Clear vision and wise allocation of capital

Metair managed a solid set of results for the year to end-December with all operating metrics up. The highlights showed revenue up 8% and headline earnings up 16%, while both operating margin and asset turn were higher.

Gearing remained unchanged at 30%, with the return on invested capital (ROIC) at 13% compared with a cost of capital of 12.4%.

But it was not all plain sailing. Locally, First National Battery, which accounts for 16% of revenue, endured industrial action. The political situation in Turkey resulted in higher inflation and a weaker currency. So despite a 55% increase in operating profits at Mutlu Akü, the rand translation was a decline of 24%.

Offsetting this was Rombat in Romania, which boosted operating profit 33% to R108m.

In SA there was good volume growth as original equipment manufacturing production volume rose to 583,000 units on the back of record exports.

Management at First National Battery has been strengthened and a better financial performance should be achieved for the year. It is hoped that after the election in May, labour will be less politicised and will herald a fall in strike action and work stoppages in the greater automotive industry.

Some stability in the Turkish lira and another good performance from Mutlu Akü would also deliver real growth in rands.

Eskom’s recent woes will provide Metair with a tailwind in its domestic energy storage hub this year.

There are also other initiatives being undertaken to drive earnings longer term. These include growing the automotive aftermarket, as well as pushing the nonautomotive aftermarket (with product for the telecoms, utility, mining, retail and materials handling sectors).

Metair’s share in Moll gives it some access to China through its agreement with Chaowei — a manufacturer of lead-acid motive batteries, lithium-ion batteries and related products.

The move to electric vehicles has happened even faster than envisaged and Metair has access to the latest lithium-ion battery technology through its investment in Prime Motors and various tertiary research institutions. This will be an area of significant growth over the medium term that Metair is well equipped to service with solutions and product.

Despite political uncertainties in SA and abroad, IM believes Metair shares offer investors value at current levels.

Metair management has a clear vision where it’s going, with a good record delivering on previous strategic plans.

The group is cognisant of its cost of capital and management has shown an ability to deploy capital wisely.

Moreover, Metair has nonexecutive directors who are independent and vigilant.

A common thread running through much of the destruction of shareholder value in SA in the recent past can be traced to poor allocation of capital and poor oversight from nonexecutive directors.

Management is targeting ROIC of three to four percentage points above the cost of capital over the medium term.

Given the continued uncertainty in Turkey and downward revisions to global growth, IM has used a ROIC of 13.9% (cost of capital of 12.4% plus 1.5%) — which implies earnings of about R755m for headline earnings of 382c a share.