SCT - Scott Tech

[HITMAN]

Awesome to see the jump today, is it going to get to $4

[sb9]

Awesome to see the jump today, is it going to get to $4

Getting close to that magical $4 mark....can it be lower for a lil while until the DRP price is determined as I've opted for the DRP

What a quiet achiever, marching along nicely. Can't believe this my second biggest gainer in my portfolio behind ATM.

[Snoopy]

Getting close to that magical $4 mark....can it be lower for a lil while until the DRP price is determined as I've opted for the DRP

What a quiet achiever, marching along nicely. Can't believe this my second biggest gainer in my portfolio behind ATM.

Why does the DRP exist sb9? Have you thought about that?

IMV Scott Technology has far too much capital. Indeed CEO Hopkins said that if they couldn't find a good use for the capital raised as a result of bringing JBS on board, they would return capital to shareholders. So it makes no sense to me to be raising more capital at this time ......unless.....there is a really big acquisition about to be announced that management are not at liberty to reveal!

Maybe all will become clear at the AGM?

SNOOPY

[sb9]

Why does the DRP exist sb9? Have you thought about that?

IMV Scott Technology has far too much capital. Indeed CEO Hopkins said that if they couldn't find a good use for the capital raised as a result of bringing JBS on board, they would return capital to shareholders. So it makes no sense to me to be raising more capital at this time ......unless.....there is a really big acquisition about to be announced that management are not at liberty to reveal!

Maybe all will become clear at the AGM?

SNOOPY

Snoops, guess you answered your own question as per my highlighted bit in your response.

Sure management have aspirations to grow further supported by strong balance sheet. Let's wait and see what their plans are either thro' NZX releases or updates at ASM.

[Snoopy]

Sure management have aspirations to grow further supported by strong balance sheet. Let's wait and see what their plans are either thro' NZX releases or updates at ASM.

The meeting opened with around fifty shareholders attending. A strong share price rally from the JBS capital raising time in early 2016 (price then $1.39) to $3.70 today made for a positive vibe. As customary, Chairman Stuart McGlauchlan announced the recently inked contracts: $21m of new business. But one good month does not a boom year make. Perhaps more indicative of relative future prosperity is the next twelve months of foreign exchange purchases that represent ‘deals in the bag’. AR2017, section D1, shows these up 32% to $24.976m. Yet I believe the best encouragement for future business comes from those senior managers (almost all of them) not at the AGM - because they were away negotiating new deals. Alan Prince from the Christchurch Maces Road site did attend, and the banter was “he is allowed one day off.”

Over ‘after meeting eats’, I discussed with senior management the segmentation of results into ‘Australasian Manufacturing’, ‘Americas Manufacturing’ and ‘Asia and Europe Manufacturing’. The current segmentation was vigorously debated at senior management level and may not be perfect. The puzzling Asia/Europe link can be explained by following the career path of appliance line manufacturing guru Ken Snowling. From heading Maces Road Christchurch, Ken oversaw the development of Scott Technology in China. Now he may be found bedding in Scott’s new European headquarters in Germany. The latest $17.5m of appliance line jobs will be manufactured in China. Europe and New Zealand. This clearly crosses market reporting segment boundaries. But Christchurch, China and Germany have always been associated with Appliance Line Production work. So the linking Asia and Europe is not such a surprise.

The AGM presentation publicity photo (slide 14) shows a smiling Cathy Smart, Scott’s first Chinese born (?) head, leading a train of happy employees. Two children holding the Scott’s banner at the head of the train are extended family. Chairman McLauchlan was quick to point out that Scott’s support family values, not child labour!

Further in the ‘post match discussion’, I asked about the absent director Andre Noguiera, who only attended two of the six board meetings held. Being head of JBS USA, Andre obviously has wide JBS group responsibilities. But the real benefit of having Andre on the board is the direct connection to JBS operations in the Americas. Having managed JBS Australia for a year on his way up in 2012, Andre is very aware of the detail of the day to day detail of running the Australasian division.

The Dunedin Kaikouri valley base will be doubled in size with earthworks starting early in CY2018. Construction will be managed by now unretired pensioner Graham Batts, a former managing director of Scotts and most recently a retired non executive director. Jobs for the boys? It was Graham who planned the move to Kaikouri valley in earlier years (completed in 2008) and had the foresight to build the new HQ such that future expansion was possible. There is no-one better qualified to fulfill the ultimate expansion plan. Dunedin is where most of the meat industry robotics systems have been built.

Eleven lamb boning systems have been delivered throughout Australasia. Ireland is most likely the next untouched lamb boning market. But internationally, lamb processing is a niche industry. Beef processing is of most interest to controlling shareholder JBS. JBS’s first plant processing beef sides is now working at JBS Dinmore in Queensland. Beef processing automation has a great future throughout the Americas and Europe, both inside and outside JBS. Pork and Chicken processing are areas where robotic expertise will be expanded. Indeed, a $3.5 million order from the United States for an X-Ray Pork Primal Cutting system was announced at the AGM. The key intellectual property (IP) that makes these developments superior is Scott’s DEXA (Dual Energy X-ray Absorptiometry) system. This not only allows a precision cut to be made in exactly the right place in each individual carcass. It can also simultaneously calculate meat fat and bone ratio – or lean meat yield.

Scott’s has on the balance sheet $26m of ‘excess capital’ (amounting to 33.5cps). Thirty acquisition targets were considered over the year. But only a couple, with the ability to significantly enhance an existing business unit or seriously disrupt it are still under active consideration. The ‘institutional imperative’ suggests that if a business has money in the bank they will spend it. Thankfully Scott’s is showing a much more disciplined approach to utilising shareholder cash. More opportunities will come up. Yet after the meeting, it was made clear to me that returning excess capital to shareholders was very much a continuing option.

Question time, and a shareholder asked about the absorption of two separately registered associated companies into the parent ‘Scott NZ Limited’ fold.

1/ Scott Milktech Limited, developing automated cow milking technology, was 61% owned. Is the former 39% equity partner still involved? Answer: No. Scott’s have bought out the former development partner to assume 100% ownership.

2/ HTS-110 Limited, the super-conductive magnet business, has made two high profile international installations ( one to a major US pharmaceutical company and another neutron and X-ray analysis tool into Germany – the sixth there). Yet revenue for the year was down nearly 50% (AR2017, p34). Should we shareholders be worried? Answer: No. This kind of variation in business is not inconsistent with the nature of HTS-110. It is part of the overall balanced business mix where not every Scott business unit does well every year.

A second shareholder railed against the Fisher Funds sell down of Scott shares around ‘JBS capital reconstruction time’ in early 2016. The missed opportunity of the ensuing capital gain has proved a disastrous misjudgment for Fisher Funds stakeholders, he pointed out. This same shareholder praised the reintroduction of the dividend reinvestment plan . Particularly that JBS and other independent directors and senior managers showed confidence in the future direction of Scotts by reinvesting with it.

Following the meeting, the workshop was opened up to all-comers prepared to wear safety glasses. My diversity observation of the day was that there was at least one woman in overalls in the workshop – good to see. There were two ‘active projects’ to inspect.

1/ The “Bladestop” safety bandsaw gave we shareholders a working demonstration. It works via the operator wearing a wire belt around their waist. This completes an electrical circuit should any part of the operator’s body touch the blade. An air actuated cylinder can fire off the brake that halts the saw blade in 9 milliseconds. A back up camera system that senses the operator mandated blue gloves provides a back up switch. Fingers and tendons will be saved.

2/ Development for a new manufacturing technique for LED lights. Essentially a high pressure plastic welding system, the job was to connect the soft printed circuit board that flashed the LED light to the plastic lens that cover it. The previous manufacturing process used an ultimately unwanted plastic sheet manufacturing by product which, if it didn’t come free, could contaminate the finished LED unit. Productivity gains plus less waste equals good business.

Finally it was time to adjourn back to the food and drink spread, and Scott’s did not disappoint. There were crumbed fish bites , mini spring rolls, mini meatballs on the end of a toothpick ready for the tomato sauce dip and a varied array of gourmet club sandwiches.
As for the drinks, what kind of wine would you like? Or beer? I don’t know if it was the time of day (4pm) or the audience. But the orange juice ran out first.

SNOOPY

[Snoopy]

The meeting opened with around fifty shareholders attending. A strong share price rally from the JBS capital raising time in early 2016 (price then $1.39) to $3.70 today made for a positive vibe. As customary, Chairman Stuart McGlauchlan announced the recently inked contracts: $21m of new business. But one good month does not a boom year make. Perhaps more indicative of relative future prosperity is the next twelve months of foreign exchange purchases that represent ‘deals in the bag’. AR2017, section D1, shows these up 32% to $24.976m. Yet I believe the best encouragement for future business comes from those senior managers (almost all of them) not at the AGM - because they were away negotiating new deals. Alan Prince from the Christchurch Maces Road site did attend, and the banter was “he is allowed one day off.”

Over ‘after meeting eats’, I discussed with senior management the segmentation of results into ‘Australasian Manufacturing’, ‘Americas Manufacturing’ and ‘Asia and Europe Manufacturing’. The current segmentation was vigorously debated at senior management level and may not be perfect. The puzzling Asia/Europe link can be explained by following the career path of appliance line manufacturing guru Ken Snowling. From heading Maces Road Christchurch, Ken oversaw the development of Scott Technology in China. Now he may be found bedding in Scott’s new European headquarters in Germany. The latest $17.5m of appliance line jobs will be manufactured in China. Europe and New Zealand. This clearly crosses market reporting segment boundaries. But Christchurch, China and Germany have always been associated with Appliance Line Production work. So the linking Asia and Europe is not such a surprise.

The AGM presentation publicity photo (slide 14) shows a smiling Cathy Smart, Scott’s first Chinese born (?) head, leading a train of happy employees. Two children holding the Scott’s banner at the head of the train are extended family. Chairman McLauchlan was quick to point out that Scott’s support family values, not child labour!

Further in the ‘post match discussion’, I asked about the absent director Andre Noguiera, who only attended two of the six board meetings held. Being head of JBS USA, Andre obviously has wide JBS group responsibilities. But the real benefit of having Andre on the board is the direct connection to JBS operations in the Americas. Having managed JBS Australia for a year on his way up in 2012, Andre is very aware of the detail of the day to day detail of running the Australasian division.

The Dunedin Kaikouri valley base will be doubled in size with earthworks starting early in CY2018. Construction will be managed by now unretired pensioner Graham Batts, a former managing director of Scotts and most recently a retired non executive director. Jobs for the boys? It was Graham who planned the move to Kaikouri valley in earlier years (completed in 2008) and had the foresight to build the new HQ such that future expansion was possible. There is no-one better qualified to fulfill the ultimate expansion plan. Dunedin is where most of the meat industry robotics systems have been built.

Eleven lamb boning systems have been delivered throughout Australasia. Ireland is most likely the next untouched lamb boning market. But internationally, lamb processing is a niche industry. Beef processing is of most interest to controlling shareholder JBS. JBS’s first plant processing beef sides is now working at JBS Dinmore in Queensland. Beef processing automation has a great future throughout the Americas and Europe, both inside and outside JBS. Pork and Chicken processing are areas where robotic expertise will be expanded. Indeed, a $3.5 million order from the United States for an X-Ray Pork Primal Cutting system was announced at the AGM. The key intellectual property (IP) that makes these developments superior is Scott’s DEXA (Dual Energy X-ray Absorptiometry) system. This not only allows a precision cut to be made in exactly the right place in each individual carcass. It can also simultaneously calculate meat fat and bone ratio – or lean meat yield.

Scott’s has on the balance sheet $26m of ‘excess capital’ (amounting to 33.5cps). Thirty acquisition targets were considered over the year. But only a couple, with the ability to significantly enhance an existing business unit or seriously disrupt it are still under active consideration. The ‘institutional imperative’ suggests that if a business has money in the bank they will spend it. Thankfully Scott’s is showing a much more disciplined approach to utilising shareholder cash. More opportunities will come up. Yet after the meeting, it was made clear to me that returning excess capital to shareholders was very much a continuing option.

Question time, and a shareholder asked about the absorption of two separately registered associated companies into the parent ‘Scott NZ Limited’ fold.

1/ Scott Milktech Limited, developing automated cow milking technology, was 61% owned. Is the former 39% equity partner still involved? Answer: No. Scott’s have bought out the former development partner to assume 100% ownership.

2/ HTS-110 Limited, the super-conductive magnet business, has made two high profile international installations ( one to a major US pharmaceutical company and another neutron and X-ray analysis tool into Germany – the sixth there). Yet revenue for the year was down nearly 50% (AR2017, p34). Should we shareholders be worried? Answer: No. This kind of variation in business is not inconsistent with the nature of HTS-110. It is part of the overall balanced business mix where not every Scott business unit does well every year.

A second shareholder railed against the Fisher Funds sell down of Scott shares around ‘JBS capital reconstruction time’ in early 2016. The missed opportunity of the ensuing capital gain has proved a disastrous misjudgment for Fisher Funds stakeholders, he pointed out. This same shareholder praised the reintroduction of the dividend reinvestment plan . Particularly that JBS and other independent directors and senior managers showed confidence in the future direction of Scotts by reinvesting with it.

Following the meeting, the workshop was opened up to all-comers prepared to wear safety glasses. My diversity observation of the day was that there was at least one woman in overalls in the workshop – good to see. There were two ‘active projects’ to inspect.

1/ The “Bladestop” safety bandsaw gave we shareholders a working demonstration. It works via the operator wearing a wire belt around their waist. This completes an electrical circuit should any part of the operator’s body touch the blade. An air actuated cylinder can fire off the brake that halts the saw blade in 9 milliseconds. A back up camera system that senses the operator mandated blue gloves provides a back up switch. Fingers and tendons will be saved.

2/ Development for a new manufacturing technique for LED lights. Essentially a high pressure plastic welding system, the job was to connect the soft printed circuit board that flashed the LED light to the plastic lens that cover it. The previous manufacturing process used an ultimately unwanted plastic sheet manufacturing by product which, if it didn’t come free, could contaminate the finished LED unit. Productivity gains plus less waste equals good business.

Finally it was time to adjourn back to the food and drink spread, and Scott’s did not disappoint. There were crumbed fish bites , mini spring rolls, mini meatballs on the end of a toothpick ready for the tomato sauce dip and a varied array of gourmet club sandwiches.
As for the drinks, what kind of wine would you like? Or beer? I don’t know if it was the time of day (4pm) or the audience. But the orange juice ran out first.

It has been a long time between drinks for me at Scott's new expanded factory in Kaikouri Valley in Dunedin. It was five years ago that I was last there at an AGM! This was the first 'live' AGM meeting since 2019 due to Covid-19, although it was a hybrid meeting with a whole row of techno-kids with their electronics along the back row of the meeting room, simulcasting the meeting 'live on the net'. There was a single reporter/photographer from the ODT too, not something guaranteed at AGMs these days, where 'reporting on the AGM' often consists of rehashing the company's own press release.

I think it is worth recording the 'departures' of a couple of Scott Technology stalwarts that I became aware of during the meeting, even though nothing was said officially.

