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Date : 25/03/2022

Capral Limited

ASX :

CAA

Market Cap : $149.9 Million

Dividend Per Share : $0.70

Dividend Yield : 8.10 %

Buy

52 Week Range : $5.94 - $9.88

Share Price : $8.60

Capral leads the aluminium distribution market in Australia and also comes with a stellar dividend yield. We recommend a "Buy".

Company Analysis

Capral Limited (ASX: CAA) manufactures, markets, and distributes fabricated and semi-fabricated aluminium products in Australia. Capral is already Australia’s largest extruder and distributor of aluminium products. Capral’s potential for growth is extremely high.

Capral produces a wide range of extruded aluminium products and systems. It distributes those manufactured products in addition to a small number of bought-in products through two distribution channels. The firm supplies to three market segments through each of its distribution channels:

  • Residential – supply of aluminium and other components for windows and doors, showers and wardrobes and security products,
  • Commercial – supply of aluminium and other components for windows and doors, internal fit-outs and other commercial building-related products, and
  • Industrial – supply of aluminium extrusions and rolled products for industrial uses.

Carpal also supplies aluminium plates, sheets, and treadplates; geometric shapes, including angles, channels, tee sections, flat bars, rectangular hollows, square hollows and solids, tube, round bar, and machine rods; extrusions products, such as moulds and trims, signage, and fencing and screening posts, seating and seating accessories, and scaffold planks to the marine, transport, building, resources, and signage industries. Essentially, Capral is a one-stop-shop brand for home improvement products.

The company offers its products under the Futureline, AGS, Artisan, Genesis, Urban Plus, Amplimesh, Juralco, Envy, Urban, Urban Residential, Elegance, and Schuco brands. Focusing on the residential, commercial, and industrial segments, Capral supplies its products to fabricators and distributors.

As of February 2022, Capral holds approximately 26% market share in the aluminium products and solutions industry. They operate 6 plants and 8 extrusion presses, contributing to an annual extrusion capacity of 65,000 tonnes. The 8 distribution centres and 12 trade centres turnover of over $600 million.


Source: CAA

While Capral may only operate in Australia, its revenues are extremely diversified, and this, of course, has its benefits. There is not one single customer that contributes to anything over 10% of the revenues generated by the firm. This is quite significant because it shows that Capral is firstly able to sell to a wide cohort, and secondly, it just ensures security over revenues during unforeseen circumstances.

The revenues are well diversified across the 3 segments that Capral operates in. Industrial and Residential buildings are where most of the revenues are generated – 42% and 47%, respectively. The industrial segment includes the likes of transport, marine, and other manufacturing sectors. While Residential includes additions and alterations.

The remaining 11% comes from the rather new Commercial Construction segment, one that is projected to grow in the coming years and increase its chunk in the company’s overall revenues.

Capral’s most famous product is its extrusion – accounting for 85% of all product sales. Rolled sheets and plates account for the remaining 15%. These extrusions are supplied and marketed via 2 channels – direct from the mill and via distribution centres. 59% of extruded aluminium production volumes go directly to customers from the mill, while 26% goes out through distributions channels. The other 15% is the rolled aluminium sold via distribution centres.

it’s a Non-cyclical Business

Capral thus has a very simple and effective business model. Another factor to have a look at is the seasonality of its volumes. The chart below shows that Capral’s volumes are not cyclical in nature – that is, there is no consistent period of low volume. However, it is worth pointing out that the second half of the year is slightly better than the first for Capral. Following a dip in 1H20 due to the pandemic, the volumes have steadily increased as construction has been boosted in Australia. Materials demand is high, and Capral’s volumes have buoyed by:

  • The surging housing market
  • Infrastructure Investments
  • Market share gains from imports – supply chain disruptions & increased shipping costs have resulted in Australian


Source: CAA

The non-cyclicality of Capral’s business forms a very good base for consistent cashflows. It gives the company a strong base as its profitability is not dependent on economic trends. During periods such as now, when we live through extremely fluid economic trends with everything happening in the world around us, non-cyclical businesses such as Capral stand out.

Company Updates

The CAA share price has returned 30% over the past year. We expect this to continue as there are favourable conditions for the company to continue selling their product. Construction and renovations in Residential Property are expected to continue to see good momentum throughout the year, and this will form a base for Capral’s growth strategy.


Source: Tradingview.com

The gains began on the back of April’s earnings report for FY20. Following that, Capral posted significant market beating results in September, that is, the half-year FY21 report. The Half-year result was significantly above the prior period and ahead of latest guidance:

  • Volume up 33% on prior period to 36,000 tonnes on the back of buoyant market conditions in residential building and key industrial sectors
  • Trading EBITDA of $15.7m (1H20: $5.8m) and EBITDA of $26.2m (1H20: $17.0m)
  • Profit after tax of $15.7m (1H20: $4.8m) includes a deferred tax benefit of $2.0m
  • Earnings per share at 93 cents
  • A strong balance sheet with net cash of $33.8m
  • Interim dividend declared at $0.20 per share, fully franked

Capral delivered a Trading EBITDA of $15.7 million compared to $5.8 million in 1H20 on 34 % higher sales revenue. EBITDA of $26.2 million as compared to $17.0 million in 1H20. Demand was higher from all key market segments. Dwelling commencements rose during the first half, assisted by the Home Builder stimulus. Market share gains against imports were maintained, and general industrial demand was lifted by infrastructure stimulus.

The improved operating leverage in extrusion plants and benefits continued to flow from 2019 operational restructure. Increased market share against imports was maintained during the period.

Buoyant market conditions led to high demand and increased sales volume. This resulted in improved operating leverage in CAA’s extrusion plants and, combined with benefits of 2019 operational restructure, produced a significant lift in profitability. The balance sheet was also strong, with net cash at $33.8 million after a $7.5 million dividend payment ($5.4 million net after DRP) and a $10.3 million capacity acquisition in 1H21. Capral renewed its finance facility with ANZ Bank to 30 April 2023.

The G James extrusion plant acquisition at Smithfield (NSW) was completed in February 2021. The plant has been integrated into the Capral extrusion network and a second shift commenced in June 2021. Other capital investments focused on life cycle replacement, safety and environmental projects.

Capral’s first-half performance supported the payment of an interim dividend. The company has declared a fully franked interim dividend of $0.20 per.

The bullish forecasts at the end of 1H22 were further boosted towards the end of 2021. In December, Capral upgraded its guidance. Capral’s manufacturing and distribution facilities continued to operate at full capacity, which has provided further increases in operating leverage, delivering higher earnings. Government stimulus has had a positive impact on demand in their key markets.

The company expects market conditions to remain strong into the first half of 2022. The improvements resulting from the restructure of Capral’s Bremer Park operations, combined with the benefit from import supply disruption and the growing trend towards favouring local manufacturing, has lifted volumes and earnings. Capral advised that it expects to achieve an FY21 Trading EBITDA of around $37 million, up to $5 million on previous guidance. EBITDA is expected to be circa $58 million. These earnings and a strong positive cash position are also expected to support the consideration of a fully franked final dividend.

Industry Analysis

Capral’s sales are boosted by the government setting up anti-dumping measures. In 2010, CAA won the original case with low-level duties imposed on Chinese imports. There were reforms made to federal legislation and methodology supporting companies such as Capral. Measures were also imposed against all Vietnam and some Malaysian imports. Anti-circumvention / trans-shipment investigations were enforced finalised, and measures were implemented. These measures have also recently been extended on Chinese imports for a further 5 years (until 2025) – this significantly boosts the attraction that Capral’s products will have in the local market.

As a founding member of Manufacturing Australia, Capral continues to interact with the government around strengthening the anti-dumping regime. The company works with Australian aluminium supply chain partners to promote the benefits of local extrusion supply in the wake of the pandemic.

Coming to the industry where Capral sells its products, that is, residential and industrial sectors, there is quite a bit of momentum built up and continues to support the long-term growth forecast.

The residential market is growing robustly. Residential markets started rising strongly, assisted by:

  • Low-interest rates
  • Home Builder stimulus
  • State government first homeowner incentives

The chart below shows us that annual dwelling commencement, that is, construction and renovation of residential properties, have recovered from the pandemic and gone on to beat the levels seen prior to the pandemic.

As low-interest rates persist and debt fairly easily accessible, we expect this trend to continue. Travellers, students, etc., have also started to come back to Australia – resulting in a lot more housing restructuring work as property owners gear up to rent their residential properties. The forecasts for 2022, therefore, show that the levels will remain close to what we witnessed in 2021.


Source: CAA

The industrial market is also rebounding well. Marine, Solar, Infrastructure/construction, Manufacturing &
General Fabrication parts of the industrial market are doing extremely well at the moment. There is solid growth flowing through as economic activity picks up following the Omicron lockdowns. Again, with people coming into Australia, the demand is expected to increase. We are seeing this sentiment also flow through. Capral Industrial Volumes have begun to show a steep growth going into 2022.


