Manufacturing

On Friday TPG pulled their offer for Billabong. We have written about Billabong extensively here at the Insights blog and while TPG pulling out may come as a surprise to many investors and commentators, that’s not the case here.

Skaffold has had BBG sub-investment grade since June 2011 – eighteen months and worse, its earnings, return on equity and intrinsic value have been in decline since 2007.

TPG have made a sensible decision irrespective of whether it was their own decision influenced by the loss CVC are taking on Nine or by investors suggesting they might not support the next fund if TPG proceed.

Fig 1. Billabong Intrinsic value Chart (Courtesy: Skaffold.com)

Perhaps if CVC had Skaffold when they bought Nine they might have been in a different position today.

Bottom line, the higher the price you pay, the lower your return. BBG reported equity of $1 billion in June this year and it is forecast to earn just 3.47%. A decent return at present rates of earnings could only occur if the purchase price was a third of the equity (and that’s excluding hundreds of millions in debt), which is about $315 million.

TPG weren’t proposing to pay $315 million, they were proposing to pay $694 million! The higher the price you pay, the lower your return. You can see in Figure 1 that the intrinsic value is not only substantially lower than the current price, but it has been in decline since 2007. We prefer businesses with rising intrinsic values – they’re the ones that are easier to sell at a profit down the track.

Now two bidders have walked away after seeing the books. What could small share market investors know (that private equity does not) that warrants their confidence to purchase shares? We reckon some of them might be mistaking speculation for investing. Thanks Skaffold.

by Roger Montgomery Posted in Insightful Insights, Intrinsic Value, Manufacturing.

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The $0.75 bid for Arrium Limited (ARI), formerly One Steel, by a Korean Consortium including their largest steelmaker, Posco, values the company at $1.0 billion. Including the $2.2 billion of debt, Arrium has an Enterprise Value of $3.2 billion. Forecasts for the year to June 2013, has Revenue of $8.7 billion, Net Profit of $210m and an after tax return on equity of 4.6%. The Arrium share price has declined from more than $7.00 in mid-2008. A number of brokers are now valuing the Company north of $1.00 per share.

This bid is also raising the question as to whether BlueScope Steel (BSL) will propose a merger with Arrium. “Mergeco” would have $17 billion of annualised revenue.
BlueScope has also seen its share price smashed, down from $8.00 in mid-2008 to the current $0.43 per share. Its market capitalisation is $1.44 billion, and with a forecast net debt of $380 million, BlueScope’s Enterprise value is $1.82 billion. BlueScope has recorded an extraordinarily disappointing four year period to June 2012, with after tax losses aggregating to $2.5 billion while the tripling of their shares on issue to 3329 million shares has been associated with an additional $2.7 billion of capital put into the company.

Arrium and BlueScope were downgraded to below “investment grade” by the Skaffold screening process in 2005 and 2008, respectively.

by David Buckland Posted in Insightful Insights, Intrinsic Value, Manufacturing, Skaffold.

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Data released yesterday from “worldsteel” on global iron and steel production confirmed slowing output. Global steel production for August 2012 was down 1% year on year. Steel production from the European Union for August was down 15% year on year, taking annual output to 144 million tonnes, or 9.6% of the 1.5 billion tonnes per annum of global production. Chinese steel production has slipped in recent months from an annualised 750 million tonnes to 700 million tonnes, or 47% of global production.
For 2013, Australia’s Bureau of Resources and Energy have recently cut their iron-ore forecast to US$101/ tonne, while many brokers are still assuming a price of at least US130/tonne. We continue to watch the steel numbers closely.

by David Buckland Posted in Energy / Resources, Insightful Insights, Manufacturing.

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Some smaller manufacturers have good momentum in a tough market.

The media often portrays Australia’s manufacturing sector as on its knees. The high dollar, rising wage and input costs, and soft demand are clearly taking a toll. But to suggest all manufacturers are struggling is wrong. Some smaller listed manufacturers are performing well.

Transport parts manufacturer Maxitrans Industries almost tripled net profit to $12.3 million in FY2012 and its shares have rallied from 40 cents in January to 79 cents. Another parts manufacturer, Supply Network, said in July it expected full-year earnings before interest and tax (EBIT) to rise $2.2 million to $6 million. Its shares have almost doubled this year to $1.26.

Engineering solutions manufacturer, Legend Corporation, also has good momentum. In August it reported full-year net profit after tax (NPAT) grew 18.2 per cent to $9.4 million, for its fourth consecutive year of profit growth. Legend’s total shareholder return over one year (including dividends) is 8.1 per cent. Over three years, the average annual total shareholder return is 49 per cent.

continue…

by Roger Montgomery Posted in Manufacturing, Whitepapers.

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The following article was contributed by Harley, and gives a very detailed account of Funtastic as a possible turnaround story. If you have the skill to identify them, turnarounds can be very profitable investments, although its not an area of focus for us at Montgomery Investment Management. In 2006, Funtastic fell to a B5 on our quality and performance ratings, and since that time has been outside the range that we would normally consider “investment grade”.  However, as Harley points out, Funtastic may enjoy better times ahead if its portfolio of toys appears on enough Christmas shopping lists.

Funtastic is in the business of fun. As a leading toy distributor with domestic and international operations, as well an entertainment arm, Funtastic (ASX:FUN) make money by selling products that make us happy. The question is, would an investment in Funtastic at today’s prices set us up for pleasant future returns or is this one turnaround story that is worth avoiding?

