Key message: Restructuring, debt reduction and simplification are key features as Metair focusses on the regional automotive market.

  • We initiate on Metair released following their 1H FY24 results. A HEPS loss of 3c was reported on a 4% decline in revenue and 59% decline in EBIT. Hyperinflation in Türkiye (Mutlu) continues to impact earnings significantly – this makes analysing the current results challenging to reconcile to a normalised earnings base (77c excluding Mutlu and 79c excluding Mutlu and including Hesto).
  • Metair is going through a significant restructuring process aimed to simplify the group (which will result in more normalised reporting and improving forecasting ability) and reduce debt. The strategic focus will be on automotive component manufacturing in South Africa, with growth sought in the sub-Saharan Africa mobility and energy sectors. The AutoZone acquisition is in line with this strategy.
  • In this report we look forward to FY25 and use this as our base valuation year – with the assumptions that Mutlu is sold In FY24 and Hesto is fully consolidated in FY25. This removes significant complexity in the reporting structure with no hyperinflation accounting (post-Mutlu sale) and the full consolidation of Hesto.
  • The key issue of the debt structure will be addressed as net finance costs increased 59% (due mainly to Mutlu – elevated debt levels, high working capital and interest rates in Türkiye). Mutlu currently accounts for approx. 70% of the interest cost for Metair. Mutlu’s debt has increased substantially recently to continue to be able to operate in a hyper-inflationary and high-interest rate environment – interest costs alone were R340m (of a total R493m) for 1H24.
  • Metair remains within temporarily adjusted debt covenants and lenders remain supportive of the debt restructuring. Post the Mutlu sale net debt is expected to be approx. R3.7bn (incl. Hesto) with net debt:equity at approx. 2.7x and will be subject to a restructuring to ring-fence South African debt and allow Hesto debt to be restructured (along longer-term project financing terms).
  • On a pro-forma basis excluding Mutlu and consolidating Hesto, we forecast HEPS for FY25 of 183c. We value Metair using FY25 EBITDA multiples and derive a Target Price of R15.70. This implies an exit PE multiple of 8.6 times on FY25 HEPS.

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