When Cookson demerged its performance materials business Alent (ALNT) at the end of 2012, most expected its share price would easily outperform Vesuvius (VSVS), the more cyclical steel-focused division it left behind. Wrong. Vesuvius has outperformed its "sexier" ex by 40 per cent since, and last week we made the case for selling its shares, largely on valuation grounds. Alent, meanwhile, enjoys superior growth prospects, a lowly valuation and takeover potential. No wonder directors are buying.
- Double-digit EPS growth expected
- Trades at discount to peers
- Self-help opportunities
- Possible takeover target
- Director share buying
- Weak third quarter
- Limited order visibility
Alent's full-year results, due out on 4 March, are likely to reveal flat sales, excluding revenue from metals passed through to customers. This disappointing result was flagged up in November when the group reported that a dip in demand from consumer electronics customers had dented third-quarter numbers. It sold less solder paste used in printed circuit boards (PCBs) for personal computers, and the shift to more modern PCB construction methods is reducing the need for the company's bar solder.
But, crucially, Alent is taking action and is at the forefront of the switch to modern, higher-margin products. And, according to analysts at Credit Suisse, Alent will ramp up earnings per share by 12 per cent this year and by 20 per cent in 2015. Admittedly, that's ahead of consensus forecasts, but we believe there are a number of very good reasons why this is achievable.
Firstly, the long-term fundamental drivers of the business remain intact. Consultancy Prismark Partners predicts a global electronics market will see a compound annual growth rate of over 5 per cent between 2011 and 2016. But Alent does much of its work for Apple, Samsung, HP and LG in the smartphone and tablet markets, tipped by researcher Gartner to grow at 24 per cent and 41 per cent, respectively.
It's likely that the European automotive industry will pick up this year, too. Alent's surface chemistries division already supplies coatings which prevent engine parts from rusting and protect decorative plastic trim. Meanwhile, work for high-end manufacturers has shielded it from the worst of the downturn.
ALENT (ALNT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 310p | MARKET VALUE: | £863m | |
| TOUCH: | 309-310p | 12-MONTH HIGH: | 413p | LOW: 298p |
| FORWARD DIVIDEND YIELD: | 3.6% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 112p* | NET DEBT: | 40% | |
| *Includes intangible assets of £309m, or 111p per share | ||||
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 433 | 87.1 | 24.1 | na |
| 2012 | 417 | 89 | 24.5 | 5.50 |
| 2013** | 423 | 88 | 24.4 | 7.10 |
| 2014** | 441 | 104 | 27.3 | 9.54 |
| 2015** | 469 | 123 | 32.8 | 11.3 |
| % change | +6 | +18 | +18 | +18 |
Normal market size: 3,500 Matched bargain trading Beta:0.9 **Credit Suisse estimates, adjusted PBT and EPS figures | ||||
Self-help should also aid growth. Action to "right size" the manufacturing operations, especially in Asia and Europe, could increase utilisation rates from 50 per cent to 60 per cent and boost cash profit margin by 200 basis points within a couple of years, says Credit Suisse. Further cost-cutting will help returns, too, and improve gearing to any market recovery.
Despite its obvious merits, a PE ratio of 12 for 2014 is a 23 per cent discount to peers, and an enterprise-value-to-forecast-cash-profits ratio of 9.2 looks low. In fact, Alent shares rank among the cheapest chemical plays in Europe on either multiple. And with the shares at these levels, there is bid potential. Merck is paying a hefty 20 times earnings peer AZ Electronic Materials (AZEM), and MacDermid, a surface chemistries business, has been sold for 11 times historic cash profits. Goldman Sachs includes Alent among a number of "strategic assets in attractive industries" - it even includes a 20 per cent M&A premium in its price target of 400p.
Clearly, management is confident - directors acquired £130,000 of the shares after the November update - and they'll be kept on their toes by Swedish hedge fund and activist shareholder Cevian, which bought another 5.3m shares, increasing its stake built up during the Cookson days to almost 22 per cent.
