Is mica on red Alert
Working Working capital capital mismanagement mismanagement culprit culprit of of its its woes woes
IT’S A SORRY SIGHT that meets you at the Alert Steel branch in Randfontein. The layers of dust on its stock suggest it’s been a while since the occasional customer got lost on his way to the local Mica hardware outlet. So it’s unsurprising that after the group’s cautionary announcement in December, investors are expecting the group is ready to talk about getting rid of some of its loss-making assets. An acquisition by a bigger player has pretty much been ruled out if you look at the group’s balance sheet. No self-respecting company would spend money on buying negative working capital. So that leaves Alert Steel with the option of selling off its assets in a piecemeal fashion – starting, most likely, with its steel manufacturing business.
You’d be forgiven for having overlooked Alert’s steel manufacturing segment. BSI Steel has completely stolen Alert’s thunder as it increased its critical mass through acquisitions last year and wowed analysts with its cost controls. BSI is also listed on the AltX and, according to reports, took a cursory glance at the opportunity to acquire Alert’s steel segment. However, BSI was dismayed by its debt levels. “With those working capital numbers, BSI would have to be paid to go anywhere near Alert,” one analyst says.
More than a few companies in the construction sector were caught with their pants down after they diverged from their core businesses to benefit from the excesses of the 2005 to 2007 boom years. Alert joined the trend and expanded to include steel manufacturing and building supplies to its steel merchandising business. Though the residential building industry has since suffered a drastic drop in demand, the group’s ailing fortunes point largely to the mismanagement of its working capital. It simply expanded too fast and used overdrafts to finance its outlets, the analyst says. Alert reported an EBITDA loss of more than R40m for the six months to end-June 2010 against the previous period’s positive R20m. Since listing in 2007 the group’s best net profit was R51m in June 2008. It’s currently sitting with an overdraft of more than R100m.
Just to make the point that a well-managed company can defy a poor industry trend, despite a drop in steel prices last year, BSI still managed to increase its earnings per share from 28c to 308c in the six months to end-September 2010.
The first player that comes to mind that could be interested in a few bits and pieces of Alert is DIY and hardware retailer Mica. The building supplies industry is a competitive place to be, with stores often located across the road from each other. Mica is already jointly operating Alert’s Wonderboom store along with the group and is boasting a tripling of foot count. So it’s surprising to hear CEO Clifford Buchler say it’s not in talks with Alert to pick up its DIY segment. Mica would consider it, of course, if any acquisition is in line with its focus, Buchler says. That props up reports from industry players that Mica is also struggling to keep the doors open. It seems Alert is fresh out of heroes.
So far a delisting for Alert isn’t on its radar and its directors haven’t sold large clumps of shares in an attempt to jump ship. From salesman to analyst, the consensus is that Alert should move back – and stick – to selling steel. But looking at the share’s plummet of 60% over 12 months it seems the market doesn’t expect a champion to enter the ring anytime soon.