
Alumasc is a supplier of building and precision engineering products. The majority of business is in sustainable building products which enable customers to manage energy and water usage in the built environment and include drainage systems and solar shading. They have now released their final results for the year ending 2014.
When compared to last year, revenues fell overall as Roofing and Walling, Solar Shading and Construction products all suffered falls in sales due to the significant aluminium smelter refurbishment work in Canada coming to an end and the non-repeat of high prior sales of insulated renders to CESP projects that ceased in early 2013. These falls were somewhat offset by an increase in Drainage and Precision products. Cost of sales also fell, however, so that gross profits were generally flat on 2013. We then see a fall in depreciation and the lack of impairments relating to a goodwill write down at Blackdown Greenroofs, and restructuring costs, somewhat offset by an increase in operating lease payments so that operating profit was £1.5M higher at £6.1M. As far as finance costs were concerned, there was a fall in borrowing and pension costs, slightly offset by a higher tax payment so that profit for the year was £2.2M higher at £4M.
When compared to the end point of last year total assets fell by £6.2M, driven predominantly by a £6.9M fall in cash levels, somewhat offset by a £1.3M increase in deferred tax assets. Liabilities also fell during the year as loans fell by £6.9M and deferred income was down £1.1M, partially counteracted by a £7.9M increase in pension obligations to give net assets, discounting goodwill, of just £554K, a £5.4M reduction compared to net assets last year. There are also £4.5M worth of non-cancellable operating leases outstanding so, if this were to be included in liabilities, there would be a net negative tangible asset base.
Before movements in working capital, cash from profits was some £713K higher than last year at £6.7M. After working capital was taken into consideration, with a particular decrease in payables, the cash from operations was £5.1M before the tax payment, much higher than last year, eroded this to £4M, less than half the net cash from operations in 2013, although this partially represents the significant advance payments received in 2013 from the Kitimat project. The only major capital expenditure was £1.3M on property, plant & equipment and £320K spent on acquisitions to give a free cash flow of £2.2M. The group then paid back £7M of borrowings and still managed to pay £1.7M in dividends so that the net cash out flow for the year was £6.9M. At the end of the year, the cash levels stood at just £2.2M so this is looking rather unsustainable.
The Energy Management business had profits of £3.4M, a decline of £500K compared to last year with profits of £507K at Solar Shading and Screening, and £2.9M at Roofing and Walling against £841K and £3.1M respectively in 2013. The Solar Shading business had a fairly quiet year but regional sales teams have been strengthened in preparation for the predicted upturn. The division installed a solar shading system incorporating photovoltaic cells to a non-commercial central London building and another project they will undertake next year is a multi-million pound contract in Chiswick Park. Export order books for the division were at record levels at the year end with North America, the Middle East and France showing particular interest. The roofing business had an improved year with an increased penetration in the refurbishment market growing sales in London and the South East with double digit sales growth and the elimination of the prior year’s operating losses. The Greenroofs business had a better year than last year and included the delivery of the SSE Hydro Arena in Glasgow for the Commonwealth games and a project for Greenwich University. The order book for the roofing brands was strong at the end of the year but this did include some delayed work from the current year.
The £13M project to supply roofing and walling products to the Kitimat smelter refurbishment in Canada has been a substantial project for the group over the past two years but activities have now pretty much come to an end, although further work was won on the site which should keep the group involved in the project until early 2015. The walling business had a decent performance against a volatile market where government and energy company funding for exterior wall insulation projects was reduced in the last budget statement. The impact is that revenues for projects funded under this initiative did not meet expectations and did not come close to matching levels achieved in prior years. The group is trying to move away from government funded projects and has managed to win more refurbishment work for timber framed and pre-fabricated homes.
Profits in the Water Management business were £4.9M, an increase of £500K when compared to last year with Construction Products having a result of £1.7M and Drainage showing a profit of £3.2M against £2.4M and £2M respectively in 2013. In Construction Products, Gatic performed fairly well and completed a large project for the London Gateway port development but did not receive any large orders from the Far East that occurred last year. Sales were also poor in Southern Europe where the business has a strong market position, although Gatic Slotdrain sales were picking up in the US and the Middle East with a multi-million dollar project being secured at Doha port in Qatar after the year end. The Scaffolding and Safety equipment business had a good year, leveraging a more buoyant UK construction industry through a widened product range including ladders, beams and scaffold sheets, gates and netting.
Alumasc Rainwater was successful exploiting new sales opportunities for its products and reducing lead times. The integration of the acquired business went well with it hitting all of its earn out targets. Likewise the Harmer brand also performed well, adding new products to its portfolio and exploiting opportunities in clean room environments with successes in a number of school and hospital projects. Timloc, the house building products business had a record year with an improved sales team able to leverage the improving South East housing market. Investments in tooling and product categories are expected to keep this momentum going.
The Precision Instruments business had a loss of £198K, an improvement of £263K when compared to last year. Dyson Diecastings performed well due to a more favourable market demand but despite some progress, Alumasc Precision Products found going difficult. Despite the considerable progress made at APC with regards to customer service and removal of peripheral projects, their large OEM customers continue to put a squeeze on margins that can be achieved at the business in the highly competitive market, particularly as Sterling continues to strengthen. Dyson achieved operating profits of £1M as it has a broader customer base and its products are more keenly differentiated on quality and finish.
Although the private housing market recovered well during the year, the group’s products are predominantly used in commercial construction which remained flat and remained some 30% below the levels before the recession.
