Capral's smelly story

Capral is no longer the vertically integrated (does the lot from smelter to retailer) aluminium outfit to which we had become accustomed.

It's quit the laborious, capital- intensive smelting game, focusing all efforts on extrusion, distribution and remelting of scrap. The strategy is an improvement but, unfortunately, there is little that excites us.

Little to excite

To be brutal, smelting is a dog of a business and Capral did well to get out of it. It's tough squeezing out a profit when caught between rising aluminium prices and falling wholesale prices.

The Kurri Kurri smelter, by far its largest asset, was sold off in 2000 for $427m. This was great for the balance sheet after reducing debt by $100m. Shareholders also enjoyed the spoils with a special dividend payment and a $310m share buyback. Unfortunately, that's where the good news ends.

The smelter sale changed Capral's business dynamics, leaving it with a 70% exposure to Australia's residential and commercial building industry. Welcome to the world of business cycles.

Cold welcome

And what a cold welcome it has been, especially after we looked beyond the smoke and mirrors of the $13.5m half-yearly profit, up 41%. It wasn't so crash hot.

After taking away the profits from plant and asset sales, actual business operations just crossed the line with a paltry $0.3m profit, compared to $21.3m the year before. Extrusion (turning metal into building frames, boat propellers, pipes, etc) and distribution contributed $6m but that was almost entirely offset by the remelt scrap division which lost $5.8m, although shareholders did get an eight cent fully-franked dividend.

Even if the building sector can maintain its new-found lustre (and, as we said in our review of Boral, that's unlikely) we don't think Capral is positioned to exploit the opportunity. When most of the other building related stocks have enjoyed a great run this year, Capral has barely moved.

If you're wondering why the share price hasn't fallen further, Ron Brierley of Guiness Peat has increased his shareholding in the company to 27% and while he sees value somewhere, we can't and lack the patience to wait.

Low risk

Due to the asset sale the fundamental risk is low. The share price risk, though, is not. When Capral is already the market leader and operates in a tight margin business, it's difficult to produce great results.

Revenue should get a boost from the newly acquired Queensland 'Supa Screen' security door business and the NSW powder coating business but management has a lot of work to do.

You may be tempted to hold and see what's in Brierley's hand. We, though, are not. SELL.