1/ "Greame James Marsh" former director of Scotts for 38 years (1969-2007) and chairman for 32 of those, has died aged 88 in June 2022. https://www.tributes.co.nz/ViewMyTribute.aspx?id=17483

2/ "Ian Devereux" died aged 80 early in the first lock-down in April 2020. Ian was the founder of Rocklabs, the globally significant "mining resource adjunct" company acquired by Scott Technology in 2008, upon Ian's retirement from the business. I think it is fair to say that since acquisition, Rocklabs has been the star performing division of Scotts.
https://notices.nzherald.co.nz/nz/ob...?pid=196083539

Details of the AGM addresses, I could not find on the Scott Investor Relations website. However, they are here:
https://www.nzx.com/announcements/402921

I don't see any point in rehashing what was said when you can go to the link of the original. One clarification made was of the $190m of forward orders reported (the highest in the company's history), $50m was from controlling shareholder JBS, $60m fitted under the header of 'standard equipment' (which means higher profit margins), leaving $80m worth of 'other business'.

During question time.

1/ A shareholder named "David Marsh", who looked like a younger edition of whom I later determined to be his father Graeme Marsh, asked for some more details on the Caterpillar deal. I have summarised CEO JKs answer to this, along with some thoughts of my own, in post 1022.

2/ A shareholder, who later identified herself as the late Ian Devereux's sister, said she was pleased to see two women at the top table and that she would be returning next year to press for more gender equality on the board. Gender equality on the day was boosted by the three male JBS appointees only being represented via video link, as was Australian based director Derek Charge. And the fact that one top desk person, company no.3, director of marketing and people, Casey Jenkins, wasn't actually a board member.

Nevertheless Scott Technology, in partnership with the University of Canterbury, did launch a "Women in Engineering Scholarship", showing that their push for more women to be involved in the company was not just lip service.

3/ A shareholder asked what was the underlying 'market force' in companies ordering new packaging solutions from Scott's Alvey division in Europe. The answer: A trend to much larger 'mega warehouses', with more and a greater variety of goods being shipped through one site. JK let slip that Pfizer in Europe was one of their customers.

4/ A shareholder asked about material cost over-runs and how this might affect the profitability of these larger installations. JK said that in Europe they were now including a 'steel index clause' that allowed variability in the contract price, depending on where the global steel price was at the time of project construction and delivery.

After the meeting we had a brief tour of the expanded workshop. I had a chat to Andrew Arnold, head of meat processing that lead the tour. He was very satisfied with progress being made on the automated beef boning room. The workshop floor employees had gone home by this point. But we saw a couple of robots being evaluated for beef boning in what looked like a small R&D section of the workshop. There was also a very large piece of pork boning equipment being lined up ready to ship.

After the meeting there was the usual 'superior spread' of small eats and drinks. But the turnout of shareholders to indulge was only around half that of previous pre-Covid years. I reckon the workers on the floor would have enjoyed a pretty impressive array of 'leftover lunch' the next day.

SNOOPY

[Snoopy]

We Skellerup shareholders have certainly had a good year. But 'good' is a word that must always have context. I find it useful to have a 'measuring stick'. Scott Technology is such a stick. Different in that it sells complete packages and not components. But the same in that both companies rely on Intellectual Property and trusted staff that can turn that knowledge into profits.

	Skellerup	Scott Technology
Operational Sector	Manufacturing	Manufacturing
Total Employees	813	622
Manufacturing Hubs	NZ, Australia, Europe, North America, Asia	NZ, Australia, Europe, North America, Asia
Share Price 27-11-2021	$6.06	$3.37
Market Capitalisation 27-11-2021	$1,183m	$267m
Capitalised Dividend Valuation per share (2017.5 to 2021.5)	$2.25	$1.27
Declared earnings (FY2021)	$40.175m	$9.527m
Normalised earnings (FY2021)	$40.243m	$11.146m
Normalised eps (FY2021)	20.5c	14.2c
Normalised eps growth over 5 year period (FY2016 to FY2021)	+72.3%	+18.3%
Historical PE (FY2021)	29.5	23.7
dps (paid during FY2021)	7c+6.5c	0c+2c
Earnings Payout Ratio (excluding DRP)	68%	14%
Gross dps (paid during FY