Capral is Australia’s leading aluminium extrusion business, but these days it is also highly profitable. It has taken considerable time and good management to transform the business into an appealing investment.
CAA is Australia’s leading supplier of aluminium products with approximately 26% market share and annual extrusion capacity of 65,000 tonnes. The company has 6 plants, 8 distribution centres and 12 trade centres providing products for the residential and commercial construction industries.
A bumper year in 2021 resulted in volume increasing 25% to 76,300 tonnes and group revenue of $593 million, up 37% on FY20. The high demand and improved operating conditions delivered improved margins and EBITDA of $59.2 million, 25% ahead of the prior year, helped along by the restructure of the Bremer Park facility. The outcome allowed the Board to pay shareholders a fully franked dividends of 70cps over the year while maintaining a balance sheet with net cash of $50.1 million.
With demand tracking ahead of capacity, a higher level of low valueadd extruded products was imported leaving domestic capacity to produce higher value products.
CAA’s volume in the residential construction market (~47% of volume) is mainly aligned to detached and low-rise dwellings. Both segments rose strongly in 2021 and while the 2022 outlook is for more modest growth, it will still be robust despite rising interest rates.
In the early 2000s, the company invested more than $90 million building a poorly designed manufacturing facility at Bremer Park in Queensland. Two decades of losses, write downs and near bankruptcy in 2009 followed. Current management completed a major restructuring of the facility in 2019 reducing the permanent cost base by $9 million pa. But the benefits go well beyond the cost savings and the big cyclical increase in earnings of the last two years may have caused investors to overlook this factor. Investors may be underestimating the future sustainable earnings of the business as a consequence.
Imports now account for about 30-35% of the market after antidumping legislation was introduced in 2014. This has led to a more stable market.
CAA purchases aluminium billet from five different smelters. Prices are consistent with the last month’s LME average price in USD. About 60% of supply comes from RIO’s Boyne Island smelter in Queensland and CSR’s Tomago smelter in NSW with the rest imported. About 60% of CAA’s sales are hedged while the balance of raw material price changes can be passed through to customers.
Investment view
CAA’s dividend payout ratio of 40% is still low and there is room for further growth in fully franked dividends taking the net yield through 8.6% (gross yield >12%).
The company has enough tax losses that it will not be paying tax for about 10 years and has sufficient franking credits to fully frank the dividend over that time frame.
We think detached housing starts in 2022 will increase by 43%. This will soften our group volume growth to approximately 0.4% in FY22f after 24% growth in FY21.
We think about the business as earning a fixed $/tonne on volumes sold, so the movement in the aluminium price is not an earnings driver although it can affect the top line. Higher aluminium prices contributed 12% to the 37% group revenue growth in FY21.
Risks to investment view
Growth in residential and commercial construction might not be as high as expected. Import volumes might reverse a long and steady decline. Supply chain costs might be higher than expected.
Valuation
Other (mostly) Australian focused building products companies such as Fletcher Building, CSR, GWA Group and ADBRI trade on a median FY22f EV/EBITDA multiple of 6.7x. We apply a 20% discount to this multiple given CAA’s relatively diminutive size which equates to a valuation of $15.80 per share.
Not included in this valuation is approximately $2.50 per share of tax losses and franking credits.
Recommendation
We begin our coverage with a Buy recommendation.