Source: CAA

The Aluminium Market is Surging

Last month, Aluminum prices reached a 13-year high due to supply tightness caused by production curtailments and closures in Europe due to high energy costs, as well as issues in China and uncertainty over possible sanctions on Russia.

Currently, Aluminium futures are trading at about $3400 a tonne. The sector is boosted by ongoing supply issues and strong demand prospects following China’s pledge to roll out more stimulus. The world’s three biggest container lines, Swiss-headquartered MSC, Denmark’s Maersk and France’s CMA CGM, suspended cargo shipments to and from Russia in response to Western sanctions on Moscow following its invasion of Ukraine. The moves follow similar decisions taken by Singapore-headquartered Ocean Network Express and Germany’s Hapag Lloyd.

Aluminium futures have been rallying since mid-December and broke a record high above $3,800 a ton in the first week of March, on continued robust demand and dwindling inventories, with the latest data showing LME warehouse inventories were at 742,200 tonnes, their lowest since 2007.

The supply-demand imbalance is therefore pushing the price up – resulting in higher margins for aluminium manufacturers.

Investment Thesis

Full-year results for FY21 were announced last month, and Capral delivered as expected, quite a bullish performance. The strong shift to local supply resulting from disruptions to import supply chains and shipping congestion seen at the end of 2020 gathered momentum throughout the year and, combined with Government assistance targeted to the residential construction market through HomeBuilder and other incentives, created unprecedented demand underpinning Capral’s strong growth in volumes in 2021.

The numerous challenges which the company faced included; gearing up production capability through recruitment to increase employee levels, adding operating shifts to meet and satisfy customer demand, and resolving supply and logistical disruptions. Capral’s management’s responses to all of these challenges were pragmatic, whilst at the same time grasping the opportunities created by the increased customer demand. Management has driven these positive responses throughout the entire Capral workforce.

Speaking numbers, Revenues of $593 million were 37% higher than the $432 million reported in 2020. Volume increased year on year by 25%. The increase in aluminium supply prices rose throughout the year as the LME Aluminium price rose to its highest levels in 13 years.

The revenue growth from increased volumes and higher prices (offset by higher raw material costs and operating costs) combined with the ongoing operating efficiencies flowing from Bremer Park, and the profitable contribution from the company’s extrusion plants, including the newly acquired Smithfield plant, added significantly to this year’s profit. These benefits will continue to contribute going forward. Higher productivity and operational leverage in all parts of the business helped deliver a Trading EBITDA of $38.2 million, 94% higher than last year’s $19.7 million.

Reported Net Profit After Tax (NPAT) includes $9.4 million arising from the recognition of deferred tax brought to account (2020: $3.0 million). NPAT was $42.7 million ($1.80 per share normalised2) compared to last year’s $25.9 million ($0.72 per share normalised2).

Whilst the substantial increase in revenues increased working capital as a result of higher receivables and inventory and the impact of higher LME prices; strong cash flows were another feature of Capral’s performance for the year. The company increased its net cash on 31 December 2021 by $1.0 million to $50 million. This was despite funding increased working capital of $13.7 million, investing $9.5 million in fixed assets and $10.3 million for the Smithfield plant, and $10.9 million returned to shareholders by way of dividends. Capral’s strong cash position enables it to continue to balance its utilisation of free cash between funding internal growth, investing in additional capacity and returning cash to shareholders through fully franked dividends.

Capral has a robust financial position

Inventory (raw material and finished goods) increased due to activity levels, increased metal prices (LME), and higher goods in transit. Capral increased receivables due to increased sales volume and price, excellent collections with DSO at 50 days (FY20:49 days).

The company has a $65m debt facility with ANZ Bank, expiring April 2023. Lease Liabilities (current and non-current) of $103.5m, primarily property leases defined by AASB16, the net impact is a reduction in Net Assets of $28.2m due to timing concerning lease terms. Non-Current Assets include $75.3m “right of use” leased assets defined by AASB16. A further $9.4m Deferred Tax Asset was recognised to reflect increased utilisation of tax losses in future periods.

Strategy & Outlook

Capral is looking to build on its strengths, optimise what they do, and invest in growth for the future. Capral’s strategy for 2022 involves a comprehensive plan for its Manufacturing, Distribution, and Sales divisions.

