A Well-Covered Dividend Set To Grow

Published in Investing on 4 April 2012

The Triton brand has ditched the debt in favour of dividends.

I reckon most have heard of Triton showers; in the UK, it's a strong brand. So when its parent company, Norcros (LSE: NXR), showed up on my favourite share screen, I was keen to find out more about it.

The idea behind the screen is that robust dividend cover could indicate growth potential, so it looks for a decent, well-covered dividend yield and modest debt.

Tempting metrics

According to covering-analysts' forecasts, at today's roughly 10p share price (market cap: £59m), the FTSE Small Cap company is on a forward yield of 4.2%, four times covered by earnings, for the period that finished at the end of March. The latest balance sheet shows net gearing of about 25%.

At current levels, you can pick the shares up for forward earnings multiples of 5.6 for 2012 and 5.3 for 2013, for expected growth of 12% and 6% respectively.

Those metrics look tempting right now, but it hasn't always been that way.

Turbulence since flotation

As well as showers, Norcros manufactures and distributes tiles and adhesives, with around 58% of revenue from the UK, 37% from South Africa and 5% from the rest of the world.

It's a business that is sensitive to consumer sentiment, and recent weakness in demand for its goods has seen the share price retreat some 40% since last year's highs, which could be presenting optimistic investors with a buying opportunity.

Indeed, in common with many others in recent years, the company has been investing to streamline its operations with a strong focus on cash flow. When it listed on the London Stock Exchange in July 2007, the company raised a net £72m from institutional investors, mainly using the cash to pay down debt.

The timing couldn't have been more disastrous for early investors as, almost immediately, the credit crunch and recession took its toll on the business. There was a further capital raising in December 2009, which saw a net £28m, or so, raised, disappear down the drain of debt reduction, and left existing shareholders owning around 25% of what they owned before.

Improving figures

Since then, the business has been trading quite well as the figures show:

 20072008200920102011
Revenue (£m)162168154170196
Net profit (£m)4.99.5(6.3)(10)6.7
Net cash from operations (£m)6.29.23.87.69.2
Diluted earnings per share9.1p7.4p(4.5p)(3.4p)1.2p)
Dividend03p000.36p

The dip in cash flow and profits that prompted the second call for investor cash can be seen in the 2009-10 figures. The diluted share base shows in the reduced earnings and dividend per share figures after 2009.

I do find the post-2009 revenue and cash flow progress to be encouraging. Indeed, free cash flow covered the 2011 dividend payout around 12 times.

It's interesting to see the balance sheet progress, too:

 20072008200920102011
Net assets (£m)(16)59507179
Borrowings (£m)11750532018
Cash (£m)4.13.37.33.97.7
Net gearingHigh79%91%23%13%

We can see the effect of converting debt to shareholder equity in the rising net asset figures, and in the falling borrowings figures. Again, it's encouraging to see that debt reduction and cash accumulation has continued beyond the last fund raising event in 2009, suggesting benefit from operational cash flow.

Outlook

The reinstatement of the dividend, and the directors' commitment to growing it, seems to suggest their confidence going forward.

Most recent company guidance came with a management statement on 16 February where the directors' acknowledged that consumer confidence had become weaker, but thought that Norcros would continue to gain market share and make solid progress.

As it is relieved of the burden of most of its previous debt, and occupies a leading market position, I think the company looks interesting as a cyclical investment that could grow as consumer sentiment improves going forward.

I'm putting this one on my watch list and will be looking out for the full-year results, due in June, to see if progress has continued.

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Comments

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jongleur100 05 Apr 2012 , 10:10pm

Showers/tiles etc: Property purchases are definitely slowing in London - very little being put on the market, in comparison with previous years. And anyone who has a mortgage is reducing expenditure on improvements and even replacements - these things tend to get done just before or just after sale. I wonder about the mid-term future of a company so obviously dependent on the housing market.
4.2-4.6% div is not tempting enough for me - I'd rather take my chances with a high-div constructor of infrastructure such as CLLN or KIE or BBY, despite the very subdued EPS growth forecasts and future challenges with public sector contracts. At least we need railways and roads.

Saesneg 06 Apr 2012 , 10:34pm

I don't understand this dividend cover. The EPS is £0.0067 and the Dividend is £0.004222 so isn't the Divi cover 67/42.22 = 1.58?
I have also read that cover is calculated: Net income after tax (£6.7M) divided by total dividend paid (£2.45M) giving 2.73.
The Telegraph site says the cover is 9.7!
This article seems to say it is about 4.
Anyone know what it really is?

KevinGodbold 14 Apr 2012 , 10:26pm

Hi Saesneg,

Year to 31/3/11 adjusted earnings per share was 1.6p and total dividend for the year was 0.36p.

Therefore, cover well over four.

See full year results:

http://www.investegate.co.uk/Article.aspx?id=201106230700069492I

Best,

Kevin

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