Is mica on red Alert

Work­ing Work­ing cap­i­tal cap­i­tal mis­man­age­ment mis­man­age­ment cul­prit cul­prit of of its its woes woes

Finweek English Edition - - FRONT PAGE - LEANI WES­SELS leani.wes­sels@fin­

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.

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