Saturday, December 4, 2010

Alcom($0.93) - It's time to revert!

Background
Alcom has been in existence for 50 years in local aluminum industry. It has almost one-third of the local market share. After they disposed their extrusion business in 2003 due to persistent losses, now they offer only two main products – sheets & foils and finstocks.

The products/end markets are as follow:

Sheets – construction
Films – cable, food industries, etc
Fin-stocks – air conditioners.

Investment attractions
(1) Below trend P/BV
This stock has fallen enough to be considered good value. P/BV is 0.65 which is a typical valuation at the beginning of economic recovery cycle. The stock can be sold at the extremely low of 0.45X of P/BV (1997/98, 2001, 2008/2009) or extremely high 1.27 P/BV(2004). Typical fair trading range is around P/BV of 0.8 – 0.9X. At this kind of range, potential price recovery will be in the range of $ 1.12 - $ 1.27 (20-36% price appreciation potential, dividend not included).

Note: I prefer P/BV metrics over PE for cyclical stocks.

(2) Consistent dividend paymaster

Despite of very volatile earnings, you can see the company is able to generate strong FCF for the last 10 years. The company has paid almost 120 million dividend over a period of 10 years or average 12 million/year. Almost 2/3 of the dividend was paid in the last 5 years. They managed their capital very carefully to weather through all kind of up and down cycles. A company in 50 years of business certainly has enough experience to manage the economic cycles.



If you punch in the numbers, assuming a flat growth, fair value based on DCF model will be around $ 1.12/share(discounted at 7%). At 3% growth, the fair value will be around $ 1.43. I leave it to you to pick a number based on your risk tolerance though I think 3% growth is very doable(see point 4).

(3) Twin tail winds

During the up cycle, you normally get twin tail winds – improving price will translate into better selling price and higher demand. (See below table how the revenue has grown from 300 mln(FY2005) to 500 mln(FY2008)).That will drive people to go ga ga over its stock price given the right market roasting temperature. Year 2004 was one of them, the stock price doubled by getting way ahead of itself. There is exception though. 2004-2008 cycle was an exception, the stock price was on a long downward slide after the stock price peaked. I have no scientific explanation. It is either kind of reminding us that past performance has no guarantee for future performance. Or Aluminium price has stopped rocketing after the sharp increase and consolidating. After the stock price have gotten depressed for so long, has the spring stored tremendous pent up energy to waiting rocket? The divergence needs to narrow.


(4) Some growth potential

They plan to increase their rolling mill’s production capacity from 35,000 tons to 50,000 tones over a period of 5 years. This will translate into potential 9% growth per year.

I was tempted to make a buy call when it hit around $ 0.80 at P/BV of 0.57 but I was afraid to make a fool of myself in public then. Now that it has shown some strengths of bouncing back, it is still not too late to buy.

Disclosure: The author has long position.

1 comment:

Stock Market Talk said...

Hi,

May i exchange blog with you?

http://stockmarkettalks.blogspot.com/

Thanks