A two minute monologue.

What it does: steelsmith

Metalrax is a hodge-podge of specialist engineering companies and two pot and pan producers. The common denominator is metal, the pre-coated metals made by Cooper Coated Coil, the group’s largest business, are used in the manufacture of bakeware, for example, which is also produced by Metalrax companies, George Wilkinson, the group’s second largest, and Samuel Groves. It also makes hinges and handles, pallet trucks, vehicle components, architectural metalwork and power products for hospitals.

Category: turnaround

Although Metalrax claims to produce the majority of bakeware sold in the UK, that hasn’t protected its profitability, which has been in decline since 2004. It made a loss in 2009. The decline was partly self inflicted, by businesses it acquired and disposed of after heavy write offs, and partly a product of recession, high steel prices, and competition. In March, Metalrax reported its second consecutive year of profit, although the smaller cookware division is barely profitable at the operating level.

What needs to happen

The triage needs to continue. Chief executive Andrew Richardson is reducing the company’s debt from earnings, and by selling assets. Although by 2009 he had executed a rationalisation plan and debt is still falling it’s largely been achieved by selling and leasing back buildings.

What could go wrong:

execution
Metalrax companies operate autonomously under the oversight of a small head office. Intuitively I like this bottom-up structure, but events at Alumasc are demonstrating uncontrolled costs can mount if management is not on top of subsidiaries.

competition
Despite dominating the UK market, there must be stiff competition in bakeware, since George Wilkinson and Samuel Groves are struggling to make a profit.

management
Andrew Richardson talks a good recovery but I’m doubtful of a board with one very highly paid executive member. Maybe a board running nine business should be stronger, and its interests more closely aligned with shareholders. Richardson’s 2.2m shares amount to only 40% of his remuneration in 2010.

company finances (excluding intangibles)
Tangible assets are over four times tangible equity which is still too high. Management says debt levels are now ‘manageable’, while admitting during a further downturn covenants could be breached.

valuation (excluding intangibles)
The shares cost 1.2 times tangible book value, which may be good value but given still high levels of debt and my concerns about management incentives and structure, its not obvious. The adjusted earnings yield is an attractive but highly speculative 21%.

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I may add more Metalrax shares to the Thrifty 30 portfolio if the price falls below tangible book value, or stronger earnings allowed it to repay more debt, but I’m biding my time.

More on Metalrax.