The Northamptonshire-based building materials company, the Alumasc Group LON:ALU is due to publish its results for the year ended 30th June 2023 on Tuesday (5th September). The AIM-listed company is in a sector that has had a hard time over the last 12 months.
Inflation, partially caused by the War in Ukraine, but not-helped by the mini-budget from Liz Truss during her short-lived premiership, the effects of which the UK economy is still feeling almost a year later, has punished the building sector, coupling higher materials and labour costs with shrinking sector demand.
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As we have reported during the last year, the UK construction sector has experienced a plethora of difficulties, from the top with real estate sellers like Smoove LON:SMV seeing revenues fall as perpetually rising interest rates dull the mortgage market; housebuilders, including Taylor Wimpey LON:TW., Persimmon LON:PSN and Balfour Beatty LON:BBY seeing a decline in their share prices as order books decline and high interest payments eat into their reserves; and building and construction materials suppliers hit by the slowdown further up the chain.
Worse yet to come for the market
In the materials sector as reported, Travis Perkins LON:TPK has had one of those years it would want to forget, with surpluses down 31% y-o-y to GBP112m, earnings-per-share off 41%, revenues down 2.5% over the six months to end-June and expected profits down around one-third to an expected GBP240m. However, The Armchair Trader and partner, BridgeWise, the artificial intelligence stock analysis specialists, both reckon that Travis will hold its own, despite the market potentially worsening before recovery, as Travis has scale.
This is less-the-case for Alumasc. Travis has a market cap of around GBP1.8bn, Alumasc weighs in at a little over GBP55m. However, size isn’t always the most important thing, its more important to know what to do with your assets, and the Alumasc Group – whilst recognising that the sector is in tough trading conditions – is, to use an over-used saying, cautiously optimistic.
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The company said in July that it was expecting revenue of GBP89m, pleasingly in line with the prior year and underlying profit before tax. The company also said that it had improved cashflow generation in the second half and was looking at debt of about GBP3m, a 0.2x multiple of earnings.
The firm’s management admitted that it was expecting subdued demand in the sector, for the reasons outlined above, but was, unlike many of the names previously mentioned, not wholly dependent on the UK property market as it had a level of overseas diversification, with previously delayed overseas projects now slowly coming back online.
Materials and financial sustainability
One of Alumasc’s unique selling points is its sustainability, or the sustainability of the products it manufactures and sells, a subject on the lips of industries globally. The company prides itself on being a UK-based supplier of sustainable building products, systems and solutions, the majority of which manage the scarce resources of water and energy within the built environment and improve the quality of life for the owner/occupier using recyclable materials.
The company is already ahead in the race towards sustainable building, which gives it an advantage over its peers and the opportunity to exploit any upcoming regulation on future construction. Alumasc’s EBITDA margin in 1H23 was 16.3% versus the industry median of 13.4%. Alumasc’s net margin of the group also weighed in at 10%, more than the industry median of 6.4% according to REFINITIV.
The company was awarded the Green Economy Mark by the London Stock Exchange and the drive to build new housing and offices that are sustainable in construction and energy and water efficient in operation can only bode well for Alumasc.
Originally part of the Consolidated Gold Fields Group, founded in South Africa in 1887, Alumasc was acquired by Consolidated in 1960, and then in a management-buy-out headed by Consolidated lawyer, John McCall became a private concern in 1984 before listing in London two years later.
Alumasc has evolved the business
Alumasc was originally in the business of precision engineering, especially in aluminium products (presumably where the ‘Alum’ in the company’s name came from), specifically precision tools for mining, the manufacture of beer barrels, drainage and rainwater products, and took the decision to focus on building materials. As the UK economy underwent a contraction and rebirth as a service-led economy in the mid-twentieth century, a lot of Alumasc’s traditional UK clients in heavy industries disappeared.
The company officially switched out of engineering into building materials and more-or-less stuck to its knitting but was not averse to building its business through an opportunistic acquisition or two, the most significant being Levolux, the UK’s leading solar shading company, acquired in 2007 which firmly shifted Alumasc into sustainable technology. Disposals of non-core assets or assets that were not sustainable-focussed followed and the company built up its portfolio in drainage, roofing and wastewater.
One such sale by Alumasc was the disposal of Levolux to private equity-owned Talrus in August last year, citing Levolux’s focus on installation and Alumasc’s transition to a supply-only business, and a slow, post-Covid recovery in demand for new build architectural solutions in the US and UK, leading to a loss of GBP2m on sales of GBP7.8m for Levolux in the year to June 2022. Nevertheless, Levolux led the way for a change in culture for Alumasc.
More recently the Kettering-based company agreed to buy Leicester’s ARP Group, a manufacturer and distributor of specialist metal rainwater and architectural aluminium goods, for GBP10m, with GBP8.5m up-front and GBP1.5m on hitting performance targets, it’s first acquisition since 2018
ARP was established in 1987 and operates four facilities, 47,000 square feet in total, with a team of over 70 employees. ARP’s consolidated unaudited results for the year ended February 2023 showed revenue of GBP10.8m and adjusted EBITDA of GBP1.3m. Consolidated net assets were GBP4.5m.
Market switch to AIM in 2019
Alumasc chose a move to AIM in 2019, citing the market as more suitable to its growth profile, its simplified rules and particular inheritance tax and stamp duty reserve tax exemptions that are available to AIM investors over the Main Market.
The company might buck the trend seen in the rest of the sector. However, scale like that of Travis Perkins has the advantage of offering the company bigger cash reserves, better staying power and presumably access to better, larger and cheaper sources of capital.
Alumasc has for several years been grappling with legacy issues, specifically its underfunded pension funds liabilities which have been eating up its cash for at least the last decade and is forcing Alumasc to continue commit funds to. The company said recently it has got a hold on the pensions deficit and the situation was looking more stable. Moreover, the rental of its property remains a big drain on resources.
The company opened trading at 156p on 29th August. Alumasc started the year at 156p, so no change there, but broke through 180p in February, before dropping as low as 135p a month later – so a bit of a helter-skelter ride. Over one year the company returned 8.3%.
Bridgewise rates Alumasc as a ‘Hold’. The analyst said: “Alumasc’s financial results from 4Q22 demonstrated decent performance but will likely only help Alumasc remain on par with its peers. Their growth and value factors performance indicate that company management is having trouble hitting the right targets or executing. We therefore gave Alumasc a total score of 66 out of 100 and a ‘Hold’ recommendation.”
This is a smaller company, and as such has higher risks than its bigger brethren, but by same measure more room to grow. The stock price is still relatively cheap, but this needs to be weighed against a uncertain future for the sector, at least in the short-to-medium term.
Sustainable building will only become more important in the future, and Alumasc has jumped the gun on that account and is well-placed to reap the rewards, however, scale will allow other larger suppliers to enter the market as small, private companies are unable to outlast the downturn in the sector’s fortunes. Nevertheless, we believe this AIM stock is ‘One to Watch.’
