The Metro Performance Glass Ltd (ASX: MPP) share price has fallen 60% this year since making its debut on the ASX at $2. The company manufactures a variety of construction products including glazed windows, laminates, feature walls, and many types of specialty glass product. Metro has a 55% market share in New Zealand and has been growing in Australia thanks to a recent acquisition.
Is Metro cheap?
Metro has 185 million shares on issue, giving it a market capitalisation of $148 million at $0.80 per share. It has $94 million in borrowings, giving it an Enterprise Value (EV) of $242 million.
Using its top-end guidance of $20 million in profit for the full year, Metro is priced at 7.4x its net profit after tax (NPAT) giving it a Price to Earnings (P/E) ratio of 7.4. This compares to the ASX average P/E of around 15x-16x at present.
With this guidance, Metro could earn around $42 million in earnings before interest, tax, depreciation, and amortisation (EBITDA). This would give the company an enterprise value to EBITDA (EV/EBITDA) ratio of 5.8x, which compares favourably to the ASX norm of around 8x-12x.
Bear in mind that Metro is a manufacturing business, so it is unlikely to be 'worth' much more than, say, a 12x P/E or 8x EV/EBITDA.
Does that make it a buy?
While Metro looks cheap, and indeed will be if it can maintain its earnings, I have a deep degree of uncertainty regarding how resilient its business is. First, the company was already highly priced at debut, and shareholders have been stung by the company's underperformance.
Second, it is impossible to escape the risk that construction markets – and demand for Metro's product – are quite buoyant and being fuelled by easy credit. It is not inconceivable for construction activity to halve in a serious downturn, which is potentially quite serious given that Metro has already reported measurable impacts from minor tightening in lending conditions.
Third, I am of the view that we are closer to a cyclical peak in property markets, although underlying demand remains strong in places like Auckland. Metro recently announced plans to double its production capacity in Australia. Companies that add to their capacity in boom times almost invariably get punished in a downturn and struggle to earn attractive through-the-cycle returns for shareholders.
I am not sure how resilient the glass business is in a downturn, and management has noted that supply has recently been a serious constraint on sales (which is usually a positive for industry pricing). This may make adding capacity a worthwhile decision, but I would be cautious and would want to look at the industry in depth (e.g. to see if other players are adding capacity, or if Metro has a cost advantage) before investing here.
While that sounds quite negative, there are several strong trends in favour of Metro, including strong underlying property demand in the key Auckland market, as well as refitting opportunities in the company's double-glaze business. At today's prices I find the company quite interesting, but it is cyclical, carries a meaningful amount of debt, and operates in a competitive space. I would suggest investigating the wider industry further before making an investment decision, as the downside for buying an indebted manufacturer, at a cyclical peak, while it is adding capacity, is potentially severe.