Manufacturing:

  • Deliver benefits of Smithfield plant acquisition, aim to run at capacity by 2Q22
  • Continue process improvement programmes at all extrusion plants
  • Maintenance capital spend to ensure ongoing plant reliability and efficiency
  • Progressively upgrade shopfloor control systems to a common platform
  • Start the upgrade of the Penrith extrusion plant 4Q22

Distribution:

  • Release Capral’s new window & door product range and systems software
  • Install paint line in the new NSW distribution centre at Huntingwood
  • Long term goal – increase volume and profitability of Capral’s own direct distribution channel

Sales:

  • Ongoing technology investment to improve sales effectiveness, including; interfaces (EDI) with customer systems, CRM, and digital marketing
  • Upgrade website and e-store to provide more information and ease of interaction
  • New sales reporting software implemented to manage and improve margins

Capral is looking to develop its market share across the Solar, Defence, Cladding markets. Anti-dumping outcomes provide the opportunity for local extruders to compete in the $60m+ solar rail market. In the Defence space, Capral already finds itself as an approved supplier to major defence contracts. This segment particularly has a very sticky customer base, and it will help Capral grow.

Capral is working with cladding system suppliers to address new fire standards and recladding opportunities. With the competitive pricing that Capral has through its service differentiation, it can expand its market share quite quickly.

Early in 2022, Capral’s operations were mildly impacted by COVID-related labour shortages. The residential building segment is forecast to remain buoyant during 2022, with a high level of work in the pipeline. Other key markets, Commercial and Industrial, are also expected to remain strong. The Smithfield extrusion plant will ramp up production levels to three shifts in 2Q22. LME is at very high levels and is forecasted to peak in 1H22 and remain at historically high levels throughout 2022. In their guidance, Capral announced that their Margins might come under pressure as import supply chains normalise in 2022. Absent any unforeseen events, Capral mentioned that FY22 Trading EBITDA is expected to be in the range of $34m-$38m and EBITDA $53m-$57m. On this basis, Capral would be able to continue the payment of fully franked interim and final dividends.

We expect Capral to hit its EBITDA guidance easily. In fact, there is a very good chance that, like in the past, Capral will upgrade its guidance. This assumption is underpinned by bullish aluminium prices and a strong industrials market here in Australia.

As for Capral’s revenues, we believe that it will continue to grow handsomely around the 10% mark. Temporarily boosted Aluminium prices will underpin the high EBITDA margins. FY23 onwards, we expect the commodity price to normalise and margins to revert to normal levels.

As we have discussed so far, Capral pays a very healthy dividend. In the past 2 years, the dividends have increased by over 50%. The strong operational performance and the bullish market means that Capral’s revenues and earnings are well supported in the long term. Therefore there is significant reason to believe that Capral’s dividends will continue to grow.

With strong momentum in the industry and Capral operating extremely well, we believe that dividends will be strong in the short to medium term. The current fully franked dividend yield of close to 8% is thus sustainable.

Technical Analysis

Trend

CAA closed the Monday session at $8.60, slightly down for the week. However, the week’s performance, a gain of 5.78%, reflects CAA’s bullish momentum since the last twelve months. Hence, since March last year, Capral’s shares have gained more than 35%. CAA reached its near-term high in early January this year, approaching the $10 mark, a level not seen since March 2011. Despite an exceptional performance, CAA shares could not hold this level and drop back to the long term support of $7.50 and $7.77, down 21% from the recent highs. We believe it is an opportunity to buy Capral while still under $10 per share.

Key price levels

Capral’s shares exhibit substantial support from its long-term key levels of $7.50 and $7.77. Thus, since last year, we have identified a tremendous volume of inflows around the 7.50 and $7.77 price range. This suggests that investors build up their long positions in anticipation of an imminent rally. This idea coincides with the recent rebound from the $7.77 level and the RSI indicator’s trend reversal.

Chart Description automatically generated

Volume and momentum

Volume increases since the last 200-day with the 20-day volume average up by 35%. The price action remains bullish in the near term, evolving between $ 7.77 and $9.0 per share.

Trade consideration

  • Market participants might be interested in entering at key support levels: $8.60 and $ 8.50.
  • Primary target price above $11 per share
  • Secondary target price at $A 15 per share
  • Consider reducing exposure below $7.50
  • It is recommended exiting the trade below $7.0

Recommendation

Capral is an excellent company that is leading the aluminium products distribution market in Australia. With an operation that includes the manufacturing of aluminium and its distribution, Capral has been able to benefit from the high Aluminium prices and grow its business. The outlook is robust. We expect Capral to perform well as the operating environment is favourable to the industrials sector. The residential and industrial property construction markets are going strong, and Capral is forecasted to do well in the coming years. The firm has also increased its dividends by over 50% in 2021, and with growth in revenues and high margins sparking an increase in earnings, dividend payouts are expected to swell further. Capral now trades with a dividend yield of over 8%, fully franked. The growth and dividend play here in a favourable sector means we recommend investors to “Buy“.

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