Following is a ShareChat Investor Interview with John Hirst, MD of Nuplex Industries (NZX: NPX ; ASX: NPX). This interview was conducted during May 2002 and published on ShareChat on May 27, 2002.
SC Investor: For several years now Nuplex shares have traded in a narrow range $2.80 to around $3.40. Current market opinion in some market corners points to a future fall off on imputation credits in a similar way to FERNZ when they listed in Australia. Otherwise many broking houses say your share price should really be trading in the $4 per share range in today's market. Given your policy of demonstrating a plausible growth path together with your take over activity do you think the markets have been looking backwards over Nuplex without acknowledging the forward moves?
John Hirst: Current indications are that we should continue to generate sufficient imputation credits in New Zealand to maintain the status quo for the next decade. There appears every reason to be confident of a change in tax regulations under CER over the next few years. This should give Australian shareholders access to credits earned from Australian derived income hence easing the burden on New Zealand shareholders. Imputation credits should not be having any impact therefore on share price.
Given the company's dividend history and a logical growth path ahead, it is equally frustrating to us that we seem unable to breach the $3.40 barrier. There is a feeling that institutional investors will need to rely more in the future on small and mid cap companies to generate competitive returns for their funds. A switch such as that, and a realisation that the old economy still has growth, provided companies operating in it continue to consolidate, may be just the catalyst needed to realise the view of the analysts of our value.
SC Investor: I manage my mother's shares in Nuplex and would be interested to learn why convertible notes weren't adopted to fund the takeover of Asian Pacific Specialty Chemicals?
John Hirst: As announced in the prospectus for our Capital Notes issue, it is the intention to seek shareholder approval at the Annual General Meeting for these notes to be convertible. It was considered an unnecessary expense to hold a Special General Meeting solely for this purpose.
SC Investor: Realistically, what would you rate your chances taking over APY without having to raise your offer price? If you do raise your offer, are there enough synergies between the 2 companies to make the deal worthwhile? Finally, would you be happy with a small holding in APY?
John Hirst: Let me answer your last question first. Holding a minority share of APY as a long term strategy has little appeal. We are a manufacturing and service company - a "doing" organisation - and we need to use our financial resources to do what we do well. A passive investment does not fit that model. Our offer for APY gives their shareholders full value and is at a significant premium to the alternative bidder. We see no need to contemplate anything higher. It should be remembered that APY Directors who collectively owned 35% of their stock previously recommended a $0.65 offer - and sold down a significant part of their holdings at this price. Their actions support our view that the offer provides full value. The benefit to Nuplex is what we can unlock from synergies and we are confident that we can achieve sufficient to make it earnings positive for our shareholders. It is difficult to perceive another party being able to do this to quite the same extent. Our experience in merging substantial businesses with different cultures and values provides us with a significant advantage.
SC Investor: What effect, if any, has the latest media coverage of rotting houses had on NPX (polystyrene and stucco houses especially being targeted by the media)?
John Hirst: The Nuplex advantage in its Construction products businesses relates to excellent products and the professionalism of the application companies. These independent operations ensure their personnel are trained to Nuplex standards and then maintained through a formal external auditing process. Nuplex and the applicator, supported by their professional body, The Nuplex Applicators Federation, jointly warrant the outcome of all contracts providing a high degree of comfort to specifiers and building owners. The current media coverage has had no apparent impact on our performance, or apparently on the industry, although it will likely have some effect, even if minor. The reality is that the share of the cladding market for these systems is so far unchanged and our advantageous position appears to be reflected in current sales performance. Architects and major homebuilders have not indicated a shift to alternative cladding systems and the matters reported in the media have not surfaced as an issue for the company. It is believed that our unique flashing design, proven products, and well trained fixers and applicators are largely responsible for his. The systems have been appraised by BRANZ as acceptable solutions for the New Zealand Building Code.
SC Investor: Which sector of your business do you expect to grow the fastest over the coming five years? I would expect you to say Nuplex Medismart.
John Hirst: I define Nuplex as a "technology" company - one that focuses on chemistry, chemical process, and compliance - these are what we see as the major part of our core capabilities. Future growth will come from a mix of organic growth in existing markets; acquisitions to consolidate existing market positions; investment in existing businesses in new markets; acquisitions to diversify market and industry spread subject to fitting core capabilities. Given that this is our thinking, it is likely that those sectors of our business that are more highly technology focused will attract our attention and investment dollar. This would favour Performance Chemicals and Environmental Services growth. We are also mindful that individual businesses must exceed a minimum size to warrant retention in our portfolio or the management effort would exceed their effective value. Today, most segments of our business have growth plans but which one will grow fastest over the next 5 years is still in the crystal stage - and I don't think me speculating would be of further value.
