When I looked at this building products company last summer, it had some interesting features. It was a cheap Superstock with a reduced pension deficit and delivering in-line trading under challenging market conditions. I had some concerns over the possibility of empire-building and the sector itself. Last week’s Interim Results prompted me to take a second look.
Summary
- On the surface, Alumasc (LON:ALU) is a cheaply-rated company trading on a forward P/E of around seven and a dividend yield approaching 6%.
- The company has been transformed by jettisoning its loss-making Levolux subsidiary and, in recent years, has generated returns on capital above 20%, suggesting it possesses a competitive advantage in its core sectors.
- The company operates in competitive, cyclical industries. However, the company has outperformed their weak end markets, generating modest revenue growth.
- The company’s Housebuilding Products division is actually the highest margin part of the business, as their modern manufacturing gives them a cost advantage. If this can be replicated across other divisions, then this could lead to higher margins and a further step change in profitability.
- However, investors will want to adjust the figures to account for the pension deficit and “non-underlying” costs that are sizable and occur almost every year. This adjustment may mean that the price-earnings ratio is closer to ten, hence not as cheap as an initial look suggests.
- The share price has been range-bound for the last 20 years, as the company has acquired and sold various subsidiaries. Their latest acquisition is not obviously a bargain. Cautious investors may want to wait until there is evidence that the company can generate top-line growth before investing.
Profile
Alumasc is an AIM-listed building products manufacturer. It traces its history back to the mid-20th Century when it sold aluminium beer casks. In 1960, it became part of the mining giant Consolidated Gold Fields. In 1984, it was taken private by former Chairman John McCall. A stock market flotation followed in 1986. During the 1980s & 1990s, Alumasc focussed on the manufacture of precision engineering components as well as aluminium beer casks. Out of these skills, the Group developed aluminium rainwater and drainage products. As the UK became less competitive for non-precision manufacturing, these businesses became the bulk of the company, and the Building Products division became the larger of the Group’s two divisions. By 2007, all the non-precision engineering businesses had been sold off.
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