Australia | Mar 13 2012
– Alesco sells its Decorative Surfaces division
– Outcome viewed positively by brokers
– Outlook for remaining businesses remains difficult
By Chris Shaw
As part of its 'Project Restore' program, Alesco Corporation ((ALS)) has announced the sale of its most challenged division, Parbury Decorative Surfaces and Appliances, for $4 million. Completion of the deal is due on April 2.
The sale is a highly positive outcome in the view of Moelis, as the Decorative Surfaces division has been well behind other divisions in terms of the efficiency improvement program and was both losing market share to competitors and money at the rate of $4.7 million in earnings before interest and tax (EBIT) in 1H12.
A tough macro environment was not helping the division, as Moelis notes margins in the division declined in 1H12 to 5.6% from 8.8% in the previous corresponding period. Moelis suggests this was a reflection of negative operating leverage, some one-off expenses and losses in market share.
While the disposal is a positive, there will be a financial impact. As Citi notes, Alesco will record a $10-$12 million significant item, a $12.7 million non-cash impairment charge and a $6.8 million trading loss.
On the plus side Citi sees the deal as improving management focus, group EBIT margins, internal capital allocation and group strategy perspectives. Remaining businesses are deemed as 'core' operations, so no other material divestments are expected.
RBS Australia notes a resetting of Alesco's earnings base means investor focus should return to cyclical issues and these have become more negative for FY13. This means macro indicators will need to improve for the stock to undergo a re-rating in the market.
If the Decorative Surfaces business is taken out of Alesco, the group should generate EBIT of $20 million FY12 on Moelis's numbers. Assuming a 55/45 split in earnings between 1H/2H, this implies full year EBIT of around $36 million ex the latest sale.
The sale of Decorative Surfaces has seen brokers adjust earnings expectations for Alesco, with Moelis trimming its estimates for FY12 but lifting its numbers for FY13 and FY14 by 14% each. Macquarie in contrast has lifted its FY12 earnings per share (EPS) forecast by 8%, while also increasing its FY13 number by 19%.
Consensus EPS forecasts according to the FNArena database now stand at 18c for FY12 and 24.5c for FY13, while Moelis, which is not in the database, is forecasting EPS of 13.9c and 21.8c respectively.
Price targets have also been increased, RBS lifting its target to $1.48 from $1.20, Macquarie to $1.58 from $1.35 and Citi to $1.80 from $1.54. The consensus target according to the FNArena database is now $1.63. up from $1.56. Moelis has a target for Alesco of $1.75.
Ahead of the realising of full Project Restore benefits and given an undemanding valuation following recent share price weakness, Moelis has upgraded Alesco to a Buy on valuation grounds. Some in the market are similarly positive, as both Citi and Credit Suisse also have Buy ratings on the stock.
But the counter argument is operating conditions in Alesco's core markets remain very difficult, something Macquarie suggests will make it tough to engineer a turnaround in the group's remaining businesses and in particular the Cabinet and Window Products division. Given this Macquarie retains a Hold rating on Alesco, one matched by RBS Australia and JP Morgan.
Shares in Alesco today are higher and as at 10.35am the stock was 4.5c higher at $1.52. This compares to a trading range over the past year of $0.995 to $3.37. The current share price implies upside of around 10% relative to the consensus price target in the FNArena database.
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