Australia | Jul 26 2006
By Greg Peel
Alesco Corporation (ALS) boasts a diverse range of interests across building and renovation, construction and mining, and scientific and medical equipment. Its recent acquisition of the iconic B&D Rollerdoors ensured a significant exposure to the residential housing sectors of Australian and New Zealand.
And therein lies Alesco’s biggest problem when it comes to market perception. A profit warning based on a softening housing market back in January saw its share price trashed big time, only for it to recover completely in the next couple of months.
The reason for the recovery was a spate of broker upgrades which suggested (a) don’t forget housing is only half of Alesco’s business and (b) this sell-off is very overdone. Since then Alesco has suffered a push me-pull you from the opposing effects of a soft housing market and a strong construction and mining sector.
Alesco’s FY06 earnings were 10.3% higher than its FY05, which was generally in line with broker expectations. Between downbeat near term guidance and ongoing perceptions of weak housing, brokers are not forecasting anything exciting for FY07.
This doesn’t stop Alesco having a 3/3 rating of Buy/Hold in the FN Arena database, including an upgrade to Buy from UBS on the back of yesterday’s result.
UBS echoed the thoughts of most that the FY06 performance was very creditable given difficult conditions. The view ahead is for an eventual turn in the housing cycle, for which Alesco is well positioned. It is inexpensive at this level and there is room for more positive acquisitions, the UBS analysts suggest.
The problem is just when the housing cycle might actually bottom out. UBS believes this will occur some time in FY07 but others may be looking further afield. The trend has been to downgrade both FY07 and FY08 earnings, while still anticipating close to double digit earnings growth in FY07.
This includes JP Morgan (Overweight) whose analysts sum up the consensus in saying:
"We believe that ALS is diverse enough to sustain steady earnings growth even during a softening housing market and has strong enough brands to be well placed for a recovery in housing activity. We regard the current price as a compelling entry point."
Citigroup and Credit Suisse are sticking with Hold, but CS echoes further consensus in pointing out Alesco’s strong yield. An increase of payout ratio from 75% to 85%, as announced with the result, implies 6.3% at these levels.
GSJB Were rates Alesco Marketperform in the short term, but Buy in the long term, which about sums up the story.
Earnings downgrades for the next couple of years have seen the average 12-month target price fall from $10.24 to $10.07. Alesco is trading around $9.00 at the time of writing which is up 1% on the day.