execution of its strategic goals and the potential impacts on its financial performance and market valuation.
Equity Development commented, “Market sentiment is rapidly refocusing on earnings potential in an improving economic cycle. Norcros’ CMD was well-timed with this increasing willingness to consider mid-cycle earnings scenarios. Norcros is targeting accelerators to boost organic growth in core bathroom and kitchen product groups, supplemented by M&A activity.
The CMD reiterated the company’s four strategic pillars and added financial targets including organic, above market revenue growth and margin expansion. Leading market positions and scale at both company and group levels provide a platform, and new product development, sales channel cross-referrals, and operational excellence are key enablers.
Norcros has announced the proposed disposal of Johnson Tiles UK for an expected £1m (plus potential deferred consideration) with a related exceptional impairment charge of £15m. We have adjusted revenue estimates accordingly with profitability unchanged; however, the disposal increases both the pro forma group EBIT margin by approximately 100 basis points and group ROCE by about 50 basis points.
We can see a pathway to a higher valuation, but for now, we raise our fair value for the company to 257p per share.”
