It's 20 years since Michael Brain and Horst Sass bought control of a tiny Cape Town plastic packaging manufacturer, Bowler Metcalf (BM). Both are still in the hot seat , Brain as MD and Sass as executive chairman, and continue to apply a measured mix of entrepreneurial flair and canny business sense that has made BM one of the equity market's small-cap blue chips.
Typifying what has kept BM's earnings growing without faltering once since its 1987 listing at 14c/share, Brain says: "We hate waste and extravagance; we represent austerity with a capital A." Ethics have also always played a pivotal role in the way BM is managed, he says . "We have never had a share option scheme and never will." On high executive salaries, he adds: "The multi million-rand salaries being paid cannot be justified." In the year to June 2005, Brain earned R1m (including a R190 000 bonus) and Sass R649 000.
But where money has to be spent - on maintaining world-class production facilities and expansion - it is. During the past two financial years (to June) capex has topped R116m, increasing BM's fixed asset base by over 125%, even after a hefty dose of depreciation.
A big portion of capex, R51m, has gone into aggressive expansion of Quality Beverages, the carbonated beverage bottling business. This was a key part of what Brain terms "a strategy of true vertical integration". Viewed with some scepticism by the market when BM acquired a 51% stake in 2001, and not without teething problems , Quality is now pumping profits.
Though exact figures were not provided in BM's June year-end results statement, turnover appears to be around R100m, while minority interest deductions indicate that Quality contributed about R4,4m (10%) of BM's attributable profit.
Brain stresses that BM has no intention of taking on giant bottlers such as ABI and Peninsula Beverages. With Coca-Cola as their primary franchise, they have a total market share of about 97%. "But we can compete aggressively against all other bottlers." Quality is already half the size of all non-Coca-Cola bottlers combined, says Brain, and "we aim to be the market's second stringer behind the Coke bottlers".
Quality produces its own brands, Jive and Dixie Cola, and bottles for retailers. "We have just won the Shoprite Checkers National Supplier of the Year award for a second time," says Brain. "There are tremendous growth opportunities." Brain adds that Quality is set for further expansion, especially in Gauteng where it already has a small plant. A pilot project is also under way in the Eastern Cape.
BM's second diversification came with the acquisition of Amcos Cosmetics in 2003. Again, expansion has been ambitious . "This year we focused on sales growth to achieve critical mass," says Brain. Amcos, now at break even, grew sales 450% in 2005.
But unlike Quality, Amcos will never have its own brands, a policy also applied in BM's plastics packaging division. "We don't compete against our own clients," says Brain.
BM's core packaging division also remains a key area of growth. Here heavy capex has provided capacity to move into higher production runs and new market sectors, he says.
Expansion has proved well-timed . Strong volume growth was reflected in the plastics division's 21% increase in turnover in financial 2005, despite resistance to price increases.
With plastic raw material prices up sharply, and a hefty rise in depreciation charges and finance costs, BM's ability to run an austere business was tested to the full. And it came through with flying colours, upping headline EPS and dividends 14% and generating a 28,9% return on equity. Brain believes margin pressure will be relieved next year by lower plastic raw material prices.
At R5,90/share, BM is trading on a probable forward p:e of less than 10 and a dividend yield of about 3%. It seems a great value buy.
