Wait for Metair’s turnaround to pick up more speed

Charles Darwin’s theory of evolution proposed that species change over time and that all species share a common ancestor. Evolution means change and not all change survives in the new habitat.

This can be an apt analogy for industrial counter Metair Investments. Founded in 1948, the company moved into automotive component manufacture for a major vehicle original equipment manufacturer (OEM) in 1964. It expanded over time and in 2012 moved into the battery energy sector through the acquisition of Rombat.

Metair was originally anchored in a partnership with vehicle manufacturer Toyota as part of the giant Wesco industrial empire controlled by the Wessels family. In the 1960s Wesco was the sole importer of a then little-known Japanese automotive brand: Toyota. This led to the domestic manufacture of a range of Toyota passenger vehicles. By the late 1970s, Toyota was the bestselling vehicle in South Africa with Toyota South Africa listed on the JSE (still controlled by Wesco). The Wessels family exited their Toyota stake for R2bn in 2008.

From this initial OEM agreement, as the South African automotive landscape expanded with localised manufacture by leading vehicle companies such as BMW, Ford, Mercedes and Volkswagen, the increased localisation of components saw Metair grow its business into supplying OEM parts to many other global vehicle manufacturers in South Africa. All was well for several years. But evolution started to catch up with manufacturers of internal combustion engine (ICE) vehicles.

Cars — since the early days of their invention and the mass production lines of Henry Ford — were dominated by ICE petrol and diesel engines. With the advancement in battery and electric vehicle (EV) technology and adoption, primarily driven by governments’ desire to reduce emissions, there has been a clear shift in vehicle sales in the past decade.

From the first Toyota Prius of 1997, there was a step change from the plug-in hybrids of 2010 and post-Covid. EVs, especially in Europe and Asia, became a force, driven by exports from Chinese carmakers such as BYD and the push by Elon Musk’s Tesla, as well as the realisation from global automotive brands (from BMW to General Motors and even Rolls-Royce) of the evolution towards EVs.

This was one of the reasons that Metair expanded its battery technology business as a counter to the slow evolutionary decline in demand for ICE automotive parts. Metair had well-regarded technology in start-stop batteries. EVs have fewer component parts than those needed for ICE vehicles.

This ambition led to Metair expanding outside South Africa with the acquisition of Mutlu Akü batteries in Türkiye for R2.17bn in 2013. Metair’s acquisition of Mutlu significantly boosted its presence in the Europe, Middle East and Africa region and provided access to the aftermarket battery market. However, deteriorating economic conditions in Türkiye and a challenging operating environment saw Metair sell Mutlu in September 2024 for R1.95bn.

The new-look Metair is trying to remain relevant in an evolving ICE and EV marketplace

This change in Metair was part of the recovery track, as the company appointed former Eskom executive Paul O’Flaherty as its new CEO in January 2024. With a headline earnings loss of 135c a share in that year, the restructuring of Metair needed to get under way urgently. Aside from the sale of Mutlu, Metair acquired retail automotive parts business AutoZone for R278m in December 2024. It needed to inject capital into AutoZone after it had skidded into business rescue.

In short, the new-look Metair is trying to remain relevant in an evolving ICE and EV marketplace. Its acquisition of AutoZone was based on the large park of vehicles in South Africa, with constrained consumers more likely to repair and maintain their vehicles than to buy new ones.

Metair’s core OEM parts business remains relevant in the transition from ICE to EVs. Key subsidiary Hesto — representing about 32% of Metair’s revenue — is involved in wiring harnesses and instrument clusters; Smiths (roughly 12% of revenue) supplies a wide range of automotive components; Lumotech (12% of revenue) produces lighting and injection moulding components; and the agglomerated battery assets, under First Battery, account for 27% of revenue.

But the real long-term question is: will South Africa transition from being a hub for ICE vehicle manufacture for export to EVs?

Transitioning to EVs will allow South African automakers to remain competitive in the global market and participate in the rapidly evolving industry. But much hinges on government policy and support. While there is a push for EV production, South Africa remains reliant on ICE vehicle manufacturing. Will ICE still be relevant for OEM suppliers such as Metair in 10 years?

Metair’s hedge against the risks of industry change seems to be AutoZone. With a park of 13-million vehicles, there appears to be a huge opportunity to capitalise on car owners repairing and maintaining their vehicles. AutoZone, through a nationwide footprint of 180 wholly owned retail branches and 31 member-owned franchise branches, has scope to expand and improve towards a R2bn turnover and return to a breakeven situation in financial 2025, with growth into the 2026 financial year. Metair aims to improve its current modest parts representation and battery offering within AutoZone, as well as expand the group’s in-house label products. O’Flaherty says there is scope to add a further 100 branches to the network.

Metair peaked in 2014 at R44. But as changes in the automotive landscape hit, earnings deteriorated, particularly at its largest operating unit, Hesto. More worrying was that debt rocketed.

For the next decade, the Metair share price was on the slide, bottoming at 500c in March this year amid concerns about balance sheet strain and the possibility of a rights issue. To make matters worse, impairments saw Metair’s NAV slide from a reassuring R29.23 a share in financial 2024 to R13.88 a share in financial 2025.

The share looks intriguingly poised at 800c — with market interest perhaps heightened by Metair last month hosting investment analysts at site visits for First Battery and AutoZone.

What is encouraging is O’Flaherty’s reassurance that there will be no need, at this point, for a capital raise and (further) restructuring. Importantly, Metair secured an agreement with its lenders in March on the R4bn of group debt — the majority of which is classified as short term. This provided Metair with a more sustainable debt structure and appropriately aligned repayment terms. In the financial 2025 results, debt servicing costs consumed 84% of profit before tax. This is a risk and needs to be addressed. The FM believes that, at some future stage, a recapitalisation of Metair is likely. Management may ultimately have no option.

For now, it might still be reckless to rush headfirst into an investment in Metair. It might be more prudent to monitor the recovery performance articulated by management. Even though stability has returned to Metair, the flux in the domestic automotive manufacturing market — especially given the recent disruption and uncertainty from US President Donald Trump’s tariffs, access to  trade allowances under the African Growth & Opportunity Act and challenges in domestic macroeconomic policy — still means layers of sector uncertainty.

The easy money has already been made by bottom-picking investors who scored from the debt restructuring agreement. However, investors need tangible evidence that the restructuring strategy, including AutoZone, will lead to demonstrable earnings growth. Without this, there is likely to be a brake on the share price until the next set of results.