16 March 2021: Taylor Collison - Capral Limited (CAA) OUTPERFORM
Strong Momentum with Tailwinds to Continue
Analyst: Campbell Rawson
Summary
Market Capitalisation: $108.0m
Share price: $6.50
52-week low: $2.34
52-week high: $7.10
Our View
Capral upgraded guidance three times in the last two months of FY20 highlighting the operating leverage that exists and subsequent earnings momentum. A leaner cost base and volume growth (leading to 100% utilisation) saw Trading EBITDA land at $19.7m, well above the $14-$16m guidance range still in place in early October. We understand near 100% utilisation to have continued for the first two months of FY21 with current and future volume being underpinned by government stimuli, import replacement, Australian-made sentiment and the beginning of housing market growth. CAA has taken market share from importers and the recent acquisition of an extrusion plant in Smithfield, NSW has provided opportunity to take further share within Australia. The above tailwinds are offset by a rising LME Aluminium price (short-term margin impact) and a rising AUD (makes CAA less competitive vs imports). FY21 Trading EBITDA guidance of $21- $23m was provided and we believe it may prove to be light, particularly given the current trading environment and our expectation of a prolonged period of import replacement volume due to supply chain disruptions. Despite the strong trading performance and market/company-specific tailwinds, CAA’s valuation is yet to re-rate. Historically liquidity has been an issue for institutional investors however we see this as less relevant following the recent restructure of Bremer Park which has ensured CAA remains profitable even at the bottom of the cycle. When coupled with managements desire to consolidate the industry and the continued focus on anti-dumping laws to further control capacity, we believe trading the cycles is less important now as earnings fluctuations are likely to be less volatile. With no debt, $50m cash, a 9.2% forecast dividend yield and trading on 2.9x FY21E EV/EBITDA we believe CAA is too attractive for investors to ignore.
Key Points
Strong result fuelled by restructure and volume growth
CAA delivered FY20 trading EBITDA of $19.7m, up 79% on pcp with H2 providing $13.9m. Total cost savings of $8m from the restructure of Bremer Park have now been achieved with $5m contributing incrementally to the FY20 result. Full year volume growth of 7.6% was also pivotal to earnings with 14% growth in H2 as CAA benefitted from a decline in imported product due to Covid-19 related supply chain congestion. Container/ship availability is forecasted to remain limited for at least the next six months and we expect CAA volumes to continue to benefit through FY21. The increase and continuing trend in ‘import replacement’ volume is significant as customers who previously were focused solely on price are now seeing the benefits of CAA’s timely supply and superior service. We see this as an important differentiator and believe a meaningful portion of customers will be retained even as imported product reverts to its normal discount and availability.
Positive anti-dumping outcomes coupled with end markets improving
CAA is mainly exposed to detached and low-rise residential dwellings which are now forecast to grow at mid-to-high single digits through 2021. To date, only WA growth has been felt and when coupled with pending government infrastructure projects, we see a platform for consistently strong volumes even when import replacement abates. Recent anti-dumping outcomes have been positive with current measures extended five years on Chinese importers and some Malaysian exporters now receiving preliminary duties. This has helped CAA to gain meaningful exposure to Australia’s $60m (and growing) solar rail market and with supply agreements in place with the nation’s largest distributor, industrial volumes are further underpinned.