SC Investor: Would you ever consider splitting off any of your faster growing divisions similar to F&P Healthcare ?
John Hirst: We are clearly focussed on growth so the concept of splitting off businesses runs counter to this strategy. The belief is that size and mass are important. Firstly it enables us to operate in a manner that is internationally competitive and hence can sustain profitability. Also, we see that it makes us sufficiently attractive to the investment community to build demand for the company's equity and achieve capital growth for shareholders. However, if we could be convinced that splitting out a particular business would deliver sustainable improved value for shareholders then we would be obliged to make that decision.
SC Investor: I see certain similarities between Nuplex and the now French-owned former division of Bendon, China Clays. Both are engaged in high tech manufacture of a raw product that is on sold for further processing. Bendon decided to sell China Clays because it didn't make sense for such a relatively small business to exist as a stand alone entity in a global market dominated by international competitors. How do you see the analogies between Nuplex and China Clays and their ultimate fate?
John Hirst: In today's manufacturing environment where the bar is being regularly lifted on compliance standards, small scale plants cannot survive. Additionally, small production units are unable to leverage sustainable supply contracts at an acceptable price to ensure profitability. The China Clays sale makes sense to me. It is consistent with our actions to consolidate businesses within a market that then provides the scale to provide the opportunity to compete with global players on a similar footing. We have gone further and have bundled businesses with common operational requirements to provide additional synergies. All businesses in our region involved with manufacturing and processing must follow this process if New Zealand, and even Australia, is going to enjoy sustainable businesses in such sectors.
SC Investor: What kind of effect does a stronger NZ dollar have on Nuplex's profitability?
John Hirst: I have long held the view that the relative value of the NZ dollar against major world currencies has had little real impact on profitability particularly on the input side of the business. This is largely because movements tend to be relatively small and slow to change. Our position, remote from our principal sources of raw materials, offers a logistics challenge but has the benefit of a reasonable window in which it is possible to manage exchange rate driven costs. This and a conservative hedging policy minimise risk. The last financial year however showed that there is an exception to every well accepted rule. The currency depreciated steadily and at a moderately fast rate at the same time as raw material prices were increasing substantially in US dollars. One of these factors on their own would have represented a challenge to recover increased cost through pricing. Having both factors acting contemporaneously was beyond the ability of our client industries to absorb the large increases necessary to maintain margins. The impact on our profitability is now history. I still believe that the rule holds however, and consider the likelihood of this particular set of circumstances recurring in the near term to be remote.
SC Investor: Nuplex depends on oil as a raw material and much of the future profitability must depend on oil price and US dollar exchange rate levels. What quantitative rules of thumb can you give investors on any net profit sensitivity of Nuplex cause by movements in the US dollar and oil prices (e.g. every cent rise in the exchange rate reduces profitability by $2 million per year)?
John Hirst: The raw materials we use are primarily chemical intermediates, which in themselves are manufactured from basic chemical building blocks. The input to these building blocks is largely from oil and gas so certainly there is a relationship between these and our raw material costs. It is however reasonably distant and relatively minor when compared to other factors, the principal one being supply-demand forces in play on individual chemical intermediates. It is here that very occasionally we can see quite violent price swings but managing these is the name of the game. It is here that our 40 years of experience comes into play and as mentioned above our distance from our raw material supply sources delays the impact of cost changes and provides us the window we need to manage such situations effectively. As also mentioned previously, exchange rates are generally not an issue so from where I sit there is no rule of thumb, and no substantial risk to our profitability.
SC Investor: Since the departure of Shamrock holdings from the share register, it might be argued that Nuplex no longer has a cornerstone shareholder. Could a new cornerstone shareholder bring any benefit to Nuplex? What type of cornerstone shareholder would you feel most comfortable with?
John Hirst: You are correct that with Shamrock's departure from the register we have lost a cornerstone shareholder. The immediate effect seems not to have been negative on our share price or attractiveness as an investment vehicle with our Capital Notes issue. My personal view is that we are comfortable as things stand at present and we would have no particularly positive result from a return to having one large shareholder. A lot will depend on our ability to continue to fund future growth.
