7:59 cut – NXR

Norcros (NXR) – FY Results

Revenue is 10% ahead as guided in their recent trading statement. Underlying EPS of 31.7p compares to the 30.7p normalised EPS consensus shown on Stockopedia, although it is difficult to know if these are calculated on the same basis. Debt was £35.0m vs £36.0m guided, although of course this could be window dressed for the year end and is certainly seasonally lower than at the half-year point.

At first glance the Underlying Operating Profit figure stands out at 25.5% ahead of last year, however the small print confirms this reflects the effect of the recent large acquisition and so is utterly meaningless. Like-for-like profitability is not given, but like-for-like revenue is up 2.3% before currency effects.

Their underlying (excluding acquisition costs and pension), diluted (by share options and by shares issued for acquisitions[1]) EPS is up 7.5%. The rise was mostly due to a the 12 month contribution vs 4 months last time of Merlyn, and seems a poor exchange for increase in debt that this entailed. Dividend is in line with EPS, up by 7.7%, giving a yield of 4.5%.

[1] EPS is always based on average shares in issue which was significantly higher this year even though the fundraising and purchase of Merlyn completed in the previous period.

More positively, ROCE (which is important as it includes debt) is reported as slightly at 18.2%, however Stockopedia reports far lower figures.

Pension

The pension deficit has reduced to £31.6m, a little more than I expected. They cite increased scheme-specific mortality rates. UK life expectancy assumptions in general have been moderating of late.

Most importantly they are able to announce agreement with the pension fund trustees over the triennial valuation, and this unexpectedly shows a significantly reduced actuarial deficit at 1st April 2018 of £49.3m (from £73.5m three years ago), however significantly increased yearly contributions of £3.25m (from £2.6m last year) with a similar end date. This seems strange and I will try to investigate further later. With a recovery period at 6.5 years, if everything goes to plan that will leave 3.5 years at the next round of negotiations which will leave trustees considerably less jumpy than in the past. The trustees have not apparently put restrictions on dividends which is positive.

Over the year I see that (cash) pension admin costs are up slightly (perhaps due to increased pension protection fund payments due to the increased risk of default implied by higher debt levels) and (accounting only) finance cost is down due to the reducing deficit. These figures should be significantly lower next year due to the increased payments and decreased deficits.

[Edit: Outlook

There is no mention of current trading.]

Strategy / Attitude

As I said in my preview article, their strategy is explicitly more about growth than shareholder returns. This also leads to the focus on underlying earnings rather than EPS. The statement below sums up the approach:

“Underlying profit and underlying earnings per share measures provide shareholders with additional useful information on the underlying performance of the Group. This is because these measures are those principally used by the Directors to assess the performance of the Group and are used as the basis for calculating the level of the annual bonus and long-term incentives earned by the Directors.”

[Edit: In my haste I didn’t read the above quote properly! It does indeed mention EPS. But what I knew from my preparation is that EPS is not one of their targets. See their KPIs on the page numbered 12 in their last annual report.]

This makes me uncomfortable.

Conclusion

The pension deficit reduction is good news. However after writing my preview piece I felt much less positive about the company. I have traded in and out in the past and I can see me reducing around the 215-220p level.