Metair makes the right moves
Metair — originally controlled by the Wessels family, who also controlled automaker Toyota — has played an important part in localising the automotive industry in South Africa over the past 75 years.
The sector contributes about 5% of GDP and is crucial for job creation in the country.
From a Metair perspective, the group now operates under two main verticals: the energy storage vertical and the automotive components vertical, operating in South Africa and globally.
Despite Metair’s rich history, the group has not been a happy place for investors of late as the share price is down about 50% over the past 12 months.
However, better prospects may now be on the horizon with the appointment in January of Paul O’Flaherty as CEO on a three-year contract. Judging by the lack of any meaningful upward movement in the share price since then, investors may be adopting a “wait and see” approach.
On the face of it, one cannot fault this mindset, especially as he is the third CEO the group has appointed in just more than a year. Still, O’Flaherty may just be the tonic — or oil change — the company needs right now.
A chartered accountant by training, he brings a wealth of turnaround and restructuring experience to the group. He has worked across a myriad emerging markets and across various economic sectors, including manufacturing and financial services. The agreed 36-month contract for his tenure is material, as it gives the stability and space required for any necessary restructuring or corporate action the group may need to get back on the right track.
Its latest set of financial results for the year ended December 2023, released at the end of March, shows light is now emerging at the end of what has been a dark tunnel for the group and its shareholders.
Revenue increased by a pleasing 14% to R15.9bn, and headline earnings swung from a loss of 17c a share to a decent profit of 135c a share compared with the previous financial year-end. The group was also more efficient in allocating its capital as measured by the return on invested capital for the period, which improved to 11% compared with the previous financial year-end’s low 4.5%. But there is still room for improvement.
Despite this positive turnaround of the group’s financials, the debt pile is a clear noose around its neck. Group net interest charges ballooned by 97%, affecting the income statement by about R741m of net interest costs. Management is well aware of the impact of this hefty debt burden, and it seems that for now this issue will receive a lot of focus. At the time of the group’s results, debt was a whopping R4.6bn compared with its market capitalisation on the stock exchange of only R2.5bn.
Attention will also be focused on sorting out the operations in Türkiye. The country’s high inflation rate makes operating in the region extremely challenging, and O’Flaherty has wasted no time in appointing specialist advisers since he took over the hot seat.
These advisers will give guidance on addressing the debt level, as well as the best way forward for the business in Türkiye and the other regions it operates in. This will include advice on the best ways of restructuring the debt pile, which may involve selling underperforming businesses or parts thereof.
Action has also been taken in its KwaZulu-Natal-based business Hesto Harnesses, which accounts for almost half of the group’s debt burden. After operational corrective action, the business now seems to be recovering from losses which had largely been due to initial challenges and one-off costs resulting from a major project ramp-up requested by Ford, one of its larger clients, for its Ranger bakkie model.
From a valuation point of view, the business is starting to appear cheap on most metrics. If one adds to the undemanding valuation the potential impact of any future corporate action to reduce uncomfortable debt levels and any optimisation the group may apply to its portfolio of assets, there may be an opportunity now for the patient investor.
Those with a more conservative approach should wait for the picture to become clearer when the group reports its next set of results for the six months to June 2024.
Attention will also be focused on sorting out the operations in Türkiye. The country ’s high inflation rate makes operating in the region extremely challenging