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MetroGlass cut to 'neutral' at FNZC as NZ cycle on moderating building cycle

Tuesday 8th May 2018

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Metro Performance Glass was cut to 'neutral' from 'outperform' by analysts at First NZ Capital on expectations the New Zealand building cycle will moderate and the sector will get less of a lift from increased investment.


​First NZ Capital also cut the 12-month target price to 83 cents from $1.20. The stock last traded at 88 cents and has shed 12 percent so far this year. 


Analysts Arie Dekker and Grant Lowe said that the Auckland-based glass product's maker has benefited from the strong New Zealand cycle over the past five years, increasing capacity and investing in automation and capability at its key Auckland site. It has also expanded into Australia with a $50 million investment, which doubled gearing.


However, while operating earnings have been robust, a variety of factors have contributed to MPG failing to deliver the earnings leverage investors would have hoped for during a period of strong cyclical support in New Zealand, they said. 


The factors include an increase in operating costs and investment associated with its core NZ processing and downstream glazing operations which have thus far failed to deliver the potential uplift MPG had been expecting, as well as competition from new entrants and import competition, the analysts said. 


"Because of these factors and earnings that could currently reflect near-top-of-cycle levels we believe a low valuation multiple is currently appropriate,"  they said. 


They noted that while the company is comfortable with gearing on current earnings, "rapid deterioration in activity would add pressure and we expect MPG to focus on execution ahead of investment and to repay debt while current conditions prevail."


New Zealand has been experiencing a construction boom in recent years, both residential and commercial, as a wave of immigrants increased the need for housing and as the government has stepped up infrastructure spending in the wake of major events, such as the earthquakes in Christchurch.  Recently, however, capacity constraints have driven up costs and put the building sector under pressure. 


Investors should expect a significant drop in earnings in a downturn and reducing fixed leverage will be critical, the analysts said. 


Last October the company announced it was carrying out a strategic review of the business and would present the outcome when it reports annual earnings later this month. 


Dekker and Lowe said "we do not expect material deviations in strategy although it is likely that MPG will look to ensure expectations for the future direction of the business are reset, to the extent that is still required."


They expect the company to identify a need to reduce investment and focus on execution. In New Zealand "this will likely be execution in an environment where the demand outlook is clearly flattening and may turn downwards." In Australia, investors will be looking for MPG to provide confidence that it can grow revenues in line with the strategy for that market.


They noted that while the core NZ residential and commercial businesses may see a drop in revenue, the Retrofit and Australian businesses "may provide MPG with some cyclical buffer." However, the company must provide investors with confidence that it can profitably grow these opportunities while needing to maintain a focus on achieving efficiency from its core New Zealand glass processing operations. 



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