ALS Up, But So Is Gearing

By Glenn Dyer | More Articles by Glenn Dyer

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A solid result for diversified building industry supplier, Alesco Corporation, and off goes the company’s shares, hitting an all time intra day high of $12.40 at one stage yesterday

The shares jumped 89c in the wake of the interim result being released to the ASX.

But by the close the enthusiasm cooled and ALS shares ended at $12.08, up 32c.

It was a reaction sort of out of kilter to a 12 per cent rise in net earnings and forecasts of a 10 per cent rise over the 2007 year.

But investors liked the way Alesco achieved that rise in the six months to the end of November, with smart acquisitions which plugged holes from the building industry slowdown, and the way it continues to do well-priced deals aimed at growing the business.

Net profit rose 12.2 per cent increase to a record $26.97 million and Alesco said that it was expecting second half trading conditions to similar levels to that currently being experienced.

“With our portfolio diversity combined with recent acquisitions and efficiency improvements from our restructuring programs we believe growth in earnings per share (before amortisation of intangibles and significant items) for the 2006/07 year will be close to 10 per cent,” Alesco said in the profit statement yesterday.

It reported record Earnings Per Share, pre-amortisation of intangibles, of 41.5 cents per share for the six months to November 30, 2006, up 10.1 per cent from the 37.7c in the previous corresponding period.

Earnings Before Interest Tax and Amortisation rose from $40.8 to $46.9 million, another record.

Alesco said its recent acquisition program had contributed to earnings growth in the first half, offsetting the sluggish housing market.

It said its “construction & mining and scientific & medical divisions experienced strong demand while the new home market, in both Australia and New Zealand, continued to experience difficult trading conditions”.

“Housing starts fell four per cent in the year to September 30, 2006; however the renovations market was showing signs of a sustainable recovery.”

It said its garage doors & openers business reported a 6.8 per cent fall in earnings before interest, tax and amortisation (EBITA) to $17.7 million for the half.

Some analysts have worried that ALS has been too exposed to the building industry and the current downturn and the company yesterday made sure no one was left in any doubt how tough it was.

“At this stage the NSW market is yet to show any signs of improvement however the Western Australian market remains buoyant and the New Zealand market is showing early signs of a recovery,” it said.

The building products division’s earnings fell 6.6 per cent to $11.4 million.

Construction and mining delivered record EBITDA of $13.6 million, up from $8.3 million previously, while the scientific and medical business saw earnings rise to $8 million from $5 million in the previous corresponding period.

Alesco declared an interim dividend of 27.5 cents, up from 25 cents in the previous corresponding period and a touch higher than some analyst forecasts.

Directors said that the “acquisition program contributed to earnings growth offsetting the subdued new housing market. Acquisition of Promedica ($21 million) and App-Tek ($3 million) completed during the half”.

Looking forward to the current half the company said that the purchase of Lincoln Sentry Group for $84 million, Flextool NZ for $6 million and EnviroEquip for $9.1 million all announced subsequent to half year balance date will contribute positively to second-half earnings.

The Lincoln Sentry deal is the most expensive and most important Alesco has done and it will prompt a revamp of part of its existing business.

Alesco said the deal was scheduled for completion yesterday.

“Lincoln Sentry is one of Australia’s leading suppliers and distributors of hardware components to the cabinet and furniture making industry and the window, door and glazing industries.

“The business markets an extensive range of leading domestic and global hardware and component brands including Blum, Assa Abloy, 3M and Dow Corning. Lincoln Sentry has a strong focus on hardware and component distribution to its specialized trade industries and will form a third leg of the Building Products division.

“Post completion the hardware business currently within the Parbury business will be consolidated into Lincoln Sentry to form Australia’s largest specialist hardware distributor to the Kitchen, Window and Door industries. Planning has already begun on the transfer of the Parbury hardware business to Lincoln Sentry which is expected to be completed prior to the end of the current financial year.

“Whilst not yet finalised it is expected that a “one-off” cost of approximately $2 million will be incurred during the transition with an annual saving of around $1 million being achieved from the beginning of next financial year.”

Alesco said Lincoln Sentry has annual sales of approximately $150 million. “The purchase price represents a FY2007 multiple of approximately 7.5 times EBITA. The acquisition is being funded by additional debt facilities and is expected to be immediately accretive to earnings per share. On a pro-forma annualised basis the acquisition is expected to add approximately 5cps for FY2008.”

The company said that in addition, restructuring programs within B&D (Project Icon) and Construction & Mining (Project Foundation) continued during the period with full annualised benefits to be achieved in FY 2008 and FY 2009 respectively.

Directors said the cost of these programs and the purchases had cut free cash flow during the year and impacted on gearing.

“The completion of the acquisition of Lincoln Sentry Group and the recently announced acquisitions in New Zealand will increase the gearing in the Company on a pro forma basis to approximately

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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