Shareholders of Norcros (LSE: NXR) have had a tough time over the past 12 months. Following the Brexit referendum 12 months ago, investors bailed out fearing the worst for this home products company. As many economists were predicting an economic crash following a ‘leave’ vote, Norcros seemed to be in the firing line.
However, 12 months on and the firm appears to be suffering no ill effects from Brexit just yet. Today the company reported its results for the year ended 31 March and the referendum is only mentioned three times in the release. Revenue for the period grew by 15% on a reported basis to £271m, and underlying profit rose 11.7% to £23.8m. Operating cash flow jumped by 46.1% to £29.8m giving management headroom to reduce debt by 28.6% from £32.5m to £23.2m and hike the company’s full-year dividend payout by 9.1% to 7.2p from 6.6p. Even after this hefty increase, the payout is still covered 3.9 times by earnings per share.
Growth ahead
Norcros is rapidly closing in on the growth goals management set out several years ago. Management is targeting revenues of £420m by 2018, and a pre-tax return on underlying capital employed of 12% to 15% over the economic cycle. ROCE is currently ahead of target and has been for the past two years at 18.4%, but revenue is still lacking.
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Excluding the negative impact of the South African rand’s depreciation against the pound, revenue for the year to 31 March would have been £304m. Still, even though the company looks as if it may struggle to meet its growth objective, management remains convinced that it can find opportunities to accelerate it over the next few years.
And if Norcros does not meet this aim, the shares still look incredibly cheap based on current earnings. Today the company reported underlying diluted earnings per share of 27.8p for the year to March giving a historic P/E of 6.3. Even if we assume no earnings growth for next year, a mid-single digit P/E looks too hard to pass up. A payout of 7.2p gives a yield of 4.1%.
Undervalued growth
Unlike Norcros, over the past year shares in Severfield (LSE: SFR) have charged higher, rising 75% as the firm’s recovery gathers steam. And today the company reported further progress with revenue for the year to 31 March growing by 10% to £262m and underlying profit before tax rising 50% to £19.8m.
Basic earnings per share for the period nearly doubled to 5.1p, although despite this growth, the shares still look relatively expensive at 83p.
That being said, Severfield’s value is in its growth potential. Indeed, management is seeking to double group profits by 2020. City analysts believe this is possible and have pencilled-in earnings per share of 6.6p on a pre-tax profit of £24m for the year to 31 March 2019.
Based on this estimate, shares in the steel producer are trading at a 2019 P/E of 12.4 and could be even cheaper if additional growth emerges in the year after.
