Time for thought shower...

Time for a thought shower...

25/9/2015

...as it were as I'm doing a quick write up on a stock that has been scoring well on the Compound Income Scores (CIS) recently. This follows on from my post last week called In praise of models & humans. In this I looked at some of the evidence for models being superior to humans. On that basis I thought I would to take a closer look at a stock which, although it scores well with a CIS of 91, I have been generally sceptical of due to my knowledge of its past, to see if I'm missing something due to my bias. Worth noting that it also scores well on Stockopedia's Stock Ranking system with a score of 95.

I say knowledge of its past as this one Norcros (NXR), which has been listed before its current incarnation and at the time was a much bigger company which generally disappointed, thus potentially clouding my view. It was put out of its misery as a listed stock last time around in 1999 by a venture capital backed management buyout, which may well have been a good deal for them as old economy stocks were way out of fashion back then and selling on cheap ratings. Having been tidied up and restructured it was then foisted back on the market with great timing (for the management and VC's) in July 2007 at 78p just in time for the credit crunch and housing crisis.

This then caused the shares to slump to around 5p by the end of 2008 which is probably why I'm still biased against it! The other negative feature is the fact that they are still weighed down with a large pension fund deficit which is a throw back to their former glory days. The Norcros Defined Benefit pension scheme has liabilities of £441.3m and an IAS19R deficit of
£44.3m at the end of FY15 which is significant in the group context and their market cap. of around £120m. This is I believe having a triennial review at the moment so this could lead to more payments and they also I believe have net debt of around £15m.

Since hitting their 5p low however it has gradually recovered to the current 20p level (see chart at the end) and does now seem to be (perhaps unsurprisingly) quite cheaply rated on around 8.5x with a reasonable 3% yield. The management also seem to have a plan to double turnover in the next few years, although this is largely expected to be driven by debt funded add on complimentary acquisitions. This is not without its risks but so far the deals they have done look reasonably sensible and since they are using debt it should enhance earnings, but would raise the risk in a downturn.

At the end of the day this one which makes Triton electric showers and other items for bathrooms plus ceramic tiles and as such is a play on the growth in the housing market and any pick up in consumer related DIY / repair and maintenance largely in the UK but also in South Africa to a lesser. It seems that the housing market and DIY demand are continuing to grow in the UK and consumer incomes are finally picking up in real terms. However given their skill in coming back to the market it 2007 I was also a bit perturbed to see the management selling shares in July, although the CEO still has a £1.5m stake and there are some reasonable institutions holding it like Miton, Schroders, Artemis, Standard Life and Jupiter.

So that's a brief background to it, have to admit I'm still in two minds about it, but it does look cheap and if the macro background remains benign then maybe it could re-rate and get to 25p to 30p range. If you are not put off by my doubts and like the sound of this one then there was also a recent sponsored note from Edison which looked at it in some detail and gives their views on valuation comparisons with other similar companies. You can download a copy below if that is of interest.