Alumasc – The market does not always do just as you hoped

Good news is announced and after a quick price lift the company’s shares can then fall swiftly, which makes you question your own reactions.

Of course, you have to remember the old market adage – buy on the rumour and sell on the fact. It can be so accurate − annoyingly so.

But then that is what markets are all about – the ability to take advantage of opportunities, whether you are buying or selling. There are always players watching on the sidelines, ready to pounce.

And it is most important to remember that prices can go up and down.

Equally as important is the advice to always do your own research and await the right moment for taking any opportunity. Being armed with your research and knowledge gives you that edge over others in the market. Just how you seize your opportunities depends on whether you are a short, medium or longer-term investor.

Is this water engineer a liquid opportunity?

Here is an opportunity to buy some ‘cheap stock’ in an old favourite of mine – Alumasc (LON:ALU).

I have highlighted this company several times over the last seventeen months, profiling it in February last year when at 116p and then again, in the depths of the pandemic, four months later, at 80p.

At the beginning of July this year, the shares touched a 288p high.

On Monday of last week, they were trading at 258p and then started sliding away to a week’s low of 210p. I just could not identify the reason why.

So, I did my homework again and renewed my view that this group’s shares are looking very cheap, following the easing back last week.

From the 210p depths on Thursday night, the group’s shares ended the week at 230p on the back of nearly 120,000 shares traded, which is almost 50% more than the recent daily average.

It is now your opportunity to top up your holdings if you already have them in your portfolios – and if not, now could be the right time to ‘jump aboard’ ahead of the group’s final accounts being released in just under a month’s time.

Alumasc Group, which is based in Kettering, designs, manufactures and sells building products, systems and solutions in the UK (85.3% of sales), Europe (5.5%), North America (4.2%), the Middle East (1.49%), the Far East (1.59%) and elsewhere internationally (1%). It employs over 450 people.

All of the group’s businesses have strong brands and positions in their individual specialist markets.

Alumasc has a long-standing heritage of excellence in the manufacture and supply of a variety of products, dating back to the middle of the twentieth century.

It supplies integrated roofing and walling solutions, including solar shading; architectural screening; and balcony and balustrading systems.

It also provides water-management solutions to manage and attenuate water, as well as a range of other premium housebuilding products.

Group brands include Timloc, Roof-Pro, SKYLINE, Harmer, Wade, Gatic and Levolux. Its subsidiaries include Alumasc Building Products, Timloc Building Products and Wade International.

Trading Performance

Last year, to end June 2020, the water-management side of the business represented 44% of sales, its building-envelope side was 43.7% and housebuilding products 11.9%.

Almost 80% of the group’s sales are driven by building regulations and specifications, and come from architects and structural engineers because of the performance characteristics its products and services offer.

Over 90% of the group’s sales relate to one or more long-term strategic growth drivers, such as energy management, water management or bespoke architectural solutions or are just due to the ease of construction, including off-site construction.

The group’s three main strategic objectives are to grow its revenues at a faster rate than the UK construction market; to improve its operating margins to enable it to grow profit faster than its revenue; and to generate superior financial returns for its shareholders. These objectives are being leveraged through the growth in the group’s export sales.

In the middle of July, the group declared a trading update, commenting on the strong finish to the end June 2021 year. It said that: “As a result, revenue for the year is now expected to be approximately £90m, some 18% above the previous year, with underlying profit before tax for the year ahead of the board’s previous expectations.” The group’s shares hit 288p in reaction.

“Alumasc’s cost savings programme, liquidity management, strong balance sheet and improved commercial positioning underpin a robust platform that is well positioned to benefit from the long-term growth drivers in our market.”

Checking the forecast

Analyst David Buxton, research director at brokers finnCap, was impressed, concluding that momentum remained strong as the group went into the new year at the start of last month: “Alumasc’s cost savings programme, liquidity management, strong balance sheet and improved commercial positioning underpin a robust platform that is well positioned to benefit from the long-term growth drivers in our market.”

Buxton raised his various estimates for last year and this current year – going for £90m (£76m) of sales and profits of £10.5m (£3.7m), worth 23.5p in earnings per share (8.2p) for 2021 and then a modest £97m of revenue for this year, with profits of £10.8m, giving earnings of 24.1p per share. Buxton goes for a 7.5p dividend for 2021, then 8p this year. He raised his price objective from 262p to 315p.

Comparing 10 similar companies in the building products sector, including Marshall, Ibstock, Epwin, Norcros, Kingspan and Polypipe, it becomes apparent that Alumasc, at just 230p, is trading well below the average ratings.

It seems that around 18.2 times price earnings for last year, then 15.3 times in the current year come out as the mid-values. On Buxton’s estimates that would put its shares on a sector-average rating of 423p for 2021 and 370p for this year. But taking a more cautious view would see the Alumasc share price range between 325p and 350p based on the finnCap estimates.

I would guess, at this early stage, that within the next six weeks or so such profit targets will be heightened in line with the current, booming, building-products market.

In my view, now is the time to either top up your holdings or buy the group’s shares before the final accounts are released on Tuesday 7 September.

This is your opportunity.

(Profile 13.02.20 at 116p set a target price of 145p*)

(Profile 08.06.20 at 80p set a target price of 105p*)