Buy high-income Alumasc

The weak market sentiment towards Alumasc suggested by the lowly rating is perhaps most obviously linked to the difficulties faced by its small lossmaking precision engineering unit. Reduced spending by original equipment manufacturers on its die castings has hurt this division for the past couple of years. But management has finally decided to sell the business. And by selling this weaker operation, Alumasc will have more funds to invest in its fast-growing and increasingly lucrative building products division.

While sustainable rainwater, drainage and solar shading products may not sound very glamorous, orders for such items increased by almost a third to £48.9m in the final six months of 2014. Indeed, the strength of the building products business meant that last year the group delivered its best interim performance since 2008. Underlying operating profits in the building products business increased by 22 per cent to £4.6m in the half-year to the end of December 2014 and operating margins were up by 10 per cent to 10.1 per cent. These impressive figures were in stark contrast to the operating loss posted by the precision engineering division, which makes management's plans to sell the struggling unit all the more appealing.

Alumasc's low valuation should appear increasingly unjustifiable if the precision engineering business is sold off, particularly when factoring in the improving outlook for the construction market. Research firm Experian forecasts that UK construction output will rise by 6 per cent in 2015 and is likely to continue growing over the next four years. That bodes well given Alumasc's track record of outperforming UK construction output growth.

Alumasc is a huge beneficiary of growing momentum in the UK new-build market, where its environmentally friendly rainwater and drainage products are in hot demand, which is partly due to increased environmental regulation. Indeed, demand has been so strong for rainwater drainage recently that the business has faced some capacity constraints. Orders are likely to keep ticking up for the group's specialist insulation products, too, particularly as they tie in with the government's community energy savings programme. Likewise, Alumasc's solar shading systems are a beneficiary of this legislation, as by shielding glass buildings from direct sunlight they reduce the need for air conditioning.

Management wants to use some of the cash it has been making, together with proceeds from any sale of the precision engineering business, to fund further product acquisitions. But first it plans to continue reducing net debt given its ballooning pension liability. A fall in gilt yields has now driven Alumasc's pension deficit up to £21.4m, with annual cash pension costs, including pension scheme running expenses, of about £3m.