China acquisition to underpin Methven profit growth

Methven [NZX: MVN] is counting on its new Chinese manufacturer to secure its supply and grow the company's profitability as the tap and shower maker targets up to 25 percent earnings growth this year.

At its annual shareholder's meeting, new chief executive David Banfield told investors the company's current performance wasn't in line "with our capability or expectations" and the addition of Methven Heshan, formerly Invention Sanitary, would increase the competitiveness of the Auckland-based bathroom fittings business. The company paid $10 million in cash and scrip for the Guandong-based manufacturer, which it said will start adding US$2 million to net profit after tax from September.

"The big thing in terms of earnings growth is realising the potential of Methven Heshan. Confidence is really high that we're going to deliver US$2 million net profit per year," Banfield told BusinessDesk after the meeting. "It secures our supply chain. We've worked with Invention in the past for 10 years. They only supplied the Methven group and we saw an opportunity to buy that business, realise the margin ourselves, and get a more flexible supply chain."

Methven reported an 8.6 percent fall in annual profit to $4.7 million in the year ended March 31, its fifth year of profit decline according to its annual report, as retailers held smaller inventories and a strong New Zealand dollar crimped earnings. Banfield said the company expects to grow earnings between 15 percent and 25 percent this year, and needed to make "a number" of changes to boost long-term profitability, including "thinking like a market leader" and a clear business plan for the future.

"We were slow to return to investment after the global financial crisis and that did impact our earnings," Banfield said. "We've got a significant number of new products entering the market this year, and those new products will be the catalyst for growth."

Shares in the tap-maker rose 0.9 percent to $1.10 and have declined 23 percent this year, underperforming the NZX Capital Index's 5.4 percent gain. The stock is rated an average of 'buy' according to three analysts surveyed by Reuters, with a median target price of $1.30.

(BusinessDesk)