After its foundations were shaken in Q1 by the collapse of Carillion, construction industry supplier Alumasc (LSE:ALU) has seen its shares build back up to 141p since the release of its 2018 results last week. Investors responded well to the firm’s decision to hike its dividend, reflecting its belief that it will now be able to outperform the UK construction industry following a record final quarter to its financial year. Here, CEO Paul Hooper tells us how Alumasc has strategically repositioned itself for both domestic and overseas growth before we ask whether a legacy pension deficit could pose any problems moving forward.
Over the last few years, Alumasc has shifted its focus towards becoming a UK-based supplier of building products, systems and solutions to the construction industry. It is split into four divisions: architectural screening, solar shading & balconies, water management, and housebuilding. The company aims to outperform the UK construction sector while expanding into overseas markets like North America and the Middle East, where it has already begun to build a presence.
The last year has seen Alumasc focus on several critical areas of strategic development to ensure it can continue to meet these goals against a turbulent macro backdrop. As part of this, the firm has invested in expanding its capacity for growth over the period, notably commissioning an 88,000sq ft factory for Timloc, one of its housebuilding firms, back in January.
The firm has also spent a lot on Levolux, its solar shading, screening, and balconies division. Levolux’s products are used on everything from office blocks and hospitals to colleges and private housing developments. Hooper sees growth potential here both in the UK and overseas following a £3.1m order from a US power station in 2017:
‘At Levolux, we have invested heavily in things like people resources, sales, estimators, designers and project managers. This front-loaded expenditure is paying off, with quotations for new work in our UK balconies and balustrading business set increase five-fold year-on-year to over £60m.
Meanwhile, quotations in our North American business are set to more than double to £40m. This progress validates our belief in the medium-to-longer term opportunity in these markets and reflects Levolux’s growing brand presence. Our focus now is to strengthen the existing commercial infrastructure in place to increase order conversion rates.’
Another area of focus for Alumasc this year has been improving the quality of its group earnings through proactive portfolio management. This saw the company sell-off a non-core scaffolding product in July for £900,000. However, its most significant move by far was the purchase of specialist drainage business Wade International for £8m in January.
Hooper says Wade, which generated operating profits of £1.3m from revenues of £5.3m last year, complements Alumasc’s existing Harmer and Gatic water management brands. He also said it contributes to Alumasc’s so-called ‘rain to drain’ solution, which sees it manage the flow, control, and attenuation of water in buildings across its water management and roofing businesses:
‘Thanks to Wade, our water management arm now accounts for almost 40pc of group revenues. When combined with our roofing division, some 60pc of group revenue now contribute to our rain-to-drain strategy. Moving forward, we would like to extend our water management business, and we believe it has export potential, especially when combined with Gatic’s strong existing presence in the Middle and Far East.’
Finally, Alumasc is dedicating time to creating a simpler and more cost-efficient structure. It has been working to refresh and renew its board, merge its two legacy DB pension schemes, and simplify its legal structure. Hopper told us the firm is also considering a move to AIM as part of its ongoing simplification:
After years of being held back by economic and political uncertainty, the UK construction sector was thrown into further disarray back in January by the liquidation of construction giant Carillion. Following several profit warnings, Carillion, which was the UK’s second-largest construction company, buckled under the weight of its £1.5bn debt pile after rescue talks with lenders and the government fell through.
Carillion’s collapse, which ultimately boiled down to risky contract and cost overruns, further damaged sentiment in the UK construction sector. This exacerbated delays in building contract customers committing to new work as reduced the availability of credit over the following months.
These dynamics forced Alumasc to revise down its 2018 revenue forecasts by 4-5pc and scale back its profit expectations by c.15pc back in March, wiping nearly a fifth off its market value at the time. Then, earlier this month, the firm announced that revenues for the year ended 30 June 2018 came in at £98.4m down from £104.8m in 2016/17. It also saw its underlying profit before tax fell to £6.5m from £9m, and its EPS fall to 12p from 18.3p.
Despite the results ending six years of consecutive growth, the market was already firmly braced for the weaker figures thanks to Alumasc’s update in March. Rather than falling, shares rose by 11.7pc on the day of the results’ release and have broadly remained between 139–145p ever since. Investors were drawn to Alumasc’s claims that performance had picked up in the final quarter of the year, with the firm even reporting record trading performance across its building products businesses.
It also said it is confident that it is well-positioned to outperform the UK construction market over the medium-term and even increased its full-year dividend by 2.8pc 7.4p to reflect its positive outlook. Hooper told us that, while the business, and indeed the broader construction sector, are not out of the woods yet, the landscape has improved considerably since the immediate fall-out from Carillion’s collapse:
‘The beginning of the year was tough for us, with a hard and disruptive winter forcing some of our production activities to come to a halt while the bankruptcy of Carillion also brought shockwaves across most sectors. That had an impact, but we had a record final quarter that helped to pick up some of the slack.
We continue to operate in an uncertain UK economic and political environment, and the UK construction industry is expected to contract by 1-2pc in 2018, with limited growth expected over the following two years. We believe we will be able to outperform thanks to our robust business model, strong market position, and strategic growth drivers, which allow us to shift our focus as necessary. For example, we can look at continuing to develop export sales opportunities across Levolux and our water management arms if we need to reduce UK exposure.’
An issue for Alumasc for some years now has been its legacy pension deficit, which sat at £15.1m as at 30 June 2018, down from £20.6m as at the end of the previous financial year. It spent £3.2m on pension deficit funding over the period.
The deficit, which stems from two legacy DB pension schemes, is a prominent feature of almost all of Alumasc’s previous online coverage and the firm itself has been very open about the issue. Indeed, in its latest results, the company showed that it is clearly trying to make good on the subject, laying out plans to merge the DB schemes to reduce ongoing administration costs and improve efficiency. It also said it plans to continue to grow its business, so the relative affordability of pension deficit contributions can improve. Even though it has reduced the deficit considerably over the year, this deficit will continue to be an issue for Alumasc. However, if the company can reduce costs and increase its business as stated, then its impact should lessen further over time.
As it stands, the business had net debt of £4.8m as at 30 June after subtracting the cost of acquiring Wade, relocating Timloc dividend payments and several other figures from $8.2m of EBITDA. Profits came in at £6.5m. With this debt in mind, it will be worth keeping an eye on Alumasc’s cash balance, ongoing financial commitments and plans to fund growth throughout the year to get a better sense of how its financials are shaping up.
Indeed, in the current financial year, Hooper told us that Alumasc will continue to invest in its strategic objectives, to once again outperform the UK construction industry while expanding overseas:
‘We will continue to invest across the business and are particularly excited by the opportunities proposed by Levolux, where we expect to see growth in the UK balconies and balustrading business trading area and the US. We have potential for further export sales for our Alumasc Water Management Solutions with Wade coming in now, particularly into the Middle East.’
Pension deficit aside, Alumasc’s performance has begun to recover after a period of macro weakness, and it is encouraging to see the business hike its dividend to demonstrate its board’s faith moving forward. The firm is generating revenues and appears well-poised for domestic and international growth across its four, well-connected divisions.