GWA’s $118m offer for Methven comes after years of underperformance
Grant Samuel’s report on Australia-based GWA’s $118 million takeover offer for Methven is a sorry reminder of how poorly the New Zealand-based tap maker has performed for investors.
The shares were floated at $1.43 in November 2004, reached around $2.50 in 2007 and since then haven't got above $2. Grant Samuel values them now at $1.41-$1.60. GWA is offering $1.60 per share and will also allow shareholders to receive a 5 cents per share first-half dividend, effectively valuing the offer at $1.65 per share.
“Over the last five financial years, Methven has achieved a low compound annual growth rate (CAGR) of 2.7 percent, highlighting the challenges of revenue growth in its existing markets,” the independent valuer says in its report.
The company's poor performance over recent years comes despite a building boom.
Methven’s New Zealand sales fell 7.2 percent in the year ended March 2018, although it lifted ebit slightly to $4.3 million from $4.2 million the previous year.
Methven’s profit margins are highest in New Zealand – its earnings before interest and tax margin improved from 12 percent in 2017 to 13.3 percent in 2018. Margins in Australia, where Methven made 39 percent of ebit, improved from 7.5 percent in 2017 to 9.6 percent in 2018.
And in Britain, where the company earned 14 percent of ebit, margins rose from just 4.5 percent in 2017 to 5.4 percent in 2018.
Grant Samuel notes that Methven shares have underperformed the S&P/NZX 50 Index since early 2017 “in part due to Methven’s lack of growth in revenue and earnings and the company missing its market guidance in 2017.”
There are a few areas of optimism in the report. “Methven’s recent growth in China is promising, but it is too early to tell if the long-term strategy in Asia will be effective,” Grant Samuel says. “If Methven can grow in China and throughout Asia, it will diversify its revenue and provide exposure to a fast-growing region.”
Methven entered the Chinese market in 2017. Sales revenue there in the year ended March 2018 was just $1.4 million. The New Zealand market went from providing 65 percent of earnings before interest and tax (ebit) in 2014 to 40 percent in 2018.
Methven will also benefit from the fact most of its local sales come from the building renovation market, not from new house builds.
“The size and value of the renovation and alterations building consent market is relatively consistent year-on-year and is less sensitive to economic cycles,” the Grant Sanuel report says. Over the past 10 years, that part of the market has achieved a compound annual growth rate of about 3 percent a year.
Meanwhile Methven has also cut its costs by $800,000 with its “Fit 4 The Future” efficiency initiatives, and there's more to come, Grant Samuel says. The full benefits of “Fit 4 The Future” won’t be realised until 2020 and beyond, the report says.
The GWA takeover has a good chance of succeeding given that 19.9 percent shareholder Brendan Lindsay is supporting GWA’s offer and directors have committed another 2.1 percent and have unanimously recommended that other shareholders accept the deal.
Because the offer is via a scheme of arrangement, to secure control GWA needs the support of shareholders owning 75 percent of shares voted at a special meeting set for Tuesday, March 12. That is a lower barrier than the 90 percent threshold for a takeover offer under the Takeovers Code.
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