Alesco on a roll after disposal

Waiting for a recovery in the residential building materials industry is like waiting for the second coming of Christ. Some have given up hope and others think it will happen but are clueless about the timing.

Waiting for a recovery in the residential building materials industry is like waiting for the second coming of Christ. Some have given up hope and others think it will happen but are clueless about the timing.

That said, an interesting catalyst can be identified at the building materials outfit Alesco Corp, the owner of B&D garage doors. The sale of the group's decorative surfaces business for about $4 million would hardly be worth looking at, but it may prove to be profitable.

The company said the division would be responsible for a $7 million loss in earnings before interest and tax (EBIT) for this year. Given Alesco is only forecast to earn $25 million for the period, this is effectively a 28 per cent upgrade to EBIT for next year, all else remaining equal.

This year's accounts will look terrible, with the company taking a hit on the book value of the decorative surfaces division however, it will make next year's earnings look considerably better. If, in addition, there is a slight pick-up in the residential building market, it is conceivable that Alesco could report a net profit of $20 million and an EBIT figure of $35 million next year. This would put it on a price-earnings ratio of about 7.5 times, which makes it attractive in a bottom of the cycle period.

The sale of the decorative surfaces unit has sparked some interest, with the stock jumping in recent weeks, but the potential is there for further upside.

HIDDEN VALUE

Is Harvey Norman a deep-value buy or a value trap? The net tangible assets, predominantly real estate, are valued at $2.30 a share, while the share price is limping along at $1.95. Deep-value investors argue that you get the retail business for free if the property assets are sold and the money is handed back to shareholders. The other big hidden asset in the company is about $600 million of franking credits that would allow the group to pay a franked dividend of about $1.5 billion.

The decision on how to realise value from the company rests with the founder and 50 per cent shareholder, Gerry Harvey. Harvey has always been dismissive of selling the property and trying to pay the franking credits out. He has been wary of having a landlord to answer to. But with structural and cyclical change at play in the retail market, it is possible Harvey and his board members are starting to look at how to realise some of the deep value in the company.

For the moment, he and his team will concentrate on trying to improve operational performance rather than capital management. The changes will see electronics and computers receive reduced floor space, and they will be replaced by white goods and bedding. This means Harvey Norman will become more of a play on a housing pick-up rather than a general retailer.

If this operational overhaul fails to deliver value, Harvey has indicated he will have to look at releasing some of the value that lies within the company.

BIOTECH STAR

Investing in biotech stocks is a white-knuckle ride. The rare winner delivers enormous returns, and investors who got into the drug delivery group Acrux a few years ago have watched their investments more than double. Unlike most other life science plays, Acrux has a product in the market and is earning revenue. The question now is what will drive the share price higher from here. A patent extension in the US could be the trigger, but first a recap.

After receiving approval for its Axiron testosterone therapy, Acrux signed Eli Lilly to distribute the product. Launched in the US last April, Axiron has grabbed 13 per cent of the market, and this share is rising rapidly. The product treats men, mainly of middle age, for a lack of testosterone through a spray or gel applied under the arm. Its main rival, AndroGel, which has more than 60 per cent of the market, has a more invasive application where the user has to lather the top half of his body using the gel, and then sit in isolation for the next hour or so.

The market for what is usually referred to as "Grumpy Old Man Syndrome" is about $1.5 billion a year in the US alone, and is growing at an increasing rate, hitting 30 per cent this quarter.

Acrux has a market capitalisation of $660 million, and net cash of about $28 million on its balance sheet. The company receives a royalty from Eli Lilly and milestone payments over the life of the drug.

The US patent runs out in 2017. However, the company is pushing for a nine-year extension and hopes to receive some good news soon. If the patent extension fails to materialise, there will be a disappointing response. An extension, however, could easily add more than a dollar to the share price.

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