Bottom Line: Brightness amid Norcros gloom

NORCROS is better focused than the over-diversified conglomerate it was five years ago, and thankfully less complacent than the company that allowed a 43 per cent share of the British tile market to slip to 18 per cent in a decade through lack of investment.

With the building industry showing flickers of improvement, the company is also less coy about its still overwhelming dependence on the home market and has done well to pull out of its ill-timed dalliance with property development.

Yesterday's interim figures, however, confirmed that those bright lights stand out against an otherwise gloomy background.

A 10 per cent increase in sales to pounds 208m was boosted by an extra week in the half-year period, and a 32 per cent increase in pre-tax profits was given significant help by lower interest thanks to June's rights issue.

A maintained 3.5p interim dividend was uncovered by earnings per share of 2.8p.

The adoption for the first time of FRS3 accounting flattered the comparison further. Stripping out last year's redundancy costs, the underlying improvement in operating profits was nearer 14 per cent than the declared 40 per cent jump.

The fundamental weakness of Norcros's trading position was underlined by an pounds 8m outflow of cash before June's rights issue rescued the picture. Analysts don't expect the tide to turn for cash either this year or next.

That goes some way to explaining the decision to maintain capital expenditure below the rate of depreciation. But it is a worrying feature ahead of any upturn that will demand even more working capital.

The extent of that upturn is as uncertain as ever under the shadow of the Budget, but its arrival is crucial to the success of Crosby Kitchens (loss-making), Crosby Sarek (doors and windows, still in the red) and Triton and Cego (profitable, but up against severe price pressure).

The other leg, printing and packaging, is in better shape and operating in higher-growth markets. Cellophane for cigarette packets is a profitable niche benefiting from spiralling sales of cigarettes in the Far East and printing tickets for airlines is a potentially huge market.

But printing is much the smaller division and Norcros is now measured against the building materials yardstick by the stock market. Thanks to that the shares sit on an optimistic forward p/e ratio of 21 on the basis of Warburg's forecast profits of pounds 20m.

That puts it on a par with better-quality rivals such as Redland and Blue Circle. The shares won't tumble too far from the current 159p on a pretty safe yield of 5.5 per cent.