MaxiTRANS: The Aussie manufacturer that keeps on truckin’

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With the announcement that Ford plans to cease manufacturing in Australia by 2016, it would be easy to think manufacturing in the auto sector in Australia is as dead as disco. The high dollar, expensive and restrictive labour practices, and cheap imports have all conspired against domestic manufacturing, leaving 1,200 Ford workers out of a job.

Despite all this doom and gloom, there are a handful of small listed Australian manufacturers that are not only surviving, but thriving. Three that spring to mind are ARB (ARP.AX) which makes four-wheel-drive accessories, MaxiTRANS (MXI.AX), which makes truck vans, trailers and tippers, and Austin Engineering (ANG.AX), which makes dump truck bodies for miners.

If you make the right product, orders will come 

These three are all making record profits despite the headwinds faced by other manufacturers across Australia, proving that if you make the right product the orders will come. It probably doesn’t hurt that all three have a hybrid manufacturing model where at least some product lines are made in lower cost countries — ARB, MaxiTRANS and Austin have secondary manufacturing plants in Thailand, China and Indonesia respectively.

A somewhat flexible cost base keeps these three in the game, but their real competitive advantage comes from their research and design efforts. For example, 90% of the products MaxiTRANS and Austin make are bespoke for each individual customer, limiting the appeal of imports.

Spotlight on ARB and MaxiTRANS

ARB, on the other hand, is a vertically integrated powerhouse. To put this in non-business speak – “vertically integrated” means it captures value at each point along the distribution chain, from manufacturing to wholesale and retail. ARB can do this because it owns and franchise its own stores. This allows it more control in how its product is distributed and ultimately, wins it higher margins.

ARB has grown NPAT at an average annual compound rate of 15.8% for the past 10 years. This is a phenomenal effort. Sadly, ARB’s long track record of success appears to be largely captured in the stock’s price — as it trades for 18.4x consensus estimates of next year’s earnings.

While perhaps not the next ARB, MaxiTRANS is of far more interest as it trades for just 8.2x this year’s earnings.

Diversifying earnings streams

The challenge for MaxiTRANS is the perception of the stock – the notion that all its revenue comes from the manufacture of trailers, vans and tippers. By their nature, these revenues are lumpy as orders come and go with the optimism of the transport, agricultural and mining end markets they serve.

What’s less well known is that MaxiTRANS, aware of the volatility in its core business, has been rapidly diversifying away from truck trailers into truck parts. This move into truck parts and consumables – a far more stable revenue stream – was accelerated in May 2012 with the acquisition of Queensland Diesel Spares.

The goal is for parts to make up more than 50% of earnings versus about 35-40% at the moment. The move to more parts is important as it provides ‘ballast’ to the potentially more lucrative but lumpy manufacturing earnings.

Foolish takeaway

Time will tell if MaxiTRANS can make the transition to a more predictable and stable business. With a relatively lowly geared balance sheet and a 7.4% current dividend yield assuming a modest 65% payout ratio, MaxiTRANS is one to keep on your Foolish radar should any move to secure more parts earnings occur.

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Motley Fool contributor Chris Prunty, in his capacity as Fund Manager for the Ausbil Micro Cap Fund, owns shares in MaxiTRANS and Austin Engineering.

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