MPG - Metro Glass

[Lease]

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.

Beagle, you should see EBIT margin has recovered in 2019 from low in 2018. And just let you know MPG NZ EBIT margin has been further recovered to 15.73% at 1H 2020.

[Baa_Baa]

Looking at the chart gives not technical analysis encouragement whatsoever. ... 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.

Thats putting it politely, the chart is a disaster. For three years this keeps finding new lows. This is a monthly chart, the moving average lines are 4 month and 10 month (roughly same as 200 daily moving average). It will be intriguing to see whether the brave value investors are correct picking the low price for entry/top-up or whether the chart ends up showing a further decline into oblivion.

Have a look and see if you'd buy into this right now

[winner69]

Beagle, you should see EBIT margin has recovered in 2019 from low in 2018. And just let you know MPG NZ EBIT margin has been further recovered to 15.73% at 1H 2020.

...and 15% ebit Margin is world class. Many similar industries around the world would be over the moon if they achieved this margin

NZ operations are not as useless / hopeless / broken / munted as most make out

Pity the money men stuffed it and no wonder the market perception of metro is what is (as per baabaa’s chart)

Takes a lot to reverse that sentiment ...and not just good financials.

[Lease]

...and 15% ebit Margin is world class. Many similar industries around the world would be over the moon if they achieved this margin

NZ operations are not as useless / hopeless / broken / munted as most make out

Pity the money men stuffed it and no wonder the market perception of metro is what is (as per baabaa’s chart)

Takes a lot to reverse that sentiment ...and not just good financials.

Yes, Winner69, market sentiment is so negative but imo it is overreacted on MPG's Aussie operation and competition in NZ. I'm in and let's see how it will go.

[Waikaka]

Really enjoying the factual discussion guys.

Feel like everyone's points/concerns are valid to different degrees. But what it boiled down to for me is will MPG be around in 5 years? Will it be earning within spitting distance of what we see today?

It is currently priced like all the worst case scenarios are true. If they tighten up the Aus operation, minimise losses to the new competitor and keep paying down debt I am happy to hold a part of the business long term.

Feel sorry for people who bought in earlier and suffered some losses but I am more than happy to accumulate around the current prices and put them in the bottom draw.

[Beagle]

Thats putting it politely, the chart is a disaster. For three years this keeps finding new lows. This is a monthly chart, the moving average lines are 4 month and 10 month (roughly same as 200 daily moving average). It will be intriguing to see whether the brave value investors are correct picking the low price for entry/top-up or whether the chart ends up showing a further decline into oblivion.

Have a look and see if you'd buy into this right now

There's no two ways about it Baa Baa, that is an exceptionally ugly chart !
Long, hard earned experience has taught me never to buy stocks with charts like that. You almost always lose.

[Beagle]

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?

I foresee a REALLY big problem with your analysis in that your assumption of 14% EBIT margin is fundamentally flawed.

There are two extremely important key flaws.

1. And this is by FAR the most important. For most manufacturing operations the cost of raw materials is actually quite low as a percentage of sales.
Most of the cost is in the operation is in the cost of the plant itself and human resources costs.
I don't know the industry well enough to know what this is but even if the cost of raw materials was as much as 50%, (and I would think it would be considerably lower than this) of sales and all other costs stayed the same, (and you be a brave man to back management to reduce human resources and other costs appropriately in line with sales reductions because I wouldn't), then if sales reduce by $44m as per your worked example the only cost to reduce are going to be the direct costs to manufacture that glass, (the raw materials and energy costs), so we would see if my guess at 50% is somewhere near the mark that costs would reduce by just $22m, so there would be $44m - $22m = $22m less EBIT and the company is running at a loss. To be crystal clear here, what I am saying is that the various plants and human resources required to run them will not run as efficiently and will sit idle at times and all other head office, plant and machinery, management, leases, motor vehicle and other administrative costs will stay the same plus an assumed inflation rate of about 1.5%, so they will go up in dollar terms !

2. Other companies do not simply take market share with no impact on pricing in the sector. (Witness how when JetStar started in the regions AIR's regional pricing had to come down to the point where although they never admitted it, they were probably struggling to make money out of the regions JetStar operated in).
If we assume just 5% price pressure overall that's another $8-9m in lost EBIT plus the $22m above, call it $30m less EBIT.

Its a REALLY tough industry. It doesn't take much for an operation that was profitable to start making losses. Someone on here needs to have a long hard look at this using the Australian operations as a valuable guide. They bought operations that were profitable and had considerable potential. It didn't take much in terms of pricing pressure and loss of business for that operation to be losing considerable money. That is your very best guide to what could happen to their N.Z. operations, someone needs to study what happened to the Australian operations very closely and learn some very valuable lessons.

I really do think this new competitor poses a very serious existential threat to MPG. MPG are very weak financially, still with far to much debt, limping badly carrying an Australian operation which itself is in a fight for its survival and are about to face a threat of serious margin pressure and loss of business.

The balance sheet is fundamentally flawed with vast amounts of fictitious intangible assets and net tangible assets are only 8 cents per share...and it wouldn't surprise me if that's where the share price is headed.

The analogy of the Titanic steaming at full speed through a field of icebergs is a very good one here. Really, with the way this company has been governed and managed in the past you'd be a very brave investor to back the captain to steer the ship around them.

