The world’s vehicle manufacturers are racing to meet tightening emissions legislation. They are investing heavily in technology to achieve increased fuel economy and lower vehicle emissions through innovations such as engine downsizing, turbocharging and weight reduction. They are also looking at
start-stop engine management systems as a cost effective solution.
Start-stop systems reduce emissions by 7-10% by switching off a vehicle’s engine when idling or not in motion. When the engine is off, the vehicle relies on a battery to power all on-board electronics, including power-hungry air conditioning.
JSE-listed Metair is one of a handful of global component manufacturers with the technology to supply the batteries used in start-stop systems.
At the presentation of its financial results for the year to December 31, the company’s management felt confident enough to announce an audacious goal: the delivery of 50 million batteries on five continents by 2020.
Achieving this will be no mean feat considering that Metair currently supplies 7.5 million batteries on three continents.
But this is a company that is not afraid of audacious goals.
Putting numbers to dreams
“Once you put a number to a dream it becomes a target. Management teams are seldom prepared to put their deliverable on the table – because you get measured against this,” says CEO Theo Loock.
This is the third time that Loock and his team have put their goals on the table for shareholders, and they haven’t missed a target yet.
In late 2006 the company announced its first 3×5 strategy: To earn R500 million (before tax) in five years, off revenue of R5 billion.
The scale was necessary if the company was to afford the global acquisitions it had in mind. By 2012 Metair had reached this target, had acquired Rombat in Rumania and launched its next 3×50% strategy.
This would result in a fundamental redesign of the business: to reduce turnover from the OE sector to 50% of revenue or less; to increase revenue from aftermarket, non-automotive and exports to 50%; and to ensure that 50% of the overall business was in batteries.
This was achieved in 2014. As a result the Metair of today is already a very different business from the one that in 2005 earned 85% of its revenue supplying Toyota with components like suspension springs, heating and ventilation systems and moulded plastic consoles.
The global financial crisis, which caused motor vehicle output in South Africa to plummet, caused a rethink of the business.
The existential question
“We asked ourselves a what if question,” says Loock. What if South Africa was to become so uncompetitive in manufacturing that the current vehicles on the production line were the last to be built. How would we survive?
“To answer that we examined the global mega-trends of mobilisation, green energy, urbanisation and how each one would affect our business.
“We could see the green economy would be big, so we began to look at our own intellectual property to see if something would address this.”
It turned out that Metair subsidiary First National Battery is one of a few companies with the intellectual property to manufacture start-stop batteries. The IP was developed for the battery packs used with for cap-lamps in underground mining.
“Start-stop batteries are an effective, low-cost solution for OEMs to achieve strict vehicle emission standards and demand is expected to grow rapidly,” says Simon Anderssen, an investment analyst with Kagiso Asset Management. “Currently 20% of passenger vehicles are fitted with these systems and this is expected to increase to 80% in 2020.”
However manufacturing these in SA was not ideal. The growth in stop-start batteries is being driven from Europe, which is a signatory to the Kyoto Protocol, and exporting heavy, lead-filled batteries was not commercially sustainable.
Thus the acquisition of Romanian battery manufacturer, Rombat in 2012, followed by the acquisition in December 2013 of Mutlu Akü in Turkey, was driven by the need to operate from the heart of the target market.
Both companies have strong technical skills, a dominant share of a growing domestic aftermarket business and are major suppliers to local OEMs.
In particular the Mutlu enabled Metair to achieve its goal of balancing the contribution from original equipment (OE) and non-OE business, and between battery and non-battery business.
The integration of both companies is now virtually complete. “Metair has successfully transferred the knowledge and production capabilities to its subsidiaries,” says Anderssen. “The integration with Mutlu has been so successful that Metair has established an R&D hub there, which is closer to its customers. As an approved supplier at individual production plants in Romania and Turkey, Metair is also better positioned to enter global supply agreements with OEMs.”
Nothing by accident
“Everything we do is by design,” says Loock. “We developed a blueprint for foreign acquisitions by copying Japanese companies like Tenzo, the largest component manufacturer in the world.
“We also spent a lot of identifying where the [acquired] company needs support, and providing it from day one.”
In Rumania, he said, management needed support with financial controls. So we put our best financial manager there, and our best metallurgist whose job it was to run the smelter to focus on chemistry of the battery.
“You can only spare 1% of your expertise in an overseas environment – so you had better choose the right people to go,” Loock says.
The benefits of the acquisitions can be seen in the most recent results. Group revenue increased 39% to R7 279 million mainly due to the inclusion of Mutlu for the full reporting period. Operating profit margin increased by 2.9% to 11.4% and EBITDA rose to R1.2 billion from R729 million (excluding transaction costs) in 2013.
This translated to an increase in headline earnings per share of 38% to 303 cents per share despite the dilutionary effect of the additional 46.4m shares issued to acquire Mutlu Akü and the interest charge arising from the acquisition debt of R1.4 billion.
“It’s difficult to comment on the [success of the] Turkish acquisition after just one year of results, but the fact that there were no massive right downs tells me they did good due diligence,” says Old Mutual Equities investment analyst Meryl Pick. “This gives Metair management a tick in terms of capability and thoroughness when it comes to evaluating a deal.”
This bodes well for future acquisitions, she says. Considering the company has targeted the delivery of 50 million batteries on five continents by 2020, an acquisition must be on the cards.
Keeping it in the family
“We prefer to buy semi-family or family businesses. We are intensely focused on the individuals and about building trust – this takes time,” Loock says.
That said, “when China and the US embrace the new emission standards we need to be ready. If we are not, the big gorillas, like US-based Johnson Controls which produces 160 million batteries a year, will squash us or take us.”
Metair, he says, is a likely target with its strong aftermarket and OEM position in each of its markets (in SA it supplies 100% of the OEMs; Turkey 75%; Rumania 90%).
“Either we will be a consolidator of smaller businesses, or we will be consolidated. We prefer to be the consolidator, but it’s not about ego. I don’t need to be in charge, and that makes the ream of possibilities so much bigger.”
Keeping its powder dry for possible acquisitions remains an important theme. Metair is conservatively leveraged with a debt/ equity ratio of 30%. The group has borrowings from third parties of R1.7 billion, which have been used mainly for the Mutlu acquisition.
It would have to raise more debt or equity to fund future acquisitions.
Both Pick and Anderssen rate the share highly, although at present only Kagiso is an investor. Old Mutual is watching it closely, Pick says.
The p:e of 12.15 is not very demanding, considering the longer term potential. “Its important to remember that in start-stop batteries are a new technology and the replacement cycle for these batteries has not really started (car batteries typically have a 3-5 year replacement cycle),” says Anderssen.