Fool's Eye View

[ February 29, 2000 ]

Still Flowering

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- Earlier today Mayflower Corporation (LSE: MFW) released its full year results. Let me put my cards on the table from the very start. I own shares in this company and I have been slightly alarmed by the fall in the share price over the last month or so. Whenever shares lose 30% or so in the month before results are released it is natural to assume that something fairly major is happening that you know nothing about. But the results appear to show that it is business as normal. The only major thing that seems to have happened is the appointment of John Major to the Board of Directors.

Mayflower is involved in automotive engineering and its activities can be split neatly in two. Firstly, there is the Vehicle Systems division that produces stampings and assemblies for cars and trucks. This accounts for about 60% of turnover. Mayflower is essentially an outsourcing operation for this part of the overall assembly process. It believes that the world market amounts to $100b and only 30% is outsourced at the moment. It expects the trend towards outsourcing to continue. Secondly, there is the bus and coach business. This division has grown more rapidly in the last few years, due to the acquisition of Dennis in 1998. This part of the business is benefiting from the increased emphasis on public transport, not just in the UK, but around the globe.

This morning's results saw turnover rise by 42%. However, as always, a lot of this growth was driven by acquisitions. In this case it was Dennis. The underlying rate of growth was said to be 12%, which is respectable, but not spectacular. Once again the group managed to increase operating margins which rose to 11%. This led to the underlying rate of profits increasing by 20%. This is an impressive result in light of the prevailing conditions in the automotive industry. It is recognised that there is global overcapacity, and the big manufacturers are not renowned for being gentle with their suppliers. However, most of the growth in margins appears to be coming from the Bus and Coach part of the business, where customers are less powerful.

Mayflower's debt pile continues to reduce, but still remains high at £222m. Interest payments rose to £21m last year and were covered almost four times by operating profits of £77m. With much of the group's growth dependent on securing acquisitions and this high level of existing debt, I think this is definitely a higher than average risk stock.

But the company does have very good cash flow. Operating cash flows have been consistently higher than operating profits for a number of years. What I particularly like about this company is that it explicitly states a figure for free cash flow in its results statement. Free cash flow is the cash flow left for shareholders after all other payments necessary to keep the business going have been met. So this is cash flow after items such as interest, tax and any replacement costs of plant and equipment. I regard free cash flow as one -- if not the -- crucial figure to look at when analysing a company. Ideally the publication of this figure should be mandatory. Company accounts focus far too much attention on profits and not nearly enough on cash flow.

Mayflower also announced the obligatory e-commerce initiative. You might be forgiven for thinking that these sort of announcements are mandatory at the moment. As far as Mayflower is concerned it is looking to reduce its procurement costs on the £120m of materials it buys each year. Frankly I would expect it, and indeed any other business, to be looking at cutting costs like this anyway. It is also investing £6m in an internet system to allow its own customers in the Bus & Coach division to order replacement parts, although this only accounts for £25m of total sales at the moment.

Overall, a very dull set of results that were pretty much in line with expectations. But then again, that is what I was really looking for.

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Related Links
• Mayflower discussion board
• Mayflower website