Bottom Line: Norcros seeks to lose its shackles

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The Independent Online
TWO-and-a-half years ago, as the UK construction recession pinned it to the ground, Norcros told its shareholders that it would not call upon them to fund a deep restructuring programme and would maintain a severely reduced dividend subject to the unforeseen.

As gearing has soared to almost 100 per cent under the combined weight of hefty spending on rationalisation, slashed profits and the albatross of unsaleable property assets, Norcros is now launching a pounds 49.7m, two-for-seven rights issue at 132p.

So shareholders are retrospectively funding the restructuring programme. With pre-tax profits down from pounds 15.6m to pounds 11.5m - or a pounds 3.3m loss under FRS3 rules, which would take pounds 7.9m of extraordinary items above the line - the company generated neither the free cash flow nor the earnings to cover last year's maintained 7p dividend.

Needless to say Norcros does not see matters this way. On its reading the rights money will liberate it from the shackles of high gearing - this stands to fall to around 40 per cent - at a time when its markets are recovering. Strong brands like Cristal tiles, Triton showers and Crosby kitchens will be prime beneficiaries of an upturn in construction and DIY spending.

To support its case Norcros says that after a flat April, activity in May was running 10 per cent higher than a year ago. Sales per employee have risen by more than 20 per cent during the four-year recession and the company has spent pounds 100m on capital investment and restructuring costs.

At last Norcros feels able to boast that only 3 per cent of its group sales are located in Continental Europe, previously a big disadvantage, with 75 per cent in the UK. All true enough. But a glance at last year's divisional performance does not inspire confidence. Margins in ceramics fell from 9.5 per cent to 4.5 per cent between the two halves of last year despite intense surgery as volume continued to slide.

Loss elimination accounted for more than half of a 115 per cent improvement in building product profits while printing and packaging was squeezed by competition in the US and a slump in UK demand for corner shop labels and tube and rail tickets.

Norcros's pre-tax profits were spared the full horrors of its property nightmare with pounds 7.8m after tax of trading losses and yet more write-offs tucked below the line.

Slashed redundancy charges and interest savings could lift pre-tax profits to pounds 18m- pounds 20m in 1993-4, with little help from trading. But this will barely be enough to cover a maintained dividend. A yield of 5.3 per cent at 165p, down 3p, and a p/e of 23 suggest the shares have little further to go.

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