Jenny Ruth: Methven aiming to make a splash overseas

The sharemarket has treated taps and showerware manufacturer and distributor Methven particularly harshly in the past few months.

While the whole small cap sector has been similarly trashed, Methven's sell-off has been extreme.

After a frothy debut well above the $1.43 issue price in last November's float, the shares were sold down as low as $1.19 in May, although they have since recovered to around the float price.

But the company has over-delivered on its prospectus forecasts.

Its net profit for the March year of $6.5 million was up 30.7 per cent on the previous year and 5.3 per cent above the prospectus forecast, struck on a 15.7 per cent rise in sales to $54.8 million, 3.7 per cent higher than forecast.

On the strength of that result, the company raised its dividend to 2.54c a share from the promised 2.42c.

That's an 8 per cent gross dividend yield, up from the 7.57 per cent promised in the prospectus.

The company has also already delivered on its promise to enter the European market by signing a licensing agreement with Italian upmarket bathroom products supplier Visentin. It is also planning to enter the United States market through a similar licensing agreement and to enter the British market in its own right in 2006.

Managing director Rick Fala said the company had already done "a huge amount of work on market research in the United Kingdom and the US markets".

The prospectus forecasts were juicy enough that all 25.3 million shares offered in the float, which wasn't underwritten, were snapped up, so it seems strange that the market is now spurning the stock.

What seems to be making investors nervous is the fear that a slump in the Australian building market, graphically illustrated by carpet manufacturer Feltex's profit downgrades, will hurt Methven.

Possibly reinforcing that was Methven's comment when it released its results in May that its Australian earnings were lower than forecast "as Methven invested more heavily in establishing its brand and retail presence as the platform for growth".

The shortfall in Australian profits was made up for by better-than-expected New Zealand results.

However, the company did meet its target for sales in Australia, so markets fears may be misplaced.

For one thing, Feltex's peers, Cavalier and Godfrey Hirst, are not suffering to anywhere near the same extent.

Both companies have said their profits were only slightly dented by the building market downturn.

That suggests Feltex's problems are of its own making, rather than being industry problems.

Methven had factored in a slowdown in the Australian and New Zealand markets into its prospectus forecasts. But the company's main focus is on the renovations part of the market, not new housing.

And, unlike Feltex, Methven's focus isn't on the cheap end of its market. Rather it is targeting the mid to upper parts of the market.

The company keeps its hand in at the bottom end of the market with what Fala calls its "fighting brand", which is imported from mainly Chinese suppliers.

"We've realised it's potentially an opportunity but it's not a part of the market we really want to be in," he said.

The new-housing and renovations markets are different. Developers tend to be extremely price-sensitive and, so, are much more likely to go for the cheapest products available.

Fala said those renovating their bathrooms and kitchens were far more focused on style and fashion and much more likely to choose higher-quality products.

There was a link between how brisk sales of existing homes were and the extent of renovating.

He said that typically, within six months of buying a house, the owner would be looking at renovating. Similarly, within six months of intending to sell a house, they were likely to be renovating.

However, as Methven's prospectus notes, any slowdown in renovating is likely to be much less severe than a downturn in building.

The prospectus expected residential construction in New Zealand to decline by 2 per cent this year and by a further 10 per cent next year. However, it expected less than a 0.5 per cent drop in renovating activity this year and a 5 per cent drop next year.

Since most bathroom and kitchen renovations don't need building consents, there's no accurate measure of that sort of activity.

In Australia, the business is much more of a start-up operation, although it bought 60 per cent of Australian distributor Flexispray in 2003 and the remaining 40 per cent as part of the float, and so is likely to grow faster than the market as a whole.

The prospectus said it was the fourth largest supplier of showerware in Australia with about 20 per cent of the market. It only launched its tapware in Australia in February last year.

And the trend towards more and bigger bathrooms should assist the company's sales. The prospectus said Australian research showed that the average number of bathrooms per dwelling increased from 1.2 to 1.6 during the past 18 years, or 33 per cent.

Also, when housing affordability becomes stretched, people might abandon the idea of buying a new house, choosing to renovate their existing house as a cheaper option.

But perhaps the company's biggest asset is its focus on research and development and design.

The company spends 5 per cent of its revenue on improving its products and extending its ranges and half of that spending goes on developing new products.

Fala said the company's tapware had a strong following among plumbers here because its products were able to cope with New Zealand water pressure conditions with cold water pressure often much stronger than hot water pressure. Methven's tapware specifically caters for these conditions.

Britain has similar water-pressure conditions.

Another recent result of Methven's research is its SatinJet technology which aerates water from a showerhead in such a way that a lot less water is needed but it still feels like a very generous amount is being used.

The prospectus says the SatinJet shower can produce a good shower experience from as little as nine litres a minute compared with the usual 13 to 22 litres a minute.

Since Australia, suffering a water shortage, is moving to enact water-saving legislation, there is an opportunity to market the technology there.

It is the SatinJet technology which Methven has licensed to Visentin, which has exclusive rights to market it in Italy and France and non-exclusive rights to market it in Greece, Turkey and Russia.

When the company announced the deal in late March, it was careful to play down its significance: it "will not immediately have a material effect on Methven's bottom line".

Fala said the technology was "quite demanding, even for an accomplished showerware manufacturer like Visentin" which has been manufacturing showerware since the 1950s.

Initially, Visentin will be selling products manufactured by Methven, probably from late this year. Eventually, Visentin will use SatinJet in its own products.

Methven

Head office: 447 Rosebank Rd, Avondale, Auckland.

Profile: The company manufactures its own brands of tapware, showerware and valves and also distributes other brands, including Visentin.

Market capitalisation: $73.7 million.

Results: Methven's net profit for the year ended March of $6.5 million was up 30.7 per cent on the previous year and 5.3 per cent above the prospectus forecast, struck on a 15.7 per cent rise in sales to $54.8 million, 3.7 per cent higher than the prospectus forecast. On the strength of that result, the company raised its dividend to 2.54c a share from the promised 2.42c.

Management: Managing director since 1998 Rick Fala; executive director and operations general manager Johannes Krill; export and general business development manager Colin Bartlett; Australian chief executive Matthew Crichton and chief financial officer Deidre Campbell.

Major shareholders: AMP Capital with 55.5 per cent, and five senior executives and their associates, including Fala, Krill and Bartlett, with 5 per cent each.