Should you be a supporter of the view that critical metals and manufacturers need to be jealously guarded and supported in Australia for general future security concerns, then Capral Aluminium (CAA) is one small, non-flashy manufacturing company which should command your attention. Plus, it has no analyst coverage, and yet the value on offer is SUBSTANTIAL by almost every metric.   

 Who are they?

 CAPRAL is a long-established, national manufacturer and supplier of aluminium extrusion and rolled products. In fact, they dominate the market with a 27% share and the main competitors (thought to be 4) are privately owned. CAA has open discussions with them about consolidation and it will occur in due course. Aged owners eventually retire.

 It’s a company with a checkered history of substantial tax losses, which is an absolute bonus for shareholders in the present-day business model. No physical tax needs to be paid for at least the CY24 and 25 years and I’ve enjoyed tax free NPBT dividends for at least 5 years – Ned Kelly would have loved investing in Capral, as do I! What’s more, depending upon the tax deductibility validity of the remaining tax losses, this might be extended.

 Yes, CAA is leveraged to the cyclical building and construction industry (particularly detached residential), but not entirely so. In fact, 46% of its revenue is generated from ‘industrial’ (read trucks, ships etc) and this is running very strongly presently.

 Of course, housing & construction must pick up once it shakes its way through the horrors of Covid and materials and labour shortages causing bankruptcy because of the offering of fixed price contracts which has doomed many a builder to a guaranteed loss.  

 The industry expects pick up in CY24 and CY25 after a softer CY23, if for no other reason than placing a roof over the head of all the immigrants here now and coming; so, buying now at the cycle low isn’t a silly investment decision.  

 Why Buy…or not buy?

 ·       The company owns 27% of an essential marketplace (even nationally important) with possibilities of extending this further via acquisition & natural growth. The 3yr CAGR revenue growth is 18% & reported EPS have an average CAGR over 5 years of 24%

·       Fully franked dividends have a 5yr CAGR average of 13%. Presently the likely CY24 ff dividend will be 70c against a share around the $8 mark; that’s a grossed-up return of 12.5%. But, note CY24 is likely to be the last franking year and the company has already begun capital value enhancing measures with an aggressive buy-back program in place.

 ·       The Balance Sheet is strong. At the half yearlies just announced the company had cash of $41m and no debt - having paid off some $24m from strong cash flows in 1HCY23 as they unwound working capital requirements. Plus, the company has unused credit facilities of $49m to fund acquisitions should they arise.

 ·       This strength underpins the aggressive buyback program of 370k shares by CY23 end out of a pool of just 18.05m shares - that’s worth an additional 15c per share. Plus, the buyback provides market price stability for this seriously undervalued company subject to the volatility of small cap companies.

 ·       A CY23 eps – based upon the companies half yearly estimates – will be around $1.66 (that’s the NPBT because no tax, remember) for a PE less than 5x

 ·       The company is exposed to the aluminium industry with its extremely high energy usage at a time of rising prices; not to mention pressure in the cost areas of wages packaging and freight. That said, the company-maintained margin in 1HCY24.

·       The company is well managed and has worked diligently to derisk & diversify the company’s product offerings. It now has a significant industrial division focusing on supplying aluminium for truck & ship build, now some 46% of revenue, as well as the housing and construction industry (42% residential dwellings and 12% commercial).  

·       Of no slight significance is Capral’s ‘approved supplier status’ to major defence contracts and its development of lower carbon emission aluminium options.

·       Presently, both book value and net tangible value per share are around $10.95 and it’s not difficult getting a DCF value of around $15 per share.

 Disclosure: I hold in real life and am a fan, so best you conduct your own analysis but take note, a number of institutions have cottoned onto the value offered here. Specifically self-styled contrarian investors Allan Gray own 21% and there are at least five others starting to build stakes over 5%.    

Capral (CAA) is an old-world company which produces aluminium extrusion; boring, I know, to you ‘tecchies’ who get moist and glaze over on technology disruption. But it is Australia’s leading supplier with 26% of market share and with the capacity to buy more share from the remaining suppliers who are largely private companies owned by boomers who will want to retire and drive the Winnebago around Australia before ascending to whatever exists on the other side. CAA have admitted they are in talks with these people.

Yesterday CAA issued an upward revision to their CY22 results and CY22 will be a cracker. As best as I can determine, eps before tax will be around $1.90 – and before tax is as good as after tax, because this company is in the most unusual situation of having some $240m in tax losses, yet they have some $14.8m in franking credits as at June ‘21.

Sure, CY22 is an extremely upbeat year and CY23 will be more muted, with expectations of residential construction where they derive the majority of their income (think aluminium windows, and frames etc) to come off some 5%.

But for crying out loud, CAA is a stealth bomber flying well under the radar – no analyst coverage and even though the share popped up to $8.95 on the announcement, that’s still a PE of 4.7x

For those wanting an income stream, you can bank on a 70c to 80c fully franked divvy – again that’s not bad as a grossed up divvy of between 11.1% and 12.8%

Morningstar reacted overnight by adjusting the IV from $9.28 to $9.74 – but this is worth north of $10 all day every day, and so says Allan Grey, noted contrarians with ownership of some 20% when they vehemently defended the company from a punt $7 takeover in recent times.

There are two other reasons why CAA – apart from buying market share as discussed above – will be okay going forward:

(1)  The decision of many to return to Aussie manufacturers and end the supply chain lunacy and uncertainty. As chair of a medium sized private manufacturer, I know first- hand the dramas of escalating material prices and freight + the delays in China, on the seas, and most recently, tied up on the wharves in Australia.

(2)  CAA is a leading company fighting anti-dumping, and with considerable success in recent times.     

Another reason to think of CAA as an investible proposition is its strong Balance Sheet; companies with no debt, don’t go broke! In fact, I do believe by the December balance off date, they will have just short of $50m in good old Johnny CASH! As the company presentation states – quote – “Robust Financial Position that Supports Dividends & Reinvestment’. I think even Warren Buffett and his sidekick, Charlie Munger, might be drooling over that statement!  

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.]