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The hanging gardens of Alumasc
Posted on November 16, 2009 by Richard Beddard
Filed Under Companies |
Working hard for pensioners
Alumasc (ALU) might be a customer of Waterman, the engineering contractor I profiled last week.
It’s a a group of companies making building materials for large commercial and public sector property developments, and houses.
It also owns a precision engineering company, and a manufactures taps and other equipment for dispensing drinks in pubs.
About 70% of sales come from building materials, which you might expect to be in deep recession. But its recent annual report shows fairly resilient sales (down about 6%) and operating profits (down about 14%). Management says that’s because all but 10% of its building products improve the environment, they reduce energy consumption and manage rainwater.
This (left), for example, is not a meadow, it’s a close-up of a green roof. From sublime solar shields, to more mundane manhole covers and washroom cubicles, Alumasc companies sell a pretty diverse range of products.
Its claim that ‘sustainable’ building products is a faster growing market than building materials in general, seems to be supported in the segmental analysis of its results. Sales and profits of energy related products, the biggest single category grew, but ‘premium building products’ like scaffolding and interior casings, made a loss (click the chart for a larger version):
Alumasc Precision, its engineering company, also made a loss. Overall, Alumasc’s sales fell 13% and earnings per share, ignoring write offs and redundancy costs mostly on the engineering side fell 37%. It’s still profitable though, and considering it repaid some of its long-term borrowings and reduced the deficit on its defined benefit pension schemes in the year, I think it’s a potential candidate for recovery.
At seven times average earnings over the last ten years, its well inside bargain territory and with an F_Score of six out of nine, it appears to be financially strong. Although it loses points because its profitability has fallen, that’s hardly surprising when three of the four quarters covered by the annual report (October 2008 to June 2009) were recessionary.
My data starts in 1992, and despite booms and busts, the company hasn’t made a loss in that period although it’s significantly changed its mix of businesses. In 2000, the earliest annual report currently available on the company’s site, precision engineering turned over £91m and building products turned over £37m, a split that has since reversed.
As usual, there is room for doubt. Alumasc’s pension obligation is £76m, double the company’s market value. Large final salary pension schemes, while very good for staff, are an unwelcome complication for shareholders because the size of the obligation is not fixed. It swings around unpredictability as salaries, expected returns on the fund that pays the pensions and actuarial calculations of life expectancy, for example, change.
Alumasc’s pension fund is £12.5m smaller than the current calculation of its obligation and it’s paying about £3m a year on top of the normal cost of the pension (about £1.4m this year) to plug the deficit. Although we might expect profits to rise once it has funded its pension, that’s some years away, and there’s always the possibility the obligation could grow.
Alumasc also has £11m in long-term debt, about 13% of total assets or 37% of equity, and these liabilities add up.
Nevertheless, its diversity seems to be a strength. Its Interim Management Statement for the first quarter of 2010 reported stable levels of activity compared to the previous quarter with reduced demand from new commercial building projects mitigated by a modest upturn in new house building. Public Sector projects, and demand for brewing products and precision engineering were stable.
So I’m going to break an unwritten rule, to avoid companies with large pension obligations, and back Alumasc to trade its way through this recession.
Like Waterman, its exchange market size is below the £1,000 I notionally invest in each of Thrifty 30 companies. Also major shareholders, management and institutions, own a sizable chunk of the company, so I’ve checked to make sure that we could in practice buy £1,000 within the spread of 100 to 105p. We can, but only just, at 104.9p.
I’ve added it to the Thrifty 30 portfolio, which you can now find here, on its own permanent page.
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2 Responses to “The hanging gardens of Alumasc”
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Hi Richard, those two links you provided (‘the wisdom of crowds’ and ‘buy and hold at the right time’) are very insightful.
At first I thought a buy and hold strategy that depended on market timing was a bit contradictory. However market timing can be triggered in various ways and market timing using a value trigger is, of course, the obvious way to go. I never thought about it in that way before!
Thanks
Thanks Robin. Dylan Grice is the heir to James Montier at Soc Gen. I must ask to be included on his mailing list!
Regarding timing buys and holding (or indeed buying and selling) using value triggers there are two complications that make it difficult:
1. Sometimes the market doesn’t go to rock bottom valuations so when do you buy? The curse of the value investor is to buy too early (i.e. as soon as shares get cheap, but only to see them get cheaper). That’s why it takes courage, why you can be wrong for long periods before you are right, and why fund managers rarely risk their careers on such decisions!
2. Typically when valuations have sunk to bargain levels, investors have just taken a beating so the may not have the cash to buy.
Nevertheless, in principle, you’re right. I am wondering whether I should keep some of the Thrifty 30 in cash (say 50% when the market looks expensive) for this reason. Graham advocated a 50:50 split between shares and bonds, rising to 75% equities when shares look cheap, and falling to 25% equities when shares look expensive. Simple, but he was obviously timing the market.