Alesco sale will boost bottom line, eventually

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.