The group made sales of £9M to Europe this year which could be something to bear in mind considering the continued weakness of the Euro. As things stand, a 10% depreciation will reduce profits by £106K, but it seems the group is more affected by the USD rate which is thankfully remaining strong. A 10% appreciation against the dollar would reduce profits by £195K. There is one customer that accounts for more than 10% of group revenues, being Caterpillar at 12%. This is in the unprofitable Precision Products business but it is hard to know how much Caterpillar is propping this division up.
One area that is causing a real drag on results is the pension scheme. Following the latest actuarial review, it seems the scheme now has a deficit of just under £18M and deficit reduction contributions will have to increase from £2M to £2.5M per year which is quite a substantial amount for a company the size of Alumasc. At the current rate, the deficit will not be eliminated for more than 13 years.
The group has substantial tax capital losses in the UK amounting to £21M, although they have not been recognised as they do not meet the criteria. During the year revaluation gains on land and buildings amounted to £1M which is likely to be offset against these above tax losses which means the amount carried forward will be £20M.
There are a number of risks that could potentially face the group. Clearly, supplying to the construction sector means they are susceptible to changes in the general economic outlook. Also those pension obligations could become a real problem if the group were to lose any revenue streams and the reliance on Caterpillar for the Engineering products business could have the potential to cause a problem.
The group is looking to export markets, particularly North America, the Middle East, Far East and Europe and with £10M of headroom between drawn debt and committed banking facilities the group have hinted that they may look for acquisitions in the Building Products division. On the 30th November 2012 the group acquired Rainclear Systems Ltd for a total consideration of £1.2M which has now been paid in full in cash. The group valued the brand of the acquired company at £500K and paid £225K in goodwill. In the seven months since the acquisition was finalised, Rainclear reported a profit of £118K so this seems like it might be a decent investment.
During the year Chairman Keith Waldon retired from the position but he will continue to be a non-executive director. David Armfield joined the board in October. He was previously a partner at PWC and became a founding partner of Kinetix Corporate Finance to provide finance to companies seeking to grow in the Cleantech industry and renewable energy.
Going forward the board can see evidence that a recovery in the UK construction sector is becoming more widespread and the private commercial sector is now expected to grow steadily from its still diminished base which should benefit the group and enable them to make some progress this year. This seems to be supported by the fact that group order books rose in the final quarter of the year, a trend that has continued into the current year to date. The year-end order book was lower than last year, however, standing at just £36.8M compared to £44M.
At the current share price the P/E ratio is a good value 10.7 which falls to a remarkably cheap 8.3 on next year’s estimate. The shares are currently yielding 4.2% after an 11% increase in the final dividend, rising to 4.7% on next year’s estimate which also seems to suggest a keenly valued share. In future the board intend to increase dividends in line with earnings growth, having regard to the cash required to fund the group’s growth and improve on the pension deficit. At the year-end net debt stood at £7.7M, which was flat when compared to last year as cash levels reduced to pay off the borrowings.
Overall then I feel this was a mixed set of a results. Profits were improved but this seems to be predominantly due to the lower one-off costs and not so much about underlying performance. Net assets fell fairly considerably as the pension scheme liabilities laid heavily on the group and there does not seem to be any progress in reducing net debt with it on a par with the levels experienced last year. Operationally a number of large projects are coming to an end, with the reduction in government subsidised work being felt particularly keenly and the competitive nature of the precision products business means that continues to struggle. Having said that, some progress is being made on more overseas orders and the improvement in the UK construction industry will no doubt benefit the group who are very cheap on a P/E basis and yield a decent amount too. All in all, though, I feel there are too many uncertainties as the moment to make this a good investment.
On the 1st October the group announced that it had completed the sale of Pendock, it’s pre-formed pipe boxing business, to Davidson Holdings for a cash consideration of £1.5M. The book value of Pendock was £400K and it made profits of £300K last year. The disposal should enable management to focus on developing their core activities.
On the 30th October the group released an interim management statement to cover the first four months of the year. Overall trading was in line with expectations. Group revenues from continuing operations were some 5% above those of the same period last year with building products up 9% and engineering products down by 10%. The building products division experienced improving market demand, aided by new products and greater export penetration. The roofing and walling business in particular had a much better than expected start to the year, building on the positive momentum within the rainwater, drainage and house building products businesses. As a consequence of this, the board expect that full year performance from the building products division will be stronger than originally envisaged.
In the engineering products division, Alumasc Precision Components (APC) continued to operate at broadly break even levels from lower sales, reflecting the exit from loss making work over the last year and cost saving initiatives. Recently, though, a European customer stated that replacement work on a new engine variant will not be awarded to APC and negotiations to settle the final account are ongoing. The Dyson Diecastings business, however, is operating in line with expectations. As part of a strategic review the board decided that APC no longer fits the group’s long term strategy and are in the early stages of exploring opportunities to sell the business.
Overall this sounds like a decent update, the core building materials business sounds as though it is doing well and selling the APC business is certainly a good idea as the group have tried hard to turn around what sounds like quite a non-specialist unit so hopefully someone will want to buy it…
On the 21st November it was announced that AXA Investment Managers had purchased enough shares to push them over the 14% mark so they are quite heavily invested here.
On the 10th March it was announced that non-executive director David Armfield acquired 25,000 shares at a cost of £38,750. This is his maiden purchase and represents 0.07% of the total shares in issue.