Balance sheet concerns loom after Metroglass downgrade

COMMENT: Balance sheet concerns loom after latest Metroglass downgrade

By Jenny Ruth

March 21 (BusinessDesk) - There were already signs of blood in the water and sharks circling Metro Performance Glass, even before this week’s profit downgrade.

For investors, Metroglass has been one disappointment after another since its 2014 float.

But, given the company has already suspended dividends until it gets its debt under control, dwindling earnings are particularly worrying.

The company emphasised this week that it still expects debt will be down by $7 million for full-year 2019 – it had increased by $1.3 million to $95.2 million in the first half.

Metroglass is aiming to get net-debt-to-12-month-rolling-ebitda (earnings before interest, tax, depreciation and amortisation) down to 1.5 times from 2.3 times at the half year and FNZC analyst Arie Dekker has said this might take three years.

The trouble is, the debt problem also highlights the assets side of the ledger, the equity: at Sept. 30, the balance sheet showed net equity of $162.8 million but intangible assets were $159.5 million – the annual report shows the lion’s share, $148.3 million, of that was goodwill on acquisitions.

Some of that goodwill, $7-10 million, will be written off this year – Metroglass’ policy on goodwill is that it isn’t amortised but is tested for impairment annually “or more frequently if events or changes in circumstances indicate that it might be impaired.”

The write-down is of Australian Glass Group, a business Metroglass paid A$43.1 million for in September 2016. At the time of purchase, it expected that business to produce about A$8 million in ebitda.

Given that AGG is expected to produce at least a NZ$4.3 million ebit loss for the year ending this month, down from positive ebit of NZ$3.2 million the previous year, the question must be whether that is enough of a write-down of goodwill.

FNZC’s Dekker says he’s treating AGG “cautiously in our forecasts” and currently values the Australian arm at about NZ$24 million, a figure that suggests a much larger write-down might be appropriate.

The company has at least been proactive enough to refinance with its banking syndicate ahead of announcing the first-half results in November.

The facility, which had been due to mature in August, was extended to September 2021 and with more than $30 million headroom available, though investors will be hoping that won’t be needed.

As for the earnings, the company now expects ebit to come in at $25 million, down from its November guidance of $28 million, which was itself a downgrade from August’s warning that ebit would be at the lower end of the previous $30-33 million guidance.

And that compares with the $30.9 million ebit Metroglass reported for the 2018 financial year, down from $33.9 million in 2017.

Analysts are not amused.

“What makes this even worse is that, given its history, one would assume the initial full-year 2019 guidance was very conservative,” says Chris Byrne at Craigs Investment Partners.

He cites ongoing operational problems, a poor outlook for the competitive environment, balance sheet concerns and earnings risk from the 2021 financial year.

That competitive environment includes Architectural Profiles (APL) building a new plant near Hamilton of about the same size as Metroglass’ Highbrook plant in Auckland and which is expected to come on stream from mid-2020.

APL isn’t a Metroglass customer but it supplies aluminium window frames to the same residential customers who buy about $50 million of glass from Metroglass a year.

As well, Metroglass’ former private equity owner Crescent Capital bought its biggest rival in New Zealand, Viridian Glass, late last year for A$155 million.

Unfortunately, Crescent doesn’t want to talk about its fascination with glass companies.

Managing partner Michael Alscher says his company tries not to talk to the press “for no other reason but that we are a private business and prefer to operate outside of the public eye.”

In any case, it would be inappropriate for Crescent to comment on Metroglass, Alscher says.

Metroglass has been in and out of private equity ownership since 2006. Another former owner, Bain Capital, swooped on an 11 percent stake late last year with the aura of a circling shark. The vehicle for its investment is a fund that targets distressed assets.

Bain and Crescent were among the private equity companies that sucked $230.5 million out of Metroglass from the $244.2 million raised in the 2014 float at $1.70 per share.

The shares are now trading at 45 cents, although that’s higher than their record low of 37 cents last November.

But back to that worrying balance sheet. Crescent and other private equity firms bought Metroglass in 2012 after it came a cropper under an earlier private equity owner, Catalyst Investment Partners, which bought the business from its founders in 2006 for $366 million.

Metroglass is no stranger to negative equity – it gained that status to the tune of $126.4 million by March 2011 before its bankers took control.

Its enterprise value had halved to $180 million by the time of the Crescent et al purchase – the partners spent about $40 million upgrading the business and readying it for the 2014 float. Crescent had completely sold by June 2016.

Metroglass will release its results for the year on Thursday, May 23.

(BusinessDesk)

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