Alesco A Harbinger Of Other Woes?

Sydney, Sep 18, 2008 (ABN Newswire) - Probably, because it had one of the earliest annual meetings this year because of its May 31 balance date, building and industrial products distributor Alesco, copped a caning when it 'fessed up at Tuesday's AGM to expectations of a first half slump in earnings.

The company's chairman, Sean Wareing told the meeting that the board expected a 15% to 20% drop in first half 2009 earnings but claimed the second half will improve with "aggressive cost reductions".

From the sharp fall in the share price Tuesday afternoon (down $1.01 on the day) and another 3.4%, or 20 cent drop yesterday, to $5.70, the market doesn't believe the second part of the statement and took fright at the first part.

But seeing Alesco had described the coming year as "challenging" in its 2008 profit announcement and outlook earlier in the year and warned that matching the record result for the 2008 year to May would be also be "challenging", the downgrade shouldn't have come as much of a shock.

Just how 'challenging' we learned at the AGM with this prepared statement from the chairman.

"Speaking ahead of today's Annual General Meeting, Alesco Chairman Mr Sean Wareing said volatile and uncertain market conditions had made it difficult to predict with any accuracy the company's full-year FY2009 earnings outcome.

"Market conditions remain extremely challenging and the softening of demand that we saw in the latter period of FY2008 has continued in the first quarter of FY2009," said Mr Wareing.
"Based on an anticipated continuation of the softness experienced in the first quarter, we expect that the trading EBITA for the first-half ending 30 November is likely to be down from the prior corresponding period in the range of 15% to 20%. 
"This is likely to result in earnings per share before amortisation and significant items being down from the prior corresponding period by 30%-35%, reflecting higher interest costs driven by the tougher credit markets, an anticipated increase in our effective tax rate and the dilutionary full period impact of 2007's capital raising.

"We are, however, expecting an improved result in the second half of FY2009 as a result of aggressive cost reductions and the specific operational initiatives being undertaken across the businesses. However, without a significant improvement in the trading environment, Alesco will be unable to match FY2008's trading EBITA result for the full year.

"While the FY2009 outlook is subdued, the Board remains confident about the future of Alesco. Alesco continues to generate strong cashflows and remains in a strong financial position. In accordance with the introduction of an annually progressive dividend policy, it is the Board's intention to at least maintain the annual rate of dividend," Mr Wareing said.

From what a couple of leading analysts wrote to clients yesterday, there's still some doubt as to just how well the company will go in 2009 as a whole.

There seems to be some scepticism about its performance, and those of other small and medium sized industrials servicing the building, renovation and allied sectors, plus the broader manufacturing generally.

However, higher input costs and fuel prices are continuing to be incurred across the group, according to the chairman.

Mr Wareing revealed that the company was also battling higher operating costs, on top of slackening demand, while New Zealand was a real concern.

"Higher input costs and fuel prices are continuing to be incurred across the Group, with freight costs approximately $6 million higher on an annual basis than a year ago. Recovering these higher costs is becoming increasingly difficult in an environment where demand is already soft.

"In addition, our New Zealand businesses are feeling the full impact of an economic recession," he added

CEO Justin Ryan said "Of particular concern is the current poor state of trading in New Zealand."

"In this context, Lincoln Sentry is closing its New Zealand operations and B&D is in consultation with employees to further restructure the manufacturing operations of its New Zealand door business.

"In Australia, Marathon Tyres is closing its wholesale Hankook tyre business in an orderly fashion over the next few months.

"This will stand us in good stead when the economy recovers."

Alesco will "at least" maintain its annual dividend. It did not comment on the interim distribution.

Alesco paid a fully-franked dividend of 67 cents a share for 2007-08, up 5.5% on the previous year. (Alesco reports its full-year to May 31 and its half-year to November 30).

Alesco's share price has fallen some 60 per cent from a high of $14.85 in June 2007, to yesterday's close of $5.70.

Alesco described it itself as managing "a portfolio of leading industrial brands operating in the building and renovations, scientific and medical, construction and mining and water management markets."

So what did the brokers say about Alesco yesterday?

Well, Goldman Sachs JBWere said the commentary from the company and chairman "bodes poorly for other housing-related stocks which have yet to provide FY09 guidance and whose AGMs will be held in the next month (eg. GWT). We expect consensus forecasts for GWT for FY09 are at least 10% too high.

"Given: 1) the ongoing negative earnings momentum; 2) lack of visibility to earnings and underlying operational performance; 3) evidence of some structural difficulties; and 4) lower housing-related earnings exposure; we believe ALS continues to be a high-risk, low-return way of playing the housing recovery. Despite the investment fundamentals appearing attractive, the stock may continue to be a value trap. GWT and CRG remain our preferred housing stock exposures, although we note we need consensus forecasts for GWT to downgrade by >10% before we would consider recommending the stock as a Buy.

JP Morgan was a bit tougher:

"The consistent earnings growth achieved by ALS over the past decade appears likely to come to an abrupt halt in FY09. Trading conditions have deteriorated significantly in recent months and costs have continued to rise, causing the company to state that it will be unlikely to grow trading EBITA at all during FY09, despite 'aggressive' cost reductions and an extra two months of the Water division.

We have reduced our normalised EPS estimates by 17% in FY09 and by 10% in both FY10 and FY11. We have retained an Overweight recommendation for the principal reason that ALS's new 'annually progressive' dividend policy means that a 67cps payout is largely assured, implying a fully franked FY09E yield of 11.4%.

"At this stage, we have no reason to believe ALS will be unable to meet this dividend. At the heart of ALS's problems is cost escalation across much of its business, particularly where fuel and steel form a significant component of the cost base.

"This margin squeeze is exacerbated by the effects of declining consumer and business spending and a stagnant housing market in parts of Australia and New Zealand. 

"Something has to change at ALS. It remains to be seen whether the cost cutting initiatives announced today will be sufficient to get the company back on its growth trajectory. Perhaps more is required."


 

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