Alesco’s Big Switch

By Glenn Dyer | More Articles by Glenn Dyer

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Building products and services group, Alesco Corporation, is set make its biggest diversification yet, with the $250 million purchase of Total Eden McCracken's water management business from the AMP and a group of investors and management.

Alesco plans to raise about $187.1 million, net of costs, to help fund the acquisition from shareholders (around $95 million) and institutions (almost $92 million).

The company's shares were suspended yesterday to allow a bookbuild for the institutional issue to occur.

Alesco later announced a modest 13.5% rise in profit after tax (before amortisation and one-off items) for the year ending May 31, of $52.8 million.

Alesco said the results for the year have been achieved in a mixed trading environment.

"The Australian new housing market has remained soft, driven largely by the decline in New South Wales, although this has been partially offset by the continuing growth in Queensland and Western Australia.

"At the same time, the renovations market has been strengthening and strong demand is continuing in both the scientific/medical and the construction/mining sectors.

"The Australian dollar was strong against the US dollar and Euro throughout the year ended 31 May 2007 and particularly in the last quarter."

The company said the result was the sixth consecutive year of record earnings per share. They rose 12.2% to 74.6 cents per share for the year to the end of May.

The company has announced a final dividend of 36cps (fully franked) up from 31cps for the previous year. This brings the total dividend for the year to 63.5cps (fully franked) up 13.4% (2006: 56cps).

Acquisitions and rising business from the mining, construction, medical and scientific areas offset the expected softness in the company's prime focus, servicing the home building sector.

"Softness in the Australasian and New Zealand new housing markets has been more than offset by ongoing buoyancy in the construction and mining markets, strong organic growth from the scientific and medical sectors, growing revenues from the Australasian housing renovation sector, and a number of debt funded bolt-on acquisitions," Alesco said in a statement to the ASX.

Alesco made acquisitions totalling $136 million during the year and these boosted earnings by just over $5 million and will add more in the full 2008 financial year.

The company said the Lincoln Sentry kitchen hardware distribution business exceeded expectations after being bought in January.

Earnings before interest and taxation (EBITA) for the 2007 fiscal year were $88 million, up from 2006's $75.7 million.

The Garage Doors & Openers division experienced difficult trading conditions and a number of structural challenges during the year to May 31, Alesco said.

EBITA for this division fell to $30.2 million in 2007 from $35.1 million in fiscal 2006.

"But the Building Products division, comprising Lincoln Sentry, Parbury and Robinhood, delivered a strong result in a difficult trading environment, particularly in NSW and New Zealand," Alesco said.

"The Scientific & Medical division has enjoyed a record sales and profit year through both organic growth and growth through acquisition."

Alesco's purchase of Total Eden McCracken's water management business from AMP Capital Investors Limited and a number of other vendors, including management, will be funded through a capital raising of approximately $225 million.

The balance of the purchase price, approximately $25 million, will be funded through debt.

The capital raising is made up of a non-renounceable, pro-rata 1 for 9 entitlement offer to existing shareholders to raise approximately $95.3 million and a placement to institutional investors to raise around $91.8 million.

Alesco said its balance sheet would remain strong after the acquisition, allowing the firm to take advantage of future opportunities.

"The outlook is positive for Alesco's Australian businesses in FY08. A continuing strong economy and potential recovery in the new housing market, combined with continuing high levels of activity in the resource and construction sectors will provide ongoing growth opportunities. In New Zealand, we expect the economy and the performances of our businesses to be more subdued.

"The ongoing solid performance of our existing businesses, combined with the acquisition of Total Eden McCracken's and the associated capital raising will, we believe, result in growth in earnings per share (before amortisation and significant items) for FY08 year at a slightly higher rate than in FY07.

"Post the acquisition of Total Eden McCracken's and the capital raising, Alesco will have a strong balance sheet with a gearing level of approximately 36%, which is below the target range of 40-50%.

"This will enable Alesco to take advantage of future acquisition opportunities as they present themselves," the company said in its statement.

The shares had closed at $13.90 on Monday. Trading was halted before the opening of the market yesterday with the two announcements following soon after.

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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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