Using a real-life example, Tony Morgan takes you through how an outsider can assess a potential listed investment, identifying what makes the opportunity enticing, and how to proceed sensibly

In brief

The 2022 earnings season in the US is kicking off and we here in New Zealand are tasked with leaving the beach for the office. The gap period of subdued investment markets, through a lack of company information, is over.

At the same time reality is finally bearing its ominous head. Interest rates are surging in the all-important 2 year and 10 year US Treasury markets as inflationary trends are here to stay. The US Fed has a challenge on its hands.

Will the unusually strong earnings trend from the largest US companies help hold up lofty stock prices in this more-savings (money-in-the-bank) investment environment? I doubt it ... expect trouble, meaning a lot more swings in stock prices (that is, volatility) in 2022 compared with 2021.

In this new tricky investment climate (no longer the easy one-way bet), one needs to be even more prepared to capture true investment opportunities as they present themselves.

Follow the wisdom of the experienced, those who can filter out the truth from the noise, the latest fad from the real deal.

Now, valuation becomes a more important concept as the wind sweeps the go-go stocks of 2020 and 2021 out to sea. Free money is no more, investments must stand on their own two feet, justify themselves to the world, make a claim to why investors should stay long.

Long term profitability rather than just sales growth as a benchmark is what will entice investors to stay for the party. Fancy tech with no guts, will be spat out like rotten fruit being parched in the summer sun (only the alcoholic smell giving some relief to the death of a once lovely specimen).

Company debt levels will also come under more scrutiny, putting the focus on the source of capital's liquid blood - cash flow.

The factor that I will adhere to in 2022, will be a more strict focus on being focused. Too easy to make stupid blunders if the mind is to thinly distributed. Thus, I will take a more nuanced view of any further diversification, take my time so much more, and hopefully avoiding stubbing my toes too much.

So, where does preparation come into the equation? It is all in the pipeline, your pipeline of investment dreams that can potentially meet your investment cash flows at the right time. And where baby steps are an increasingly valid investment strategy as we negotiate this hurdle of monetary tightening.

The opportunity

I have an investment idea for the pipeline to share: to get 2022 underway in a real tangible way. No pissing around. So, let’s make a start examining a relatively simple business proposition, an investment proposition that a simple-minded bloke like myself can understand and happily get my hands dirty in the process.

The easier to understand an investment from a general perspective, the better it is for a new investor to get started on the train of wealth accumulation. At least that is my view. I am not one for listening to the latest gossip on what is 'hot' or not.

We will follow this darling (some would say ugly duckling) over 2022 in examining the case as it develops and maybe along the way invest, or not. I have already taken a baby step as the Stud knows quite well. He has been firing questions at me over the last two weeks as he beaches from the surf and his curious mate, with an analytical mind presents the case in his own subjectiveness, the figures, the longer-term hypothesis (I like you Logan). These young lads are into it…I love the enquires. They are learning the trade. I am learning just the same.

This investment target is a very modest gem of a goer, but good enough for all readers to take away something by watching how we approach it.

Here goes.

Metro Performance Glass (MPG)

Oh, what a dog you say. Oh, Tony, what are you doing?

Here we have it. New Zealand’s leading glass manufacturer. This company has been listed since 2014 (raised capital at $1.70/share) but been around much longer. It has thereabouts 1000 employees, cannot tell you exactly, not too worried. But isn’t it great they have 80 or so apprentices? Tell me another company with more?

And glass, what a unique but beautiful substance in itself that can be molded into so many uses that contribute to our daily lives, primarily assisting in giving us light, security and comfort, all at the same time. And the beauty. Perfectly clear.

Anyhow the long and short of this case comes down its story that has unfolded since listing.

My overview here will be very superficial and simple, and without perfect knowledge. (The latter lack some would say is a barrier to investment.) The Shepard in all his youthfulness suggested one day that this imperfect position can be a saving grace as you don’t get caught up in the hubris on living inside, whereas you can pick up the bigger, more essential picture to place a successful position. I agree.

Upon listing mid 2014, the company ran smoothly until MPG decided (under the then captaincy of Nigel Rigby) to buy Australian Glass Group (AGG) in 2016. The purchase seemed logical, and performed well for 18 months or so. MPG's debt increased to about $95 mln with the purchase of AGG, but it still managed to pay a respectable dividend through to the 2018 full year.

Nigel Rigby announced his resignation late 2017 but the new CEO, Simon Mander did not transition into the leadership until August 2018. This period of top management changeover is about where the shit hit the fan. Quite an interesting fact, in hindsight.

Keeping matters succinct: at the 2019 half year results in November 2018, the company quashed the once regular and enticing dividend in favour of reducing debt to a more manageable level. The Australian business got a restructure and a non-cash goodwill write-down eventuated. There was also the announcement that new competition was entering the NZ market, thus causing further investor concern. Subsequently the stock, already on a major downhill trajectory, tanked below $0.50. Real pain.

And then we come into 2020 and as you all know, the uncertainties increased with Cov19.

More non-cash write-offs eventuate, this time the NZ business, caused by an existential angst that business won’t be as good going forward beyond 2020.

The most important points, as we get to the present situation, is that firstly debt gets radically reduced down to below $50 mln (which improves free cash flow), secondly the Australian business starts to turn around, and thirdly NZ operations continue to be profitable.

Nevertheless, inflation and Covis-19 issues (being that damn Auckland lockdown for months in the second half of calendar 2021) have been challenging for MPG. The company was determined to start paying a dividend in the first half of the 2022 financial year, but has postponed this resurrection.

It is worth mentioning that the company has continued to protect and enhance its dominant position in NZ through significant capital expenditure, all paid through cash flows. Here lies the story, why we are interested.

We can now buy a business at less than a fifth, yes a fifth of its listing price (back almost six years ago). We get this carrot of an opportunity because no dividend is being paid. The shareholder base has been traumatised. Mr Rigby has left the registry, but that canny, generally very long term investor, PF Masfen, has accumulated a substantial block.

Yes, the competitive climate has caused MPG some rethinking, maybe margin reduction (I am not sure), but the market for glass products is so much more than it was 5 to 7 years ago. Competition is good. I think MPG is a lot better focused and organised now. Gee, it is quite a big business, total revenues hover above $225 mln.

Now the strategy from here, like always, is too listen to what the company says next.  We should be getting an announcement sometime mid-February.

My thoughts are these: I expect them to be cautiously optimistic as the fourth quarter (the last quarter) of the 2021-22 year approaches. Cash flows will align then, but possibly not before as they mitigate increasing costs and inventory disruptions.

At around $0.36/share, with 185 mln shares on issue, MPG has a market capitalisation of about $65 mln. It has debt of approximately $50 mln thus an enterprise valuation of $115 mln. Free cash flows from here should improve markedly, given that the majority of this year’s capital expenditure was completed in the first half.

The gap between this upcoming next announcement, the basing share price (on relatively minor volume) provides a window (pun intended) to baby step as I have. I am not 100% sure, but willing to throw some money its way. I like the promise of a dividend in the near future. I like the historical disappointing returns, gives us the potential of better returns to come.

But most importantly, the tide is turning as Mr Mander and his team manages the business through difficult circumstances.

... to be continued.

[This is not investment advice and is no substitute for proper advice. It is only a top level indication of how the author has assessed the opportunity. It is intended as guidance on how to think about issues like the one presented. Get you own independent advice before doing anything yourself.]

Tony Morgan has run a portfolio management business and an equity brokerage, both of which were purchased by Craig Investment Partners. He now runs a small family office that invests globally. Other articles in this series can be found here. And the profiles of all the NZX50 companies can be found here.