Ambitious Norcros worth 50% more

With its eyes set firmly on doubling revenue to £420 million revenue by 2018, Johnson Tiles-owner Norcros has just bought bathroom fittings firm Croydex for £21.9 million. It looks like a decent buy, and the shares do look cheap on traditional valuation metrics, but the Triton Showers firm will need more of these to hit that top-line target.

Following its successful 2013 acquisition of Vado, today's deal is expected to boost earnings by 12% in the year to March 2016 and by 14% the year after. Funded entirely through debt, the deal - £20.8 million in cash and £1.1 million deferred for three years - values Croydex at 6.5 times trailing cash profit. Norcors trades on about five times.

"The deal is in line with the group's objective of bolt-on acquisitions in the bathroom sector and clearly demonstrates that, now legacy issues have largely been dealt with, management can fully focus on potential growth opportunities," said Numis Securities analyst Christen Hjorth.

He now expects underlying pre-tax profit of £18.8 million this year, up from £15.8 million in the 12 months to March just gone, rising to £21 million next year. That gives adjusted earnings per share of 2.3p and 2.6p, respectively.

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Net debt, having halved last year to £14.2 million, doubles to £27.9 million this year, according to Numis. But Hjorth thinks Norcros still has room for additional bolt-on acquisitions once Croydex is integrated.

"The acquisition of Croydex is a compelling fit with our strategic growth criteria, broadening the group's product offer as well as providing a number of opportunities to drive revenue and procurement synergies," said chief executive Nick Kelsall.

The acquisition will diversify Norcros's bathroom product range and ensure the business benefits from global distribution channels. Based in the UK and South Africa, Norcross owns the British brands Triton Showers, Vado, Johnson Tiles and Norcros Adhesives, along with the South African Tile Africa, Johnson Tiles South Africa and TAL. In the year to December 2014, Croydex generated sales of £19.9 million, with cash profit of £2.7 million. It made £3.1 million in the 12 months to 31 March.

Impressed by the deal, the market added fuel to Norcros's recent surge, sending its share price to 13-month highs at 20.25p (see chart).

Before the market's reaction Thursday, Hjorth said: "Norcros trades on an annualised 2016 P/E of 7.5x, EV/EBITDA of 4.7x and dividend yield of 3.6%. In summary, we see this as a positive step forward for the group and we therefore reiterate our Buy recommendation and target price of 30p."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.