Methven books $2.7M after cancelling earn-out with Chinese factory owner

Listed shower and tapware maker Methven [NZX: MVN] booked a $2.7 million gain in its full-year net profit adjustments after cancelling an earnout agreement with the owner of the Chinese manufacturing facility it bought in 2014.

Two years ago the company bought Invention Sanitary, since renamed Methven Heshan, from Hui Zhuang. It reached agreement with him in May last year to cancel an earnout agreement despite hitting the required financial targets set out in the acquisition because working capital at the Chinese operation proved higher than anticipated during due diligence.

Zhuang retired from the business in December last year and then last month sold his 5.85 percent stake in Methven. Methven is currently trading at $1.31 per share, unchanged today but up 34 percent on a year ago.

Methven Heshan’s production increased 10 percent during the past year as the company ramped up sales though it doesn’t disclose the production split between its manufacturing hubs in New Zealand and China.

Methven reported a 31 percent increase in full-year net profit for the year ended June 30 and $8.6 million in net profit for the previous 15 months after changing its balance date from March to June. Adjusted net profit after one-off provisions was $8 million, up from $6.4 million the prior year.

The Auckland-based company, which mainly sells into New Zealand, Australia, and the UK, cleared a record $1.4 million in slow and obsolete inventory during the year, which revealed its previous provisioning was inadequate. That led to a detailed review at all sites and a $1.7 million one-off provision to cover clearance of older inventory in China, New Zealand, and Australia.

Methven reported 12-month sales revenue of $105.8 million, up 8.1 percent on the prior year and in line with guidance. That was up 6 percent on a constant currency basis, its first material revenue growth since 2009.

Chief executive David Banfield says the company is now considering options for an employee share scheme for its 350 staff, to be introduced in the next couple of months because it wants employees to act like shareholders.

The directors have declared a partially imputed final dividend of 4.5 cents per share payable on Sept. 30, taking total dividends for the year to 9.5 cents.

Sales growth was highest in New Zealand, where it rose 11 percent to $35.7 million while earnings before income and tax excluding non-recurring items rose 17 percent to $4.7 million. Banfield said it had gained market share in New Zealand and Australia but wouldn’t divulge what that “market leading” share was.

In Australia, sales increased by 6.9 percent to $39.6 million with a strong performance in the showering category and a slight increase in earnings before interest and tax.

The UK market showed a strong earnings increase of 122 percent to $553,000 though revenue fell by 2.3 percent to just under $12 million and below expectation as the start of contracts won during the financial year were delayed.

Banfield said the company, which turns 130 next month, has significant momentum but still has a way to go to become a truly world-class enterprise.

It’s on track to meet its strategy target of raising revenue to $130 million and achieving net profit of 10 percent of sales by June 2018, he said. Shareholders last year criticised the strategy as not being aspirational enough.

The group is targeting revenue growth of at least 5 percent and net profit growth of 10-to-20 percent in constant currency for the 2017 financial year. Net profit is likely to be flat at the half-year compared to the previous period, which Banfield said was largely due to the timing of investment.

In March, Methven launched its new patented shower spray technology Aurajet, which has won more design awards than any other product in the company’s history.  Methven now has two of the five global leading shower technologies with Aurajet and Satinjet and has reached the ‘design freeze’ stage – where it knows it can technically achieve what it wants to – with a new showering technology. Banfield wouldn’t say how soon that technology was likely to come to market.

Aurajet had delivered less cannabilisation of Satinjet sales than anticipated because it appeals to different customers and the latest technology would also be aimed at a new customer segment, he said.

(BusinessDesk)

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