Companies: MRX   

Metalrax, the engineering outfit based in Birmingham, is the sort of company that all investors should have in long-term portfolios. While other companies may try to shoot the lights out, Metalrax contents itself with a secure, solid business model, incremental growth and, because it generates real hard cash year-on-year, an attractive, progressive dividend policy.

This approach has served it well since it launched onto the market in the 1960s with sales of just £1.2 million, profits of less than £200,000 and net assets of £235,000. Now, following years of organic and acquisitive growth (at a studied pace), sales have grown nearly 100-fold, profits more than 50-fold and net assets stand at £50 million.

Growth Company Investor tipped Metalrax a couple of years ago at 67p. It has weathered the bear market well – and is now just as good a bet at the current 82.5p.

Led by the very able Richard Arbuthnot who succeeded the previous chief executive, Alan Mackenzie, last year, Metalrax is comprised of 26 divisional companies operating in two distinct areas – engineering/storage and houseware products

The engineering division spans a diverse array of sectors (albeit with a weighting towards the motor industry), dabbling in everything from aluminium extrusion and presswork products to gold-plated copper heatsinks, steel storage equipment, wooden cabinets and much else besides.

Metalrax has fulfilled tool and production orders for side-impact airbag tubes used in Volkswagen, Audi and Saab cars. It has produced stainless steel inlet pipes for the new Mini Cooper, filter mounting brackets for Jaguar and battery retention components for Ford.

In other deals, various electronic components for transmitter masts have been shipped to China and tooling and production orders fulfilled for Carlsberg lager displays.

On the shelving side, past work includes contracts for museums and all manner of retail outlets. The business also supplies mezzanine structures, emergency staircases, stairways, belt conveyor systems and fabricated steelwork.

The housewares division is equally impressive in the range of products it offers and number of clients it deals with. It makes and distributes everything from kitchen tools and utensils to microwave cookware and wine racks. You probably have many Metalrax products at home but you just don't know it.

The key to Metalrax's success has been its 'best manufacturing practices', its innovation and its new product development.

For Ian McInally, of independent broker Bell Lawrie White, one of the most attractive aspects of Metalrax is that 'they are not dependent on any one client. The business has been going for many years and is made up of many companies that have been added throughout the years. When they acquire groups, they don't engage in slash and burn tactics. They would love to identify major cost savings, but they engage with companies where very few procedures are replicated. What they are looking for is complementary products and expansion in new niche areas.'

Metalrax's most recent deal, the £1 million purchase of the fasteners, hand tools and maintenance products group, Welland, was in line with the principles laid out above. Chief executive Arbuthnot confirmed that it was 'an investment in a new market which will further expand and diversify the group'.

Figures for the year to end-December showed a three per cent increase in turnover to £111.7 million and profits 6.3 per cent better at £12.3 million. The dividend was struck at 5.4p for a yield of 6.5 per cent. Cash resources climbed to £11.1 million and cash inflow totalled £16 million.

Despite the difficult market conditions, the group confirmed in a recent AGM statement that its business was still progressing and McInally is confident of further progress too.

'What we have with Metalrax is a robust, conservatively managed, cash-rich, cash-generative company. It doesn't do spectacular growth because it's a slow burner, but the dividends more than compensate for this. The management will continue to cast their eye far and wide for opportunities and, although it is always a fight to improve in these conditions, I have no reservations about their ability to deliver.'

McInally is expecting profits of £12.8 million this year on sales of £115 million leaving the company trading on a forward p/e of 11. Worth buying.

Metalrax

GCI Recommendation

Buy