16-Nov-2020:  Taylor Collison: Capral Ltd (CAA): Initiating Coverage - Outperform

Analyst:  CAMPBELL RAWSON, crawson@taylorcollison.com.au  +61 415 146 725  www.taylorcollison.com.au

• Market Capitalisation: $84.5m
• Share price: $5.10
• 52 week low: $2.34
• 52 week high: $5.25
• TC's Recommendation: Outperform
• TC's Valuation: $7.40-$8.00 (see below)

Our View

Capral operates in a difficult industry with competition from low-cost, imported product placing pressure on volume and price. The Anti-dumping commission continues to investigate importers and is slowly but gradually ramping up measures on offenders. Despite being a low-margin manufacturing and distribution company, Capral is in a strong position with a low cost base, 25%+ market share and the only national network of production and distribution facilities. A restructure at the largest plant, Bremer Park, has removed a cost burden from the business and now ensures profitability, even at the bottom of the current housing and economic cycle. Current government housing and infrastructure stimulus is underpinning steady volume recovery with CAA’s manufacturing plants currently operating at full available capacity. Any increase to import duties or consolidation within the aluminium extrusion industry will likely disproportionately benefit Capral. With no debt, trading at a 45%-57% discount to our valuation and a 7.4% forecast dividend yield, we are attracted to Capral on valuation grounds.

Key Points

• Attractive valuation and no debt
  • CAA trades at a 55% discount to global listed aluminium extrusion peers with the discount widening to 65% when compared with peers who also operate a distribution network. Whilst all the peers are far bigger due to operating in much larger markets, CAA shares the trait with many of easily being the largest player in their market. Customer switching costs are not insignificant and help underpin CAA’s competitive position. With 50-55% of CAA’s production flowing directly into residential and commercial construction, we have compared valuation with Australasian building products suppliers and also found a ~65% discount. A notable difference in all the comparisons is CAA’s lower EBITDA margin and subsequently we have attributed a 15-25% discount to peers as an appropriate current valuation. This implies an EV/EBITDA multiple of 5.0-5.5x and a share price of $7.40-$8.00. We see this valuation as attractive given no debt obligation and a lower earnings risk profile with significant cost removed from operations.
• Dominant market position
  • CAA accounts for a third of Australia’s aluminium extrusion capacity with more than double the capacity of its nearest competitor. Although market excess capacity of 20%+ exists currently (bottom of housing cycle), CAA is well positioned relative to competitors having recently completed a restructure of the largest plant, Bremer Park, resulting in $8m of cost savings p.a. CAA’s size and lack of debt provides opportunity to consolidate the market with downturns expected to create financial stress for competitors. Meaningful market share gains are likely should the Australian government lift duties on low-cost importers out of Asia.
• Greatest risk remains the influence of low-cost imported product
  • For over a decade, aluminium importers from China have faced duties on excess import volumes into Australia. With many of these offenders receiving various forms of subsidies from the Chinese government, incentive remains to find ways around Australia’s current anti-dumping laws. Duties currently cap out at 60% and whilst they have helped stem market share growth of importers, eradication of dumping is a long way off. We look to the USA where duties are as high as 400% and import market share fell from 20% to <1% in five years. Until the Australian government ramps up duties further, the disturbance to volume and pricing from dumping provides the greatest risk to CAA earnings.

--- click on the link above for the full TC report on CAA ---   [I do NOT hold CAA shares.]