Aluminium looks good for Billiton

The Investment Column

edited by Sameena Ahmad

After a shy start, shares in Billiton, the base metals company recently demerged from South Africa's Gencor, are gaining confidence. Floated at 220p at the end of July, Billiton's share price closed yesterday at 248p, pushed 6p higher by competent pro forma full-year figures and positive noises from analysts. There are good reasons to keep faith.

In themselves, yesterday's sketchy, unaudited numbers included in Gencor's full year figures to June, were no more than reassuring. Unsurprisingly Billiton beat its own US$330m flotation forecasts, reporting pre-tax profits up 4 per cent to $335m. The 43 per cent jump in aluminium profits, over 45 per cent of the total, to $193m reflected full inclusion of associate Alusaf and the fall in ferro-alloy profits was flagged. Billiton's audited figures, reported on 2 September, will be more meaningful.

The argument too that Billiton's share price will be driven by its imminent inclusion in the FTSE and the need for tracker funds to buy is weak. True, capitalised at over pounds 5bn and with a primary listing in London, Billiton is likely to join the FTSE club, even though 70 per cent of its profits are made in South Africa. UK tracker funds are still short of Billiton's shares, given the strong South African shareholding. But extractive industry stocks represent a small fraction of the total UK stock market - around 1.5 per cent - so fund managers need not rush to buy.

More compelling is to look at base metals prices, particularly when comparing share ratings for Billiton, an aluminium player, with UK rival Rio Tinto, which makes around 40 per cent of its profits from copper. Copper and aluminium prices have been heading in the opposite directions. The price of copper has been steadily falling. With the operating costs of producing copper considerably less than the copper spot price, players have expanded capacity. The pressure on prices is likely to put a brake on Rio's earnings growth.

Aluminium is in better shape. A glut of the metal in the early 1990s hit prices, leading to a cartel of the big players, agreeing to cut capacity.

Enduring caution about oversupply, plus high operating costs relative to the metal's spot price, should keep aluminium prices firm. So will growing demand in US packaging and the automotive, aerospace and building industries - all heavy users of aluminium.

On UBS's numbers, Billiton is currently rated at just over 15 times forward earnings compared to 16.5 times for Rio and 14 times for the extractive sector. A discount to Rio is not inappropriate.

Billiton is a less diversified company and needs to prove itself outside South Africa. But Billiton's management is aggressive and, with proceeds from the float, has the firepower and appetite to diversify. It has already outlined bold expansion plans in the nickel, coal and copper markets. Given that and prospects of faster earnings growth than Rio, Billiton's discount to Rio should narrow. Good value. Kalon, the Yorkshire-based paints group, has been an erratic performer since its merger with Euridep, the French paints subsidiary of Total, two years ago.

Shares in the group have sunk from 160p to barely over 100p towards the end of 1995, before recovering strongly this year.

The price perked up another 9p to 171p yesterday on the back of a 24 per cent increase in first-half profits and news of greater cost cutting at the merged entity.

At the time of the deal Kalon said it anticipated pounds 10m total cost savings. Yesterday it revised that to pounds 23.5m savings by 2000. Most of the additional benefits will come from France as the UK restructure is already completed.

Kalon's performance has been creditable given the unfortunate timing of Euridep, a deal giving Total a 66 per cent holding.

The French economy hit the skids almost as soon as the merger was consummated. Managing director Mike Hennessy estimates the economic downturn in France has knocked pounds 10m off profits with no sign of an upturn.

As France is the group's largest market, Kalon has had to work hard to achieve growth with most benefits coming from cost cutting and in-fill acquisitions.

The hike in interim profits to June to pounds 24.4m was achieved in spite the strong pound. This knocked 10 per cent off sales, but shaved just pounds 1.8m from profits.

Though France remains grim, the UK is showing signs of life. UK sales were 5 per cent down due to the previously announced loss of some private- label contracts.

Sales of decorative paints to DIY sheds such as Sainsbury's Homebase and Do It All rose by 4 per cent. This is the first glimmer of hope in the market for several years.

But the limiting factor for Kalon is that though house prices have risen strongly in the South-east, the relatively low level of housing transactions has kept the lid on sales.

In France margins are ahead but trade volumes have been badly hit by lower government spending.

On the acquisition front, talk of a foray into the US was dismissed by the company yesterday. Kalon is more likely to concentrate on Europe, where it is already the second-largest paints group. Germany, which is the largest paint market in Europe, should be the next target.

On full-year forecasts of pounds 45m, the shares trade on a forward rating of 22 falling to 18 times. High enough.

Time that Marley

homed in

With the housing market and the commercial property sector taking off it is logical to assume that the building material sector should also be booming.

So why then has the materials sector fallen by more than 5 per cent in the last year at a time when the stock market has raced away?

The simple answer is that many of the building suppliers went overseas to try to escape problems at home when the housing market fell into recession in the early 1990s. That was fine while continental European markets were flourishing. But the strong pound and an alarming tail-off in important markets such as Germany has put a real dent in profits.

Marley, which sells everything from roof tiles to plastic drainage and plumbing systems, has been one of the worst casualties. Its shares, which slipped another 5.5p to 109.5p yesterday, have plunged from 140p last October.

However, the fall looks overdone. True, sterling's strength knocked pounds 2.3m off profits in the six months to June and hit exports of flooring products to Germany. Even so, underlying profits rose 11 per cent to pounds 28.8m, ignoring the one-off profit the company made from selling its automotive business last year.

Strong growth in housing starts in Britain, forecast to rise by around 10 per cent this year, is helping Marley's blocks and roof tiles business and it should be able to make price rises of 10 per cent stick this year.

The rate of growth will no doubt slow, but the market looks set fair for the next few years.

Syroco, the US plastic furniture manufacturer bought in 1995, has been a serious disappointment due to an indifferent US retail market.

The episode gives little confidence that Marley, which is on the hunt for more acquisitions, can spend its money wisely.

That said, the recent purchase of Flexco, a US flooring group, looks promising, and the worries are more than reflected in Marley's low rating. Analysts are forecasting full-year profits of pounds 50m, putting the shares on a prospective price/earnings ratio of 11. Good value.

PROMOTED VIDEO
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
filmBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
Arts and Entertainment
Preparations begin for Edinburgh Festival 2014
Edinburgh festivalAll the best shows to see at Edinburgh this year
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Arts and Entertainment
arts + ents
News
Morrissey pictured in 2013
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices