Australia | Apr 11 2011
– Alesco sells Marathon Tyres division
– Divestment completes non-core asset sales program
– Stockbrokers see value from improved efficiencies in remaining core businesses
By Chris Shaw
Building products group Alesco ((ALS)) surprised the market last week with the sale of its Marathon Tyres business. An after tax profit of around $9.4 million was recorded on the divestment, with proceeds to be used to repay debt.
The Marathon business contributed around 6% of Alesco's revenues in FY10, so as Citi notes the sale has more of a strategic impact than a financial one. JP Morgan agrees, noting the sale means the divestment of non-core assets by first year CEO Peter Boyd has essentially been completed.
What this means, according to Citi, is Alesco will benefit from reduced internal competition for capital going forward. There will also be scope for faster traction with respect to 'Project Restore', which is the business improvement program put in place under Boyd.
JP Morgan notes Boyd was successful in improving operations for the Garage Doors and Openers division when he headed that part of Alesco's business, so similar group-wide improvements are expected as the program takes hold.
At the same time as the sale was announced, Alesco has indicated there will be a number of redundancies across the group. This will lower Alesco's cost base by around $3 million per year, which Credit Suisse suggests will come at the same time as efficiency improvements come through.
Given the small size of the Marathon division the sale has little impact on earnings forecasts. Credit Suisse has adjusted FY12 earnings per share (EPS) estimates down by around 7%, but this reflects more conservative volume assumptions with respect to the new home and renovation cycle more than the Marathon sale.
Citi also sees FY12 earnings as being of interest, this given an expectation the year will be a period of two very different halves. The first half is likely to be a period of consolidation for 'Project Restore' and a time of solid demand with respect to housing completions and rebuilding in Queensland.
The second half of FY12 will be the opposite in Citi's view, as while completions and demand should be showing signs of moderating, 'Project Restore' should be gaining much greater traction with respect to group earnings.
Credit Suisse is now forecasting EPS of 26.2c in FY11 and 35c in FY12, which compares to consensus forecasts according to the FNArena database of 27.1c and 35.2c respectively. The consensus price target for Alesco is now $3.56, up from $3.51 previously.
The sale of the Marathon operations has not changed the views of any brokers in the FNArena database. This shows five Buy ratings and one Hold, courtesy of UBS. Citi's Buy rating reflects in part the view management at Alesco will be able to transfer what was learned in improving the Garage Door business to other divisions.
Citi also sees value, estimating at current levels Alesco is trading at a 30% discount to historical valuations. Similar arguments are offered by Credit Suisse and RBS Australia, while JP Morgan also expects an operational turnaround from 'Project Restore' to create value relative to current share price levels.
While FNArena database ratings on Alesco are unchanged there has been an upgrade elsewhere, as Goldman Sachs has moved to a Buy recommendation from Hold previously. There are four reasons for this, one being valuation. As well, Goldman Sachs sees scope for Alesco to make bolt-on acquisitions given a stronger balance sheet post the Marathon divestment.
Goldman Sachs is also positive on a turnaround in the Functional and Decorative Products business on the back of a new range launch. Trough-to-peak earnings growth for the division could be as much as $20-$30 million on the numbers of Goldman Sachs.
The other positive is a store rollout program in the Parchem division, with scope for as many as 30 new stores to be added over the next three to five years. This has the potential to add up to 11% to group net profit over the same period on Goldman Sachs forecasts.
To reflect the Marathon sale and the potential drivers of Alesco going forward, Goldman Sachs has lifted its price target by 10% to $4.14. This reflects a reduced discount to the Small Industrials Index given the better quality of Alesco's remaining businesses.
By way of comparison, the highest price target in the FNArena database is $3.74. Shares in Alesco today are stronger and as at 11.05am the stock was up 12c at $3.36. This compares to a trading range over the past 12 months of $2.25 to $3.63 and implies upside of about 10% to the consensus price target in the FNArena database.
