Here's a company offering a yield over 9% IF it can be maintained -- and the company says it can.
It goes without saying that it's not a good time to be a building products supplier. As people and businesses feel fearful about the future, they of course preserve cash, so any non-essential work is deferred. When your house is going up in value by £800 a week, and commercial property is the hottest of sectors, such considerations are mere trifles it seems. Borrow a bit more against it and get the roof sorted out. Not any more.
Massive profit drop
It came as no great surprise, then, that the full-year results to the end of June for FTSE Fledgling constituent Alumasc (LSE: ALU) were disappointing. In fact, the company reported an 82% drop in pre-tax profit as lower construction activity and weak markets hit demand for its specialist products. Turnover fell from £125.8m to £109.1m.
Almost three-quarters of the group's sales come from its building products division made up of nine separate companies around the UK, making products such as solar shades, drainage products and environmentally-friendly roofing. And as you might expect, the last year wasn't a good one as fewer office blocks and the like got built.
Nevertheless, the company told us that revenues were healthy until the final quarter (April-June) and that infrastructure and public sector construction projects remained robust. But the problems caused by lower revenues were compounded by adverse currency exchange movements which caused imported products to be more expensive to the tune of £1.1m. Things were generally worse, pro-rata, for the company's engineering products division
Not all bad
But it wasn't all bad news. What gave investors a lot of cheer was that Alumasc maintained the final dividend despite the massive fall in profits. This is either sheer recklessness (the dividend is barely covered by earnings) or it speaks of confidence in the future. On a glass half full basis, it looks to me like it could be the latter, so for income seekers, Alumasc could be a good bet.
The boss said that holding the dividend at 6.75p, giving a total for the year of 10p (representing a yield of 9.3% at the mid price of 107.5p), showed "great confidence in the company's position to exit the recession strongly". The pay-out is covered only once over by underlying earnings, though diluted earnings per share fell from 20.2p to 2.9p for the year.
Growth areas
Also, the headline fall in profit was worse than the reality. Before impairment charges and restructuring costs the pre-tax profit figure was £5.2m; not a bad performance at all given the UK's economic woes. And Alumasc is positive about its move towards sustainable products, sales of which held up during the year.
Longer term, the company expects environmentally sustainable products and energy-saving building materials to give earnings a sustained boost. Meanwhile, it expects a better year at its precision engineering unit where cost cutting, new management and contract wins with Caterpillar and Aston Martin will help earnings.
The shares have doubled since the turn of the year despite the setback caused by the less than sparkling results. At 107.5p, though, they're still a long way off their highs -- and the group is valued at less than £39m, with net assets of almost £31m. The broker has earnings of 11.7p pencilled in for 2011 and expects the 10p dividend to be maintained.
Income and growth
It'll take a while, but things will pick up for the likes of Alumasc. And this bears the hallmarks of a sensibly run company that is very aware of the needs of its shareholders, as demonstrated by its maintenance of the dividend. This is a rarity indeed these days, particularly in such a small company.
It's far more common in these troubled times for small shareholders in small companies to feel like an unwelcome thorn in the side of directors and large shareholders more intent on feathering their own nests. This is a comfort for Alumasc shareholders who look set to benefit from a combination of income and capital growth over the long term.
More share ideas from David Holding:
