MPG - Metro Glass

[Balance]

Having bought into and exited all three companies also on the premise of this multi year building boom, am very interested in Balances opinion also. Surely it can't all be management incompetence? FBU at least should have improved quality & volume metrics based on it's new automated housing factory when ramped up for starters...

In the case of MPG, the two contributors are the acquisition in Oz and the advent of APL as a major competitor (and loss of a strategic major customer) which resulted in the company being where it is today.

Alas, MPG has gotten very unlucky - the gains from industry consolidation have dissipated with the two contributors to its misfortunes.

Sometimes in life, you can get lucky as some developers I know were able to make money even while building costs went through the roof on their projects - only because land values were going up even faster!

[Davexl]

In the case of MPG, the two contributors are the acquisition in Oz and the advent of APL as a major competitor (and loss of a strategic major customer) which resulted in the company being where it is today.

Alas, MPG has gotten very unlucky - the gains from industry consolidation have dissipated with the two contributors to its misfortunes.

Sometimes in life, you can get lucky as some developers I know were able to make money even while building costs went through the roof on their projects - only because land values were going up even faster!

As somebody else who was especially long & wrong also on Metro, I STILL don't fully understand how their share price was so savaged when the APL competition was announced, it simply seemed totally over the top - companies compete all the time, even Metro operated in a competitive market, albeit with its economies of scale advantage over smaller players. I just don't want to get so totally blind-sided again by such an announcement without understanding the SP dynamics of such a circumstance. It seems that you can never know too much in this game and competitive position in a market is never straightforward to investigate...

[t.rexjr]

On the contrary, MPG's gross margins had been in the vicinity of 50% - mark up of 100% in other words.

Reason why competitors have entered the supply market.

APL is building and bringing on stream the most modern and integrated plant in the Southern Hemisphere - so costs will be lower and quality will be higher.

Outlook very grim for MPG - especially with the ill fated acquisition in Australia.

As I wrote before, long and wrong - big enough to admit it but not happy.

I wonder if APL’s state of the art setup is going to trump Metro’s state of the art set up?
Was the glass supplied to APL at 100% margin?
Will APL be supplying consumers with a cheaper/better product?

Never bought into the growth lies.
Aussie was a mistake
Will they take a hit? Yes.
Will they still be a viable company? Yes.
Are they undervalued? Time will tell

Seems to me there’s a lot of wound licking rather than objective thinking in this thread. Polar opposite to the hype crazed blinkers of a few years ago. I doubt it fits many peoples ‘investment crteria’ in it’s current unknown state so I see no reason trading or investing in it currently. But it’s not off my radar.

[Lease]

Let's do some numbers work and see what will happen to MPG. We only focus on NZ segment.

		2016	2017	2018	2019		2021
Sales		188037	213830	212901	217434		173947.2
EBIT		30124	33083	29240	31087		24352.608
EBIT Margin		16.02%	15.47%	13.73%	14.30%
Interst							3850
NPBT							20502.608
Income Tax(28%)							5741
NPAT							14762
No. of shares							185378
EPS							0.080
Implying PE at current SP							3.37

You can see MPG NZ business is reasonably stable from 2017 to 2019. It represented 50% market share MPG had. Let's assume APL take 10% off MPG since its operation is fully functional from March 2020.

So by the end of March 2021, MPG market share down to 40% thus its NZ revenue=217434 X 40%/50%=$173,947. You can see its EBIT margin dropped from 2016 to 2018 but had some recovery in 2019, so I assume EBIT margin at 14%. Thus 2021 EBIT=173947 X 14%=$24,352.

The Company have actively paid down debt so by March 2021, the loan should be below $70M and I take the figure to work out interest expenses=$70M X 5.5%=$3,850('000).

Net Profit before Tax=24352-3850=20502, take 28% tax rate so Net profit after tax=20502-20502 X 0.28=$14,762.

It has total outstanding shares of 185378('000), so EPS=14762/185378=0.08.

For Aussie operation, as its Victoria and Tasmania are profitable, NSW have been through restructure and write-off over the last two years so it can reasonably assume NSW will be break-even but in my analysis I simply assume the entire Aussie business is just break-even.

That leaves MPG EPS will be $0.08 by the year ended 31 March 2021, imply forward PE will be just over 3 at current SP.

What do you guys think?

[BlackPeter]

Let's do some numbers work and see what will happen to MPG. We only focus on NZ segment.

		2016	2017	2018	2019		2021
Sales		188037	213830	212901	217434		173947.2
EBIT		30124	33083	29240	31087		24352.608
EBIT Margin		16.02%	15.47%	13.73%	14.30%
Interst							3850
NPBT							20502.608
Income Tax(28%)							5741
NPAT							14762
No. of shares							185378
EPS							0.080
Implying PE at current SP							3.37

You can see MPG NZ business is reasonably stable from 2017 to 2019. It represented 50% market share MPG had. Let's assume APL take 10% off MPG since its operation is fully functional from March 2020.

So by the end of March 2021, MPG market share down to 40% thus its NZ revenue=217434 X 40%/50%=$173,947. You can see its EBIT margin dropped from 2016 to 2018 but had some recovery in 2019, so I assume EBIT margin at 14%. Thus 2021 EBIT=173947 X 14%=$24,352.

The Company have actively paid down debt so by March 2021, the loan should be below $70M and I take the figure to work out interest expenses=$70M X 5.5%=$3,850('000).