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by Harley Grosser Posted in Companies, Insightful Insights, Manufacturing.

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Portfolio point:  Reporting season is in full swing and there have been some excellent results.  We always watch GWA because it’s a company that has the potential to regain its crown but the 2012 results didn’t inspire.

GWA is a leader in the design, manufacture, import and distribution of bathroom & kitchen products, door and access systems, and heating & cooling products. Brand names of these three core building fixtures and fittings divisions include Caroma, Dorf, Fower, Brivis, Dux, Gainsborough and Trilock.  Analysis of virtually every financial measure over the past five years has seen GWA demonstrate bond like qualities.

continue…

by Roger Montgomery Posted in Companies, Intrinsic Value, Investing Education, Manufacturing.

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Earlier this month we warned readers of the highly attractive pre-delivery finance CRHI was offering customers to win market share. The downturn in the Chinese shipbuilding industry and slippage in vessel delivery saw the Company, for the 6 months to June 2012, report an 82% decrease in net profit on a 37% decline in revenue to RMB5.5b (US$865m). The deterioration in CRHI’s finances over the past eighteen months has been extraordinary: net debt/ equity has jumped from 40% to 143% (US$3.55b/$2.5b), receivables have risen dramatically to RMB4.4b (US$700m), while receivable days have increased from 10 days to 125 days. Over one-third of the receivables are past 180 days, and half of this is past 360 days.

With its eroding credit worthiness, China Rongsheng Heavy Industries has seen its share price decline from HK$8 in late-2010 to HK$1 and it is now selling at 40% of its book value. We will be closely monitoring other Chinese-based steel, cement and shipbuilding companies, especially in the context the iron ore price has just breached the psychologically important US$100/tonne.

by Roger Montgomery Posted in Companies, Insightful Insights, Manufacturing.

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Roger Montgomery discusses how the latest data reveals that the mining boom has ended, and he discusses the implications of this on mining stocks with Ticky fullerton on ABc1’s The Business.  Watch here.

This program was broadcast 1 August 2012.

by Roger Montgomery Posted in Companies, Insightful Insights, Manufacturing, Value.able.

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We had a wry smile this morning after reading Macquarie Equities daily newsletter.

China Rongsheng Heavy Industries’ net earnings have been downgraded by 37% in 2012, 68% in 2013 and an astonishing 79% in 2014.  Forecast 2014 profitability is now one-sixth of the the level recorded in 2011.

A significant factor which had come to light is the fact that Rongsheng has provided highly attractive pre-delivery finance to customers to win market share.

As Rongsheng has had operational (and credibility) issues, it has had to increase its working capital and gearing to meet expenses during during the shipbuilding construction period. With the fast decline in their order book, from US$6.6 billion in 2011 to an estimated US$3.6 billion in 2014, cash flows are under pressure.

The extraordinary rise and fall of Rongsheng and the outlook for the Chinese shipbuilding industry lends support to Montgomery’s caution with respect to the materials industry.

We will become more positive on materials stocks when the outlook from the Chinese steelmaking, cement and shipbuilding industries is less pessimistic.

by Roger Montgomery Posted in Insightful Insights, Investing Education, Manufacturing, Value.able.

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Earlier this year we had the opportunity to visit China Rongsheng Heavy Industries, one of China’s leading shipbuilding companies.  Rhongsheng was founded in 2005 and floated in November 2010 on the back of winning an enormous order from Vale to build twelve ore carrier vessels each 360 metres long, 65 metres wide and 30.4 metres deep with a deadweight tonnage of 400,000.  The ambitious founder, 46% shareholder and Chairman, Zhang Zhi Rong, was desperate to challenge the global leaders, South Korean based, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine.

Back in 2008, Rongsheng represented all that is good and bad in China.  With Government support, Chinese corporate support, recently announced offshore diversification and the cost of shipping dry goods such as grain, coal and iron-ore at US$55,000 per day, the outlook was superb.

Let’s fast forward to July 2012 and the price of Rhongsheng’ shares have declined from HK$8 to HK$1.  For the six months to June 2012, China’s 1,536 shipyards have announced a combined 50% decline in orders.  The cost of shipping dry goods has crashed to sub US$10,000 per day (-82%), and Rhongsheng is experiencing a number of operational and credibility issues.

With the global slump in ship orders caused by a glut of vessels, Rongsheng is trying to diversify from shipbuilding and earlier this year they won a contract to build an offshore support vessel for CNOOC, one of China’s largest government controlled oil production and exploration companies.

Last week CNOOC announced a US$15 billion offer to acquire Nexen, a US listed Canadian based oil company.  Nexen rose 52% on the announcement.  The US Securities and Exchange Commission (SEC) just announced various traders had stockpiled shares of Nexen in the days leading up to the takeover bid.  The SEC has claimed US$13m of illegal profit was realized and the finger is being firmly pointed to a Hong Kong based company controlled by none other than Zhang Zhi Rong.

The development of China has seen some extraordinary national champions in industries like ship building, however we wonder how many of these companies will ultimately become global champions.  With several front page newspaper disasters associated with misfeasance, we continue to be wary of China’s corporate governance record.

In the meantime we believe a lot of companies in commoditized industries like shipbuilding, steelmaking and cement production are likely use their upcoming results presentation as an avenue to downgrade their outlook.

by Roger Montgomery Posted in Insightful Insights, Investing Education, Manufacturing.

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