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Investors cool on Masterfridge training costsATOP-NOTCH audience of investment analysts and fund managers attended the Johannesburg presentation of annual results by Masterfridge, which listed 16 months ago after an undersubscribed offer of shares at 275c. The Swaziland-registered fridge manufacturer and distributor caught the imagination of the market when investment trust NSA put in R40-million of new capital last year. The share price climbed to as high as 840c before retreating after the results. In presenting results for the year to June 1997, the directors took an unusual step in taking a R4.2-million management consultancy and training bill as an abnormal item in calculating headline earnings on the grounds that it is an investment in the future of the company from which the benefits will be reaped over the next few years. "If we had bought machinery, it would have been capitalised," says director Rocky Palmer. A weak market in the first four months of this year led to a reduction in operating margin to 7.7% of turnover in the second six months from 9.2% in the first. Managing director Bronwen Phillips says the first four months of this year required aggressive marketing, which cost money. Retailers began to look at their debtors' books, which also affected sales. In the year to June, Masterfridge lifted turnover by a third to R385-million and the elimination of a R7-million interest bill meant an additional 53% net income of R30.2-million. The systems consultants' bill was deducted at this point; tax and outside shareholders called for another R4.5-million to give attributable profit of R21.4-million, 34% ahead of last year. In spite of adding back a net R3.4-million abnormal item to the attributable income, the increase in headline earnings a share did not match the pace because of a far greater number of shares in issue. On a fully diluted basis, Masterfridge earned 27.8c against 26c. This disappointed the market and Masterfridge shares retreated to 740c, still 27 times historic earnings. They later rallied 20c. Masterfridge began to make fridges in Swaziland in 1990 principally to avoid breaching a restraint of trade agreement on chairman and founder Charlie Palmer. Manufacturing costs are far cheaper in Swaziland. Phillips was challenged about pay rates by a member of the Investment Analysts Society who said he represented Numsa Security: Did Masterfridge pay R3.50 an hour in Swaziland when a South African factory would pay R8.80? "You're saving R17-million a year on this," he told Phillips. He would not leave the issue alone and eventually had to be overruled. There are two elements here: the first is that Cosatu is desperately trying to get into neighbouring countries but is being barred by their governments. The second is that if non-South African manufacture is what it takes to make money, then, as Rocky Palmer put it, "good luck to ourselves". Phillips thought on her feet: Masterfridge pays better than the going rate in Swaziland, the labour content of a fridge is between 8% and 10% of total cost and 90% is based on efficiencies and economies of scale, and in any event, Masterfridge needs to manufacture competitively. "Our competition comes from the Far East where the average wage is $50 a month." Touché. The group spent R35-million enhancing the Swaziland factories. They can now make up to 2 100 domestic and ice-cream fridges a day, running below capacity until summer lifts demand. Phillips says Korea's Samsung has supplied technical help, and Masterfridge has become only the second company in the world to be granted a licence to manufacture on behalf of Samsung. It is also making Hoover under licence for McCarthy Retail, and Defy as well as many house brands such as Mercury, Superfrost, Sansui and AIM for retail chains - more than 60 models are manufactured to furnish each chain with its own range. Masterfridge has also entered the bar fridge market, and its new plastics factory makes injection-moulded fridge baskets to give the group every component of vertical integration. Phillips says Masterfridge is negotiating with a multinational group seeking to re-enter the SA market to manufacture products for export to the Middle East. It might include diversification towards stoves and laundry equipment but, as Palmer says, there is no hurry to do this. General Electric is the likely partner. In partnership with black empowerment group Malesela, Masterfridge has established a factory at Bronkhorstspruit, Mpumalanga, to make up to 300 gas/electric fridges a day, the objective being that the fridge can be run off either power source and is not a wasted purchase when an area is electrified. The venture is called Siya Embili. Statistics show households buy a fridge between 12 and 18 months after they are electrified, and Eskom is connecting 350 000 a year. It has also entered a 60-40 joint venture with Delta Corporation in Zimbabwe, (the first ever in which Delta has taken less than the partner) and invested R5-million on a factory to make domestic fridges, freezers and beverage coolers for African markets. Production began last month at 120 a day; capacity is for 350 units. Masterfridge already covers most of southern Africa. Palmer says the Zimbabwean government introduced a 70% import duty on fridges in February, obliging Masterfridge to manufacture there in order to do business. This also capped Masterfridge's exports, which were maintained at 20% of sales, expected to rise to 30% this year. Phillips says quality products and attention to service are behind the gain in Masterfridge's market share from 39% to 50%. Toll-free numbers printed on the inside of the fridge can summon 24-hour service seven days a week to anyone who bought their fridge from a retailer. Phillips says after-sales service is of great importance to the emerging market. On prospects, the regional market is growing in line with electrifications, bottle-coolers are an integral part of entrepreneurial development (and as Palmer notes, Delta Corporation is big in beer and drinks in Zimbabwe and beyond). South African retailers are beginning to open stores in Africa and Masterfridge will supply and serve them. Exports elsewhere are rising: approval has been gained on standards for Australia and the European Union and there is potential in the Middle East and even the Far East. Lower interest rates might also help. Phillips says a big investment has been made in both fixed assets and people. It seems a pity unconventional bookkeeping was adopted with regard to the cost of training, because this type of move alienates investors. Masterfridge will probably mark some time before rallying again, although the outlook for the longer term is undoubtedly positive.
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