SC Investor: I remember Nuplex saying some time ago that its shares were undervalued. Does the company still consider this to be the case?
John Hirst: Yes - by any measurement we believe the shares still to be undervalued. The analysts are giving a good lead in this regard but the market appears reluctant to follow. I remain hopeful.
SC Investor: There has been plenty of demand for your capital notes. In retrospect do you think the interest rate the company intends to pay was too high? For example. Tower recently completed a capital raising at under 9% and it was also fully subscribed.
John Hirst: Advice seems to be coming from two quite different directions - our professional advice set the interest rate on which the offer was made. This advice was a consensus result provided by several advisors from different sectors of the financial services market. Subsequently various commentators have suggested a lower interest rate would have achieved the same result. I find it hard to make a judgement on the two positions but based on the evidence of recent Capital Notes issues in New Zealand, our margin of 2.5% is around the median. It appears low relative to the size of the issue.
SC Investor: China is on the company's agenda for expansion. New Zealand investors tend to be wary of expansions into China given the past results of a number of companies (Lion Nathan, for instance.) What is the company's strategy for dealing with risk in expanding into China?
John Hirst: We now have a representative office in Guangzhou with a threefold purpose. Firstly it will be part of our export route to market in that country with the advantage over using agents exclusively that we will hold the relationship with customers as our intellectual property. Secondly, it will be the focus of our learning experience. We intend to develop comfort in the way business is done, how the different laws and customs can be managed to avoid undue risk, and to finally invest if we are confident we have sufficient knowledge. That will likely be some time away yet. Lastly, it will provide us the opportunity to develop relationships with Chinese chemical intermediate manufacturers and through these be able to purchase raw materials at beneficial prices. We believe this is an appropriate risk management strategy for China.
SC Investor: Last year your chairman said that Nuplex had overpaid $11.9 million for the Medihold acquisition. What has the company learned from this experience? Has the experience had an effect on the current valuation protocols for the purchase of Asian Specialty Chemicals?
John Hirst: We have learned much from the Medihold experience, which will impact all investment decisions in the future. The current bid for APS Chemicals came only after completing a due diligence programme designed and audited by our professional advisors. Where management judgement was relied upon in valuations, this was subjected to external scrutiny and the board has enjoyed independent professional advice to confirm its own assessment of the potential of this business for Nuplex. It is a very different business to Medihold. We have a thorough understanding of Performance Chemicals and a good record of acquisition, mergers and restructuring in this business segment.
SC Investor: The manufacture and sale of resins is still the majority earner for your company. Would you like to see dependence on resins reduce? If yes, to what level?
John Hirst: The manufacture and sale of resins represents about 60% of total revenues, the balance coming from the other businesses and sales of third party functional products. The APS acquisition would add some new performance chemicals to the portfolio that would provide further product and market diversity, a direction I favour. Our consistent and generally resilient performance in past years has, I believe, been built on this formula of exposure to multiple market segments, and to different geographic regions. I see no purpose in trying to substantially dilute the role of resins in our sales mix - it should be realised that we have several large market segments, coatings, composites, paper, ink and so on, which in themselves represent diversity. The reality will be that growth, in Australasia will tend to be focused on different areas, while elsewhere, resins in their various forms will likely be the key direction.
SC Investor: Why have you been so successful in Vietnam? Can the kind of growth you have had there to date be sustained?
John Hirst: The Vietnam success is a mix of timing and the Nuplex business model. It was the first, and remains the only substantial domestic merchant resin manufacturer for the coatings industry. It was commissioned as the Vietnam paint industry was going through an expansionary period and when technology was changing to meet the needs of an increasingly sophisticated market. We have good technology and an ability to satisfy the technical needs of the modern paint industry. We have reliable quality and our ability to provide JIT service when the client industry had uncertainty in their demand patterns, made us the supplier of choice. Our people are committed to the Nuplex principle of customer care, and are technically and commercially competent. Simple stuff but it is a winning formula in any market. I expect that reported profitability from Vietnam would show more year on year variance than we are used to from our traditional markets. However, as we grow the capacity and capabilities and reduce our reliance on a relatively narrow market segment, we can expect good growth for some years to come.
ShareChat thanks John Hirst for taking part in this Investor Interview.