Net Profit before Tax=24352-3850=20502, take 28% tax rate so Net profit after tax=20502-20502 X 0.28=$14,762.

It has total outstanding shares of 185378('000), so EPS=14762/185378=0.08.

For Aussie operation, as its Victoria and Tasmania are profitable, NSW have been through restructure and write-off over the last two years so it can reasonably assume NSW will be break-even but in my analysis I simply assume the entire Aussie business is just break-even.

That leaves MPG EPS will be $0.08 by the year ended 31 March 2021, imply forward PE will be just over 3 at current SP.

What do you guys think?

Couple of things which worry me:

1) competition typically takes not just market share, but they will as well push the margin lower for everybody. This might impact on your calculation.

2) MPG is geared up for the typical individual NZ house where for some stupid reason nearly every window will have a different size. MPG optimized their production for cutting lots of unique window sizes. I have seen their factory in Christchurch (and assume the others are similar) - i.e. I know what I am talking about. This means however that they can't really utilize the advantages of mass production.

If the market is moving to standardized window sizes (you will see this trend with larger developments like e.g. retirement villages), then competitors producing standard solutions will be able to produce much cheaper than MPG can. Given that APL is supplying not just the glass, but as well the frame with the glass this is what I'd expect will happen. MPG might find themselves quite soon in a situation where APL can sell frame plus glass for standard window sizes cheaper than what MPG would need to charge for the glass alone. If this happens, this would kill MPG. They don't have a frame factory and are not geared up to produce larger volumes of the same size.

Obviously they could program their machine to cut all the day the same size, but this would not reduce their production cost per window, which in a real mass production would happen.

While not certain, I think there is a real chance that MPG might bite the dust .. and in this case the share is obviously too dear as long as it costs more than nothing.

[Leemsip]

Really interesting thoughts from both sides. Thanks guys.
I'm siding with lease and going to snag a small parcel on Monday for a 2 year buy and hold.. ..

[Davexl]

Seems to me there is going to be a bidding war for engineering talent to optimize the computerised production plant. MPG ending up with the lower volume higher margin custom windows vs APL with the mass production. Both going after the double glazing retofit market. Or MPG as the established player undercutting APL as the new entrant and leveraging established frame makers as well on the understanding of a mea culpa of the historic margins.

[t.rexjr]

Couple of things which worry me:

1) competition typically takes not just market share, but they will as well push the margin lower for everybody. This might impact on your calculation.

2) MPG is geared up for the typical individual NZ house where for some stupid reason nearly every window will have a different size. MPG optimized their production for cutting lots of unique window sizes. I have seen their factory in Christchurch (and assume the others are similar) - i.e. I know what I am talking about. This means however that they can't really utilize the advantages of mass production.

If the market is moving to standardized window sizes (you will see this trend with larger developments like e.g. retirement villages), than competitors producing standard solutions will be able to produce much cheaper than MPG can. Given that APL is supplying not just the glass, but as well the frame with the glass this is what I'd expect will happen. MPG might find themselves quite soon in a situation where APL can sell frame plus glass for standard window sizes cheaper than what MPG would need to charge for the glass alone. If this happens, this would kill MPG. They don't have a frame factory and are not geared up to produce larger volumes of the same size.

Obviously they could program their machine to cut all the day the same size, but this would not reduce their production cost per window, which in a real mass production would happen.

While not certain, I think there is a real chance that MPG might bite the dust .. and in this case the share is obviously too dear as long as it costs more than nothing.

Standard window sizes = low margin product. The industry does already have fairly common window sizes. I doubt there is any benefit in offering a std window size at a largely reduced cost. For mass production of std windows to be viable you’d then need a) more stock on hand and b) more warehousing. Then you’d also have the issue that non standard windows would be comparatively cost prohibitive. Your clients would tend to go the company that offers flexibility at a reasonable cost as their client demand said flexibility. There is very little money to be made in the low cost end of town.

[BlackPeter]

Standard window sizes = low margin product. The industry does already have fairly common window sizes. I doubt there is any benefit in offering a std window size at a largely reduced cost. For mass production of std windows to be viable you’d then need a) more stock on hand and b) more warehousing. Then you’d also have the issue that non standard windows would be comparatively cost prohibitive. Your clients would tend to go the company that offers flexibility at a reasonable cost as their client demand said flexibility. There is very little money to be made in the low cost end of town.

That's what car makers used to say as well - before Henry Ford cut them with his model T out of the market ...

But sure - not everybody bought a Ford T, but for everybody the price of cars dropped (i.e. watch that margin ...).

[Beagle]

Very interesting debate. Got to say I am siding with Blackpeter on this one. Looking at the trend in EBIT margin from 2016 to 2019...the trend is not your friend if you're a shareholder and looking at the above posts nobody has commented on this clear and worrisome trend. Slice another 3-4% off that EBIT margin with decent competition and if losses continue in Australia as I believe they will, my instinct says this grinds its way onward with the downtrend continuing.

Looking at the chart gives not technical analysis encouragement whatsoever. Management have a long track record of talking a big game and failing and their credibility doesn't wash with me, frankly their credibility is in tatters. They talk that they can turn Australia around and I don't think they will.

PE's are meaningless if the E part is a complete unknown. If there was a very clear buy signal such as a break up through the 100 day MA support line, (if this ever happens), I'd think this might be a good de-risked time to take a punt.