One day this week I tagged along with some real analysts to visit two manufacturing plants. It was really fascinating, and while they were asking proper questions about earnings and depreciation and top and bottom lines, I was wondering about quite different things. Like why were we there.
Naturally a company invites a bunch of nosy parkers (and feeds them lunch) only when things are going well. And things did seem to be going well.
At Vaal Sanitaryware there were bathroom appliances popping out of moulds and kilns at a fair old rate. Management’s excitement and pride in the new automated moulding and handling line was catching. Elsewhere in the factory, the process of turning clay into containers is still performed by hand using techniques probably as old as civilization. We were, however, assured that the newest urinal design was a first. With 50% of local market share and only one competitor, planned revenue growth for these guys is to come from fighting for more of the upmarket sector. This is currently satisfied largely by imports which, according to our hosts, contained many European second grade rejected items. I asked where their own reject items went and they gestured northwards!
Down the road, at Everite we were relieved and delighted to hear that not a scrap of asbestos has been used at the plant in almost two years. It was difficult when asking questions to remember to refer to the material as “fibre cement’. These days the fibres are cellulose or, increasingly, a smart new plastic material that looks like very fine white hair clippings, imported from China. A hugely enthusiastic new team has pulled this 60 year old factory from the verge of closure. The growth in this business depends upon the building professions specifying and recommending fibre cement products in preference to alternative materials like wood and steel. Most of the houses on Thesens Island in Knysna are clad and roofed in fibre cement.
The unifying thread is that these two plants form the biggest chunk of the manufacturing division of Group 5. A brief presentation about prospects for the construction division, revealed the very interesting fact that the World Cup 2010 soccer stadia have to be complete and ready by mid 2007 for a FIFA inspection! This puts the construction phase much earlier than I thought. Some doubt was expressed about whether the industry had sufficient capacity for all the promised projects. From what I could see, however, there is going to be no problem with having enough toilets and garden pots!
With Group 5s earnings growth at almost 20% pa, and sounding like it might even improve, the pe at less than 10 and dividend yield at 3.4% the catch is that all these parameters are at multi-year highs. So buying now is not compelling - to me anyway. But keep an eye on it.
I am indifferent to the outcome of Saturday’s sweatfest in the cauldron at Loftus, but I think the Cheetahs deserve to win. And remember the late start to the Brazilian GP on Sunday.
James Greener
22nd October 2004
