BUILDING products group Alesco Corporation has warned investors to expect an even tougher year ahead with the residential housing market and consumer confidence both expected to weaken further.
In comments which could set the tone for the building materials sector as the companies reporting season kicks off, Alesco's chief executive Peter Boyd said the outlook for the industry was only going to get tougher.
"My sense is that [trading conditions] will be more challenging in 2012 than they were in 2011," he said. "Forecasts around housing completions are to the negative and with consumer confidence levels on the decline that's likely to affect products going into the renovation sector."
The impact of plummeting consumer confidence levels on retail sales has been well-publicised, but the gloom and the fear of possible future interest rate rises has also prompted investors to put off big decisions like home purchases or renovations.
With the impact of government stimulus draining out of the economy, weak housing approvals and stagnant auction clearance rates have prompted analysts at Nomura and RBS to predict the number of new houses being built next year to fall by more than 10 per cent to below 140,000. Housing starts were at 130,000 during the worst of the global financial crisis.
Alesco reported a net profit of $13.6 million, a sharp turnaround from a $124.3 million loss last year, which included significant writedowns on its loss-making water products business.
Alesco has since jettisoned the water division and also sold its Marathon Tyres during the year as Mr Boyd, who took over as chief executive in May last year, persisted with his turnaround plan.
Shares in Alesco yesterday surged 5.6 per cent to $2.84, but have lost about a quarter of their value since the start of the year. Shareholders were lifted by news they receive a 5.5? special dividend from the proceeds of the sold businesses, bringing the company's final dividend to 12.5?.
On a continuing operations basis, Alesco reported a 3 per cent fall in sales to $534.1 million, but earnings before interest and tax rose 9 per cent to $36.5 million, largely on the back of improved margins in its garage doors division, which has benefited from the strong Australian dollar by outsourcing manufacturing to China.
Mr Boyd said Alesco would continue to manage costs and look at small bolt-on acquisitions as a possible way of growing earnings.
But Alesco's loss-making kitchen products business, Parbury, dragged on earnings as it continued to shed market share.
"I've got to say the problem [in Parbury] is bigger than I first anticipated," Mr Boyd said.
Frequently Asked Questions about this Article…
What did Alesco say about the outlook for the building materials sector and the housing market?
Alesco’s chief executive Peter Boyd warned that trading conditions are likely to be tougher in 2012 than in 2011. He said forecasts for housing completions were negative and falling consumer confidence would probably hit products sold into the renovation sector.
How is falling consumer confidence affecting demand for home purchases and renovations?
The article says plunging consumer confidence has led people and investors to postpone big decisions like home purchases or renovations. That weaker demand, together with fading government stimulus, weak housing approvals and stagnant auction clearances, is expected to reduce sales of building products.
What were Alesco’s recent financial results and how do they compare to last year?
Alesco reported a net profit of $13.6 million, a sharp turnaround from a $124.3 million loss the prior year (which included large writedowns on its water products business). On a continuing operations basis, sales fell about 3% to $534.1 million while earnings before interest and tax (EBIT) rose 9% to $36.5 million.
Which Alesco divisions helped drive improved earnings and why?
Improved margins in Alesco’s garage doors division helped lift EBIT. The garage doors business benefited from outsourcing manufacturing to China, a move that was aided by a strong Australian dollar.
What restructuring and disposals has Alesco completed, and how did shareholders benefit?
Alesco jettisoned its loss-making water division and sold Marathon Tyres during the year as part of a turnaround plan. Proceeds funded a 5.5% special dividend, bringing the company’s final dividend to 12.5%, which helped lift shareholder sentiment.
How did the market react to Alesco’s results and dividend news?
Shares in Alesco surged about 5.6% to $2.84 after the results and special dividend announcement. However, the stock had still lost roughly a quarter of its value since the start of the year.
Are there still problem areas in Alesco’s business investors should watch?
Yes. Alesco’s kitchen products business, Parbury, remained loss-making and continued to lose market share. CEO Peter Boyd said the problem at Parbury was larger than he first expected, indicating it’s an area to monitor.
What are analysts saying about new home construction and why does that matter to investors in building-product companies?
Analysts at Nomura and RBS were predicting new house builds could fall by more than 10% to below 140,000 next year. For investors, fewer housing starts generally mean lower demand for building materials and renovation products, which can pressure revenues and margins for companies in the sector.
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