Technical analysis, (the share price chart), is telling you the company is in a fight for its survival, because it is !

I think the bank knows this and although to the best of my knowledge the company hasn't admitted it, I think the company is "under instructions" from its bank to get the debt down because they want to lower their risk.

So with this grim view where do I think the share price is headed in the foreseeable future ?
Have a look at the share price chart that Baa Baa kindly posted yesterday. I would extrapolate from that and think over time the share price simply grinds lower and lower.

Be careful how much you punt on this one folks. The boat is already taking on water from the iceberg they hit in Australia, do you really want to back management to avoid hitting further iceberg's with their previous track record or is it more likely they hit a big iceberg while meddling around repositioning the deck chairs ?

Disc: I have no shares in MPG and do not hold a short position in them.

[Lease]

I foresee a REALLY big problem with your analysis in that your assumption of 14% EBIT margin is fundamentally flawed.

There are two extremely important key flaws.

1. And this is by FAR the most important. For most manufacturing operations the cost of raw materials is actually quite low as a percentage of sales.
Most of the cost is in the operation is in the cost of the plant itself and human resources costs.
I don't know the industry well enough to know what this is but even if the cost of raw materials was as much as 50%, (and I would think it would be considerably lower than this) of sales and all other costs stayed the same, (and you be a brave man to back management to reduce human resources and other costs appropriately in line with sales reductions because I wouldn't), then if sales reduce by $44m as per your worked example the only cost to reduce are going to be the direct costs to manufacture that glass, (the raw materials and energy costs), so we would see if my guess at 50% is somewhere near the mark that costs would reduce by just $22m, so there would be $44m - $22m = $22m less EBIT and the company is running at a loss.

2. Other companies do not simply take market share with no impact on pricing in the sector. (Witness how when JetStar started in the regions AIR's regional pricing had to come down to the point where, (although they never admitted it, they were probably struggling to make money out of the regions JetStar operated in).
If we assume just 5% price pressure overall that's another $8-9m in lost EBIT plus the $22m above, call it $30m less EBIT.

Its a tough industry. It doesn't take much for an operation that was profitable to start making losses. Someone on here needs to have a long hard look at this using the Australian operations as a valuable guide. They bough operations that were profitable and had considerable potential. It didn't take much in terms of pricing pressure and loss of business for that operation to be on life support.

I really do think this new competitor poses a very serious existential threat to MPG. They are a weak financially still with far to much debt, limping badly carrying an Australian operation which itself is in a fight for its survival and are about to face a threat of serious margin pressure and loss of business.

The analogy of the Titanic steaming at full speed through a field of icebergs is a very good one here. Really, with the way this company has been governed and managed in the past you'd be a very brave investor to back the captain to steer the ship around them.

Technical analysis, (the share price chart), is telling you the company is in a fight for its survival, because it is !

Your argument is valid but I can't agree. If sales were down, labour cost would be surely come down and other costs as well. This is the way of running business. I understand MPG will face big challenges but thanks to the recovering property market and now construction activities are much stronger, thus I don't think MPG won't survive.

TA means nothing to me. When I bought THL at 66C in 2009, the chart was very similar to the one MPG is now. And then you know what happened to THL in later years.

[Beagle]

Labour costs only come down if management are adept and quick enough to reduce them in a timely and appropriate manner. Other costs are likely to keep increasing.
THL a very different company and had the skills of a very sharp man with Rob Campbell at the peak of his career at the time. (I think he's gone beyond his level of technical competence now with the American operations). Surely you are not suggesting that the current management are remotely in the same league as Rob Campbell ?

Ignoring TA is a very risky business. I only do this when I have a compelling belief in the fundamental's of the company and at least a satisfactory level of confidence in management. Neither of these situations is present in MPG as far as I am concerned.

I'd be very interested to see someone post some detailed analysis of what went wrong with their Australian operations, how much sales and margins declined before they started losing money. Some VERY BIG clues to MPG's future lie in a detailed analysis of this. (I don't have the inclination to do this on the weekend but if I'm extremely bored next week and if nobody else does it, I might run the abacus over it in due course).

[Lease]

Labour costs only come down if management are adept and quick enough to reduce them in a timely and appropriate manner. Other costs are likely to keep increasing.
THL a very different company and had the skills of a very sharp man with Rob Campbell at the peak of his career at the time. (I think he's gone beyond his level of technical competence now with the American operations). Surely you are not suggesting that the current management are remotely in the same league as Rob Campbell ?

Ignoring TA is a very risky business. I only do this when I have a compelling belief in the fundamental's of the company and at least a satisfactory level of confidence in management. Neither of these situations is present in MPG as far as I am concerned.

I'd be very interested to see someone post some detailed analysis of what went wrong with their Australian operations, how much sales and margins declined before they started losing money. Some VERY BIG clues to MPG's future lie in a detailed analysis of this. (I don't have the inclination to do this on the weekend but if I'm extremely bored next week and if nobody else does it, I might run the abacus over it in due course).

"Other costs are likely to keep increasing."?????? If MPG used to run full capacity in plant, now as sales come down, they don't need to run full capacity, thus power, water, maintenance, etc will surely come down.