Metalrax: the numbers

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To recap: Metalrax makes baking trays, pallet trucks and other prosaic things out of metal. It’s the kind of unexciting business that actually is exciting to value investors because of the absence of hype, hyperbole and high prices. Metalrax appears to dominate its bakewear niche, which is a good thing, but that hasn’t protected its profits, which is bad. I suspect it overspent on expansion just as the credit crunch hit, which increased costs as profits collapsed, forcing it to close or sell many of its businesses below book value, and write-off some of the value of those it retained. If that’s true, and the shrinking is coming to an end, Metalrax could be in a position to grow again. If it does, the low valuations are too pessimistic. The key numbers (above right) from Metalrax's preliminary results published last month and previous annual reports confirm the it looks cheap. Based on the 10 year earnings yield, the current price offers investors a return of 11% in a typical year assuming Metalrax can sustain the 9% return on equity its achieved in the past (here’s an explanation of that calculation). Since adjusted ROE was 9% in 2010, a year in which the company dramatically improved its performance, Metalrax could be coming back to life after a loss-making 2009. The statistical evidence for recovery last year is reinforced by its maximum F_Score of nine out of nine, showing that every one of the nine basic accounting signals employed were positive or improving. Metalrax was profitable (return on assets was 2.9%). Cash profits were positive too, by a healthier margin and Metalrax reduced its long-term debt in relation to total assets. Although the headline figures are positive, it’s clear from the charts that 2007, 2008 and 2009 were cataclysmic for Metalrax. The company’s book value declined from about £50m to under £20m and including dividends the last four years has wiped out all of the wealth Metalrax earned for investors  between 2001 and 2006 (orange bars). In terms of book value, Metalrax is a much smaller company than it was even in 2001. It’s also more indebted (blue bars). Apart from current liabilities, which are covered by current assets. Metalrax owes just under £8m to the bank, £5m to its pension fund and, unrecorded on the balance sheet and therefore not reflected in my charts, it owes about £5m in future payments mostly to landlords on uncancellable property leases. The total value of the company’s assets is now three times the value of equity, which means the company is mostly funded by debt of one kind of another. The curious thing is, if you’d looked at Metalrax in 2006, you’d have seen a company that had grown shareholder wealth over the previous six years, and little debt. It had the makings of a good investment, but it wasn’t. It’s share price fell from around 100p to below 10p in 2010. Those qualities were ephemeral, though, and the argument for investing in Metalrax now, when the figures are, on the face of it, worse, is:

  1. The scale of the share price decline is so much greater than the decline in the company’s book value it suggests investors were over optimistic about Metalrax in 2006 and may be overly pessimistic now.
  2. After all the write-offs and asset sales, the company’s book value is probably much more accurate now.
  3. Judging by its return to profitability, it looks like the company is turning around.

The return to profitability is not unequivocally good news, though, because Metalrax is achieving it with more leverage (borrowing) than in the past. At 2% its profit margins are low, and well below the 5% median it achieved over the decade, or the high of 10% in 2004. There’s a rosy way of looking at these statistics, and a jaundiced way. The rosy view is that profit margins will recover and now the company is more leveraged, that will mean return on equity rises above its long-term average. But Metalrax is in a very competitive market and a hostage to steel and energy prices so the jaundiced view is lower profit margins are permanent and we’re left with a riskier company because of its indebtedness. The directors were very keen buyers at 4p and less exuberant buyers at 8p. Now the shares are nearer 12p they may still good be good value but the case is more finely balanced. A lot depends on management’s intentions, which means it’s probably time to read the fluffier parts of the annual reports. A brief note on the charts: You may have noticed I’m charting some new statistics. FCFROE is Free Cash Flow Return on Equity, and I’ve subdivided NAV ps into Tangible Net Asset Value per share (TNAV ps) and Goodwill ps. It’s probably worth noting that 41% of Metalrax’s reduced equity is goodwill, which, as we’ve seen can just evaporate. The good news is Metalrax did not write any goodwill off in 2010, so perhaps the write-offs have ended. I’ve also included adjusted net profit/sales (profit margins), and sales/assets (asset turn) on the chart that formerly included only assets/equity (leverage or gearing). These are the components of return on equity, and by tracking them I can see more clearly how Metalrax is earning a return (currently by employing increased leverage).


I'm not sure what to make of this one. An F-score of 9 and director purchases certainly suggests something is going on. Is a price rise from 4p to 11p too much? Well,it's still on a price to free cashflow of only 3.3, so there could be more good news to come. Analysts predict good earnings increases in 2012.

I have an idea as an experiment in decision-making. And it's this: make a call, Richard! You can say buy, or sell. No hold - that's too much of a copout. We'll see how you do in 6 month's time. This is not a share that is "fairly valued" - either the market is grossly misperceiving a further recovery of the company and the P/FCF is just too tasty and the share will go higher despite recent significant advances, or else it will go considerably lower, as the P/FCF was a useless statistic and the company hit further rough patches.

Remember Richard, it's just an experiment for you to try, and whether you are proved right, or you are wrong, I think it will prove a useful learning experience for you, and everyone else.

The internet awaits your answer!

For my actual call, the Internet is just going to have to wait until I've read the fluffy stuff (stage 3 of my investment process: Stage 1: What does the company do? Stage 2: What do the numbers tell us? Stage 3. How credible are management's plans?).

However, as you're putting a gun to my head now. Assuming I have the cash... To save my life you understand... because more equivocation will lead to a bullet in my head... I'd..... I'd...... I'd add it to the portfolio. Now check in again after Easter and let's see if I actually do that!

Just thought I'd add some confusion into the mix. I see that capex during the year is +1.1m, i.e. a cash inflow. I presume that this is due the sale and leaseback.

So the question is: is the P/FCF meaningful? After all, although it received 1.1m, that it probably a one-off. The interesting thing, too, is that nothing had actually "changed" in the company. It'll still operate in the same way.

Just to add my amateur thoughts on sales and leasebacks: I've heard negative comments about them as being a sign of weakness. It's a form of financing, effectively, usually on at unfavourable prices. You're selling an asset and substituting a fixed obligation.

Your observation in a previous article (SCS Upholstery?) about leasebacks being a form of off-balance sheet finance that could explode in your face despite a balance sheet that was ostensibly fine (thanks for the tip, BTW!). As an aside, I note that DXNS (Dixons) is doing a bit of sale and leaseback, and suggests to me that it is potentially a hugely dangerous play.

It will be interesting to hear how this one plays out. Do keep us informed.

Will do Blippy, I hadn't noticed the sales and lease back, but would be wary of buying on the basis of P:FCF since that's looking at only one year of 'profit' any way. As you say any increase in leverage would be unwelcome as I feel it's already too leveraged. Certainly something to bear in mind for when I make my real call...

Thanks, Richard. I'll be interested to see the developments, although I'm not suggesting that because you're saying "buy" that that implies that anything other than adding it to the T30 is a disappointment, MRX seems like a very risky investment, so from a risk-management point of view, I would never give it a full weighting in any portfolio I constructed anyway. MRX seems weak financially, maybe managerially, too.

Interesting to see Games Workshop in T30. I think that that's a company that is truly cash-generative with a stonking balance sheet. A much more conservative choice. It's down 7.6% on the day, though, so there we have it.

On Games Workshop, generally I agree with you and think of it as a 'hidden champion' but it screwed up in the wake of the Lord of the Rings 'bubble' when, presumably encouraged by a big but largely temporary increase in interest, it expanded recklessly and in the words of its own management 'grew lazy'. I think it thought war-gaming had gone mainstream, when in fact it's a niche. This time it seems determined not to make the same mistakes, so it will be interesting to see how GAW responds to an increase in interest as a result of the Hobbit film (I believe its licensed the Hobbit) and how investors respond (and whether history repeats itself). I wonder if the recent run up in price is recognition of GAW's back to basics strategy, or anticipation of another bubble.

Richard, I think you nailed the arguments spot-on.

I'm cautious about growth on this one. Even without growth, the 6% yield is very attractive. GAW also looks pretty cheap on a PFCF and EV/EBITDA basis. In fact, it's never been cheaper.

I have a good feeling about this one. I think there's a lot of downside protection.

[...] Metalrax: the numbers [...]

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