HomeBusiness DigestTaking Stock - With Barbican Asset Management

Taking Stock – With Barbican Asset Management


NTS share is grossly undervalued

NATIONAL Tyre Ser-vices Ltd is the leading manufacturer of retreaded tyres, tread rubber, rubber and moulds products. It is the distributor of Dunlop and major ty

re brands including sole agency for Yokohama tyres.


In addition they supply accessories for motor vehicles as well as tyre fitting and wheel alignment services.


Over the past three years, NTS focused on consolidation of its business units, a move that was made to counteract the challenges of a highly volatile economic environment. Streamlining of some of its non-core business in 2000, coupled with closure of other branches outside Harare and merging of the strategic ones, ensured the company’s survival in these difficult times.


Value drivers


The group’s overall strategy is to achieve profitable growth in the tyre and rubber-related products market through driving volume and productivity in Zimbabwe, optimising and expanding established positions on the local market, seeking major value-adding investments with brand portfolio opportunities, economies of scale and distribution benefits. In line with this strategy NTS continues to grow and enhance their position internally. The company is also in pursuit of various goals and has extended its prominent position in Zimbabwe and focusing at industry consolidation where value for shareholders can be ob-tained.


Strengths


NTS has a diverse portfolio of businesses, producing a wide range of products. The company continues to operate under a stringent inner core of values that ensure NTS is synonymous with integrity, quality and social responsibility. They optimise the creation of wealth to provide fair reward and recognition for the contributions of all stakeholders. NTS’s products, brands and services are of uncompromising quality to meet the needs of their customer base.


On the regional scene, Comesa provides huge opportunities for NTS in its role as traders as it can now utilise the facility to reach its clients. Exports to Comesa are up 60% in the past five months and in South Africa demand has gone up.


The major strengths of the group hinge on the following aspects: NTS management has a long and proven history as manufacturers of tyre and rubber-related products with sound commercial disciplines, able to produce improved shareholder value as indicated by their performance in 2002;


Undemanding level of gearing of the group;

Consolidation, synergies in their product range which NTS is well placed to extract these synergies;


Focused brand portfolio is important source of value.


Threats


In their commentary for the results for the 12 months ended December 31 2002, management cited the decline in volumes in the replacement tyre sector, largely due to the current price control situation in the country. This puts the formal sector under threat from black market traders and secondhand tyre markets.


“The local tyre market diminished with the advent of price controls and that has not been compensated by growth in imported products,” the MD was quoted by one of the local daily papers. He said that the overall tyre market decreased last year, particularly in the agriculture sector. The construction industry was not in good shape and mining sector has been in the doldrums.


However, the road haulage sector has improved significantly due to volumes of essential commodities being transported in and around the country and beyond Zimbabwean boarders. The inability of railways to meet demand was a blessing in disguise for NTS. The unavailability of foreign currency remains a major threat to importing companies.


Overview


Financial results for the year 2002 show that NTS has produced strong underlying operating performances in an environment marked by mixed trading conditions.


In essence, NTS’s results have been cha-racterised by improving fundamentals in many of their operations. However, this has been overshadowed by currency weaknesses, and unavailability and price controls.


The highlight of the year 2002 was a 40% boost in truck tyre retreads which lifted NTS earnings per share by 350% to $42,14 from a mere $11,19 the previous year, well ahead of market forecasts of below $35. Turnover more than doubled to $5,8 billion and the profit after tax of $991 million represented a 284% jump from the comparable figure of $257,9 million.

The group also offered a total dividend of $9 up from $2,40 in 2001.


Expenses had been kept under control and productivity from the labour force continued to improve.


Interest payments remained low at $37,09 million as the company had over $500 million borrowed at rates under 40%. On the balance sheet, the company had around 12 weeks of stock valued at $1,5 billion while debtors amounted to $1,4 billion.


The group also announced it would propose to shareholders at its AGM in early May, a 10-for-1 share split and scrip in lieu of the final dividend of $7,10.


Investment case


NTS provides short-term to medium-term value for investors. The stock, which is trading at $470, looks certain to trend upwards. Especially given recent evidence of share splits. Overall, we continue to be bullish about the stock. However, the weakening fundamentals in the Zimbabwean economy is a cause for concern for every investor. As for the outlook, domestic demand should continue to shrink and fuel shortages are hardly good for the group.


With no solution in sight for NRZ’s problems, NTS should continue to eat into NRZ’s market share and there are opportunities in agriculture with things having settled down somewhat.

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