Shares digital

London’s taxi cab-maker has been bold in its plans for manufacturing in China, but the figures look high risk

by Timon Day

Manganese Bronze (MNGS) 310p, Stop loss: 350p

Shares summary

China is a gamble that a lower-cost black cab will sell in greater numbers than it has done before. The downside risk is greater than the upside and a 250p price target by Christmas look very reasonable.

Business:

Makes London’s black taxi cabs.

Vital stats:

Market value: £77 million

Historic PE: 28

Prospective PE 2008: 56

Prospective PE 2009: 14

Sector PE: 10.9

1-month relative strength: -23%

1-year relative strength: -53%

Yield: 1.7%

Spread: 1.9%

In 2006 it seemed with one bound Manganese Bronze would be freed from the shackles of its tiny home market. The deal with Chinese car manufacturer Geely to set up a joint venture in Shanghai was announced and the shares went ballistic, quintupling to peak at 950p last summer.

Manganese shares in the joint venture profits but Geely has the majority as it both manufactures and sells the cabs in China and Asia, leaving the UK company to sell in the UK and other countries.

A sharp reality check then saw the shares crumple to a 2008 low of 277p two months ago before rallying to almost £5 in August. Since then the downward trajectory has resumed and it will be no surprise if the price falls another 20%.

The problem is no one knows if the black cab will sell in China, even if it retails at around £8,000 or a third of the UK price. Cab fares are dirt cheap in China – a fifth less than in the UK – because taxi drivers are lightly regulated and own cheap Japanese cars.

The question now haunting shareholders is just how many taxi drivers will be willing to invest several years’ wages buying a vehicle that could prove difficult to hire – black cab taxi fares in Beijing might have to be twice as much as the cheapest operators to cover the purchase and operating costs.

The same will be true in other Asian countries. The chance of the black cab breaking big time into any new market looks pretty remote – only 250 have been sold since 2003 to US operators.

Manganese said its joint venture Shanghai LTI has doubled its order book from 3,000 to 6,000 TX4 taxis between 2009 and 2011 and production will start shortly. But this is small beer as Manganese sold almost 3,000 TX4s in 2006 in the UK.

Sales this year will probably fall to around 2,000. The interim report six weeks ago showed sales had slumped to 1,112 in the six months to the end of June against 1,342 in the half year to the end of January 2007. This sales crash, blamed on the economic downturn and slump in the Square Mile, is expected to worsen as taxi owners suffer lower takings and defer purchasing new vehicles. On a like-for-like basis sales are down by over 30%.

With luck Manganese might recoup the £16 million it has invested to date in Shanghai LTI but there is no guarantee of this, as the directors point out in the section Principal Risks and Uncertainties in the interim report.

The good news is the company has no debt and break even for manufacturing new taxis has been sharply reduced. But chief executive John Russell, who is heading the international sales drive, says UK prices will not be cut.

Arden Partners issued a sell recently, saying the shares were too expensive unless sales were much higher than expected in China.

Even if estimates of pre-tax profits of £7 million are achieved next year, the shares will be on a price/earnings ratio of 14 and, if Chinese production runs at 2,000 to 3,000 cabs a year, there will be little prospect of profits rising further.