ALESCO CORP
THE sale of building materials outfit Alesco Corp's (ALS) Decorative Surfaces business for $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 the 2012 full year. Given ALS is only forecast to earn $25 million for the period, this is effectively a 28 per cent upgrade to EBIT for 2013, all else remaining equal.
The 2012 full-year accounts will look terrible, with the company taking a hit on the book value of the Decorative division, but it will make 2013 earnings look a lot better. If, in addition, there is a slight pick-up in the residential building market, then it is conceivable ALS could earn a net profit of $20 million and EBIT of $35 million in 2013. This would put it on a price-earnings ratio of about 7.5 times, which makes it attractive at the bottom of the cycle.
HARVEY NORMAN
IS HARVEY Norman (HVN) a deep-value buy or a value trap? The net tangible assets, predominantly real estate, are valued at $2.30 a share while the shares are limping along at $1.95 each. Deep-value investors argue that you would get the retail business free if the property assets were sold and the money handed back to shareholders.
The other big hidden asset is about $600 million of franking credits that would allow the group to pay a fully franked dividend of about $1.5 billion.
The decision on how to realise value rests with 50 per cent shareholder and founder Gerry Harvey. Harvey has always been dismissive of selling the property and trying to pay the franking credits out. But with structural and cyclical change in the retail market, it could be that Harvey is starting to think about how to realise some of the deep value.
For the moment, Harvey and his team will concentrate on trying to improve operational performance rather than capital management. Changes will see electronics and computers receive reduced floor space, replaced by white goods and beds.
If the operational overhaul fails to deliver value, Harvey has indicated he might have to look at releasing some of the value that sits in the company.
ACRUX
INVESTORS who got into drug delivery group Acrux (ACR) a few years back have watched their investments double.
Unlike most life-science plays, ACR has a product in the market and is earning revenue. But what will drive the share price higher from here? A patent extension in the US could be the trigger.
After receiving approval for its Axiron testosterone therapy, ACR signed global company Eli Lilly to distribute the product. Launched in the US in April last year, Axiron has snaffled 13 per cent of the market, and rising. The product treats mainly middle-aged men through a spray or gel that is applied under the arm.
Its major rival, Androgel, which holds more than 60 per cent of the market, has a more invasive application in which the man has to lather the top half of his body in a gel and then sit in isolation for the next hour or so.
The market is about $1.5 billion a year in the US alone and growing.
ACR receives a royalty from Eli Lilly and milestone payments over the life of the drug. The patent in the US runs out in 2017 but ACR is pushing for a nine-year extension.
The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. Ex-fund manager Matthew Kidman is a director of WAM Capital.
Frequently Asked Questions about this Article…
What was the Alesco sale and why does it matter to investors?
Alesco sold its Decorative Surfaces building‑materials business for $4 million. Although the cash price is small, the division had been responsible for a $7 million EBIT loss in 2012, so the sale removes that drag and improves the company’s earnings outlook for 2013 compared with 2012.
How will the Decorative Surfaces sale affect Alesco’s 2012 and 2013 earnings forecasts?
The 2012 full‑year accounts will look worse because of a write‑down on the division’s book value, but removing the $7 million EBIT loss effectively upgrades Alesco’s 2013 EBIT by about 28% versus a forecasted $25 million EBIT for the period. If the residential building market picks up slightly, the company could reach roughly $20 million net profit and $35 million EBIT in 2013.
Does Alesco (ALS) look cheap after the sale and what valuation should investors note?
Based on the scenario in the article (net profit ~$20 million and EBIT ~$35 million for 2013), Alesco would trade on a price‑earnings ratio of about 7.5 times, which the article describes as attractive for a company at the bottom of the cycle. That attractiveness depends on recovery in the residential building market and execution.
What hidden value do Harvey Norman (HVN) shares contain according to the article?
The article notes Harvey Norman’s net tangible assets, largely real estate, are valued at about $2.30 per share while the shares were trading around $1.95, suggesting a potential asset buffer. It also highlights roughly $600 million of franking credits that could, in theory, support a fully franked dividend of about $1.5 billion.
Why might Harvey Norman be a deep‑value buy or a value trap?
It could be a deep‑value buy if the group realised its property and franking credit value for shareholders, but the decision rests largely with 50% shareholder and founder Gerry Harvey, who has historically resisted selling property or paying out franking credits. Structural and cyclical changes in retail mean the company may either unlock value or remain a value trap if operations don’t improve.
What operational changes is Harvey Norman making and what should investors watch?
Harvey Norman is shifting store space away from electronics and computers toward white goods and beds as part of an operational overhaul intended to improve performance. Investors should watch whether these changes materially lift trading and margins; if the overhaul fails to deliver, management has signalled it may consider releasing some of the company’s asset value.
What is driving Acrux’s (ACR) revenues and share performance?
Acrux has a commercial product, Axiron, a testosterone therapy distributed globally by Eli Lilly. Launched in the US, Axiron has captured about 13% of the US market and is growing. Acrux earns royalties and milestone payments from Eli Lilly, and the US market for testosterone therapies is roughly $1.5 billion a year.
What are the main risks for Acrux investors, particularly around Axiron and patents?
A key risk is patent life: Axiron’s US patent runs out in 2017. Acrux is seeking a nine‑year extension, which would materially affect long‑term royalties, but the extension is not guaranteed. Also, the product competes with entrenched rivals like Androgel, which holds more than 60% of the market.
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