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magazineBuilding the case for transformed Alumasc
The market valuation attached to building products business Alumasc (ALU) does not reflect its earnings potential or inherent qualities.
The market doesn’t appear to have picked up on the Kettering-based company’s transformation from an engineering conglomerate to a pure play on premium building products.
The stock trades on 8.2 times forecast earnings for the year to June 2018 which looks far too low, in our opinion.
RENEWED FOCUS
It is not a perfect like-for-like comparison but Renew Holdings’ (RNWH:AIM) share price has increased six-fold in the last five years as the company shifted its focused from heavy construction to specialist engineering services.
Its share price was also static for a while, but the re-rating was spectacular once investors realised how Renew’s business had changed. The same could apply to Alumasc.
The last of Alumasc’s engineering-related businesses was sold in July 2016 with the £4m disposal of Dyson Diecastings.
The focus is now on ‘fast flowing streams’ in the building products space. This encompasses a focus on sustainable products which help conserve energy and water and solutions which help constructors meet building regulations.
The investment in these areas and an increase in marketing spend was rewarded by a 17% increase in first half revenue to £50.7m. Unfortunately, the impressive top-line growth was not replicated at the bottom-line. Adjusted pre-tax profit only nudged ahead 2% to £4.1m as rising input costs hit margins.
The increase in costs can be attributed to sterling weakness and rising steel prices and although these have now largely been passed through, there was a lag which hit profitability.
BUMPER ORDER BOOK
A near-record £27.6m order book and the timing of completion on several large contracts underpins boss Paul Hooper’s confidence that margins can be rebuilt in the remainder of its current financial year. This could act as a positive catalyst for the share price.
The company’s operations coalesce in four key areas: solar shading and screening; roofing and walling; water management; and housebuilding and ancillary products.
The Levolux solar shading business and Gatic drainage systems arm are successfully winning orders overseas. Mainly driven by Levolux sales in the US, export revenue almost doubled to £7.5m in the six months to 31 December 2016.
The niche focus and international expansion should help the company outperform the modest growth expected in UK construction in the coming months.
Keep a close eye on the £33m pension deficit. Annual cash contributions of £3.2m didn’t prevent Alumasc from hiking its first half dividend by 5.6% to 2.85p. (TS)
Alumasc (ALU) 174.5p
Stop loss: 139.6p
Market value: £63m
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