Skellmax industries

[rosey]

Does anyone follow this one
I see it has some positives
it is also an add recomendation by ABN amro craigs with a target price of 1.30
Cheers
Rosey

[peterafaj]

I am not a follower of this stock but some thoughts

1) It depends on the level of excitement you want ! Currently 118 and a target of 130 ! ie 10 %
You can't take too much notice of targets as every broker will have a different one.

2) Dividend yield is reasonable, so if you are looking for dividends and only modest capital growth then it could be a fit for you

3) The high dollar probably hurts their export returns but will make inputs(rubber) cheaper. You would need to do some research and find out the balance. My guess is that this will be a better share when the $NZ drops late 2005 ??????? ...or whenever


Cheers

Peter

[pajama]

i hold some of these, they are not exciting as such i agree. on pe and div yield basis they are sound i feel. the high NZ$ certainly has an impact. my own view is if a coy can put together reasonable results with a high$ it should be well placed to perform strongly with a lower $. who knows when that will be but if the strong data out of US continues could be sooner than later.
it is worth noting that SKX bought Deks (oz private coy in similar business) for AUD $4.2m in dec 2003. may not have a lot of impact for current financial year but positive that they can purchase a complimentary business and still maintain div yield. don't have financial data in front of me but recollect that cash flows a lot higher than reported profits. not a stock to set the world on fire but a good long term hold as part of a diverisfied porfolio in my opinion.

[peterafaj]

Hi Rosey

In today's Sunday Star there is an article by Garry Sheeran

He talks about researching companies paying more than 8% Gross Yield.

He has a Table giving "Forecast 2005 Yields"

Skellmax rates well at 8.8%

Cheers

Peter

[Cooper]

Anyone else picking up SKX at these prices?

+ A company looking for acquisitions, although how much the last one was picked up for is unknown.

+ Good Divi yield (as mentioned by peterafaj above)

+ Exposure to Agriculture. (Dairy Liner division looking good).

+ Sell down a result of (IMHO) it coming out of the top 50 and because of market sentiment.

+ Geographically diversified.

+ Apparently undervalued, according to FirstNZ (val: 130) and Forbarr (val: 160)... although as we've seen with FTX these valuations may rely on assumptions that later prove false, and market sentiment isn't exactly bullish at the moment.

Anyways, Cooper has already picked some up for a longer term play. Any critical views?

[limegreen]

As a recent seller, it just seems rangebound (see the SKX chart thread for details...). I bought in at a good price ($1.15 ish??), on similar recommendations and valuations several years back. I watched it climb up to $1.35 odd, fall back, climb up to there again, and fall back, and climb up there (I sold) and then it fell back hard...

I don't see it going anywhere in the short to medium term. Yield is of negligible interest to me. Seems solid enough :)

http://www.sharetrader.co.nz/topic.asp?TOPIC_ID=20094&whichpage=3&SearchTerms=skx

[Cooper]

Cheers limegreen, I have absolutely no TA skills so your point of view is appreciated. Buying with a long term view so sideways movement doesn't concern me as long as the divi is sustainable.

[Cooper]

Lizard made some good negative points on the supplied thread as well;

Quoting Lizard...

"My thoughts on reviewing recently were:

1. Debt levels are high following Deks acquisition. Given the dividend levels and reduced cashflow, they will have trouble reducing this in a hurry. Meanwhile, interest costs are going up.

2. Exchange rates tending on the unfavourable side a present, so maybe a net benefit if the NZD weakens.

3. Will the growing trend to once-a-day milking affect sales?

From my analysis, it looks like a steady business that won't go anywhere in a hurry. With rising interest rates, it is less valuable as a low volatility-high yield play. Its time may come, but not yet."

[limegreen]

I actually had another quick flick over a chart with up to the minute data. The OBV is still in a long-term uptrend, which does suggest it's slowly being accumulated. The break below the trading range bottom ($1.17) is not so healthy, however. Added to Lizard's reasoning, I'd suggest waiting for the SP to bottom out, and preferably start to look up a bit before jumping back in.... which may well be when interest rates and the exchange rate start to cool off.

[Cooper]

My opinion is that we're nearing the end of the interest rate rise cycle and the next year should see sideways movement in interest rates before they're lowered again... hopefully the dollar goes south earlier. All only opinion of course. I think they're hedged as well, but I'll have to confirm that.

[limegreen]

My memory is that SKX have been well hedged in the past, although, at least with respect to forex rates... I'd wonder if they're out of their original cover... and any current hedging will be at a higher rate.

[Lizard]

Hedges - at June 2004, they had hedges for $US25m at average 0.48, running to 2008. Not bad! Also have a natural hedge from imported materials (mainly rubber).

[Cooper]

Cheers Lizard... not bad at all.

[Lizard]

Acquisitions seemed to give SKX a boost. Interesting, because a bit of publicity in weekend newspaper re the price of rubber reducing earnings for tyre companies. So was expecting a down day! Will be interesting to see how these acquisitions are funded. On the plus side, dairying had a reasonable year and new China production should have reduced costs, so perhaps they find themselves with spare cash and are picking up companies for cheap... or perhaps I'm just bored waiting for some news on MET, HQP, RBD and now GDC....[|)]

[Cooper]

Yes... hasn't been a bad return in three months... 17% since I purchased. Quiet achiever. Hopefully others got on at the same time.

[Base Trader]

The pursuit of 4 aquisitions probably lets us know that they have solid cashflows and I would be surprised if SKX announced a weaker than expected result.

On Lizards points - the pressure on rubber manufacturers really depends upon their market. Large machinery tyres for Mining and large excavation equipment are selling for excellent premiums due to supply constraint. Hence, the ability to pass on price increases is very important and if you can maintain margins - then you actually earn more. It will certainly be interesting to see if SKX Ag division can pass on price increases. With Dairy prices up - one hopes that this will have re-started the growth in this market. But as we know dairy farmers tend to have short arms and long pockets.

On the China costs - I would be surprised if they have ironed all the issues out of the new factory. I have seen so many companies flounder in establishing operations in China that I remain circumspect. I expect that the Christchurch operation has been going full throttle on Ag Division production - which has excellent margins.

[Lizard]

Well done Cooper - it's looking even better for you today. Picked mine up at $1.05, but as that was now over 2 years ago, I can hardly rave about the returns...

[Cooper]

Cheers Liz, abt 30% now before costs. I was pointed in the direction of SKX by my Forbarr broker, just to show those cynics out there that they are worth listening to now and then. :)

You're a harsh taskmaster for yourself if 40% in two years is a disappointing result, Liz...

[Lizard]

Cheers Cooper. Most of what Forbar says makes good sense.

Us "buy & hold" types can always sound impressive in a bull market - but I'd be hard-pressed to name one share on the NZX mid-caps that you couldn't have made at least 40% on over all or part of the last 2 years...

[Sid]

SKX has been on at least a 8% gross yield based on a $1.05 purchase price. Your 2 year return would be closer to 55%.

[limegreen]

I sold out of Skellmax a couple of months back at $1.33. Following it's recent run, I've been using the joys of hindsight to check up on my decision. Had I bought it an the end of the recent downtrend, I'd be sitting on a fairly tidy profit, but I'm very glad that I didn't just hold. The last couple of day's price action looks mildly impressive, but is not a great improvement on my sale price (c.8%). However, the money I placed in a more growth-oriented stock (MFT) has increased over 20 in that time. The couple of years that the stock has been languishing between $1.17 and $1.35 have seen exceptional returns elsewhere. I certainly wish I'd sold earlier.

[Base Trader]

Skellmax has a great market position and I have held for about 11 months now since picking up at $1.17. Fundamentally it was going to trade into a sound S/P over time with the cyclical rebound in dairy spending, which has taken off of late. It was coming off lows in the US and we have seen strong dairy prices (refer USDA production and Starbucks analysis of milk prices). The "Starbucks" trends, Actimel and other pro-biotic milk and strong cheese sales in Europe and US and even China has re-invirgorated the industry. The strong margins here will insulate from increasing oil prices as well as a strong market allowing some pass through.

The building and mining markets have been going very well (FBU result will likely be excellent). However, margin compression may occur here.

What is unproven is managements ability to manage the risks - espeically commodity risks and general pricing risks. China plant success remains uncertain. However, their credit they picked the currency well and have excelelnt levels of protection compared to other NZ Companies.

What has changed is the profile of the Company. Traditionally the Ag business has been treated as a cash cow to milk but growth prospects built on other businesses. Now Ag is cyclically looking better and we have contributed growth from new businesses too.

Technically - you can see a definite fall in volume following the SP slump earlier this year. Those sold - had done so. From 28/7 we have seen a marked increase in volume from 1.5m shares on 28/7 to 0.8m yesterday. Interest has been piqued and buying has followed. But as buying subsides on this announcement will SKX deliver to fundamentally deliver on the higher SP Announcement? I think so this time... but we have been here before.

[Base Trader]

Correction - the vol traded 28/7 was 150k not 1.5m. Vol c.0.5m per day in August.

[Lizard]

Thanks BT. That is useful. I found it intriguing that I heard (or read?) an interview with one of their execs regarding the acquisitions and he said they "had very little debt". Now this seems odd to me, because at Dec 04 HY, they still had $32m of debt on the balance sheet - more than the $29m of equity (BEFORE approx $3m paid in divs). Operating cashflows of $4.8m for the HY would hardly be likely to have brought the debt down substantially... I can't see any sign they've sold off anything. So I am looking forward to seeing the FY cashflow statement!

[Base Trader]

FYI - the key financing ratios for in general acquisition financing revolve around cashflow coverage (CFFO - excluding increases in WC from acquisitions) of debt and servicing costs.

The fact they are looking at acquisitions means that they have adequate coverage at present.

[winner69]

Well done guys

Staying up at the new dizzy heights for this stock ... the old 115/135 range gone now

Maybe a new range 135/155 will be formed

Worth while looking at if this eventuates

[Base Trader]

FY05 Result at first impresssions looks sound enough.

Some may get a bit uptight that EBITDA increased only 9.4% to $24.5m and NPAT up 8.4% to $12.5m. However, these numbers improve when we take out the final Viking Pacific/Goldman Sachs IPO payment (exceptional - NZ1.1m) – NPAT increases to $13.4m (+15.8%). Based on the latter figure – normalised PE is 10.29x (SP of 1.38). On 15% growth numbers – that is a good PE.

The outlooks appears adequate – with “comfiortable” forward exchange hedging for the next year and in that time we should see a weaking in the NZD anyhow.

Most pleasing has been Skellmax’s integration of the new businesses and managing the cost structure adequately. As the China factory begins to add more value in 2006 – hopefully this will improve further.

The risks of course remain from higher plastics costs (petro chemicals), however, these have had only a relatively small effect in FY05 despite significant increases. This maybe due to pass through of costs or the commodity price being only relatively small component of final sale prices (I will review in full year financials).

However, I would not expect SKX to become sexy yet but I like the share at present due to its increased diversification and increasingly more robust cash flows. It has 12 months more of FX protection, exposure to infrastructure and overseas markets - including mining so will not suffer to the same extent from the potential for a weaker local market in 2006.

[Paper Tiger]

quote:
Some may get a bit uptight that EBITDA increased only 9.4% to $24.5m and NPAT up 8.4% to $12.5m. However, these numbers improve when we take out the final Viking Pacific/Goldman Sachs IPO payment (exceptional - NZ1.1m) – NPAT increases to $13.4m (+15.8%). Based on the latter figure – normalised PE is 10.29x (SP of 1.38). On 15% growth numbers – that is a good PE.


Can I correct this?

The 1.1m payment from Viking Pacific was last year.
When you subtract that from last years figures you get you modified growth percentages.

This years NPAT is $12.5m and P/E is thus 11.0.

Still a good result.

regards

Paper Tiger

[Base Trader]

Good effort PT. I should be more careful.

[Lizard]

Did anyone manage to view the MD's presentation to the AGM? I tried to get a copy, but too large for mailbox and has bounced... Just wondering what the comments on outlook and trading conditions were?

[Sid]

Lizard, Here's a few comments as reported on Stuff:

Skellmax confident of repeating higher profit
29 September 2005
By GARETH VAUGHAN

Skellmax expects its profit to grow in 2006 by a similar amount to this year's 8 per cent and is continuing to seek acquisitions.


Managing director Donald Stewart told yesterday's annual meeting in Auckland that as recently as Tuesday, he had spent five hours in a meeting about a potential acquisition. But no announcement was imminent.

Skellmax has acquired five firms in the past year, in New Zealand, Australia and Britain. Mr Stewart said it was looking for more – compatible with both its agribusiness and industrial units – in New Zealand and overseas. Skellmax makes 58 per cent of group revenue from its industrial business and the remainder from agribusiness.

Chairman Keith Smith said Skellmax was confident it could finance any acquisitions "sitting in front of us" from current cashflow.

He said infrastructure projects and commercial construction should boost sales in the industrial division during the coming year.

Though international dairy prices may have peaked, they remained stable and this, as well as a growing global appetite for milk products, would underpin continued demand for Skellmax's dairy consumable products.

"Taking these conditions into account, along with the organic growth opportunities and the expected earnings from recent acquisitions, we are confident of achieving continued growth."

Mr Stewart said Skellmax was looking for similar net profit growth in 2005-2006 to this year's 8.4 per cent, and $12.5 million result.

He was confident profit margins could be maintained in the face of increasing costs because the company was able to pass costs on to the market.

[Lizard]

Thanks Sid. Been away a few days, so just saw this.

Would be nice to see them forecasting double digit growth. Hard to get enthused, but seems fine for a bit of long term growth and income.

Cheers,

[Base Trader]

The statement and AGM was understated. I do not have a problem with this - under promise and over deliver is always a good way to be especially in integrating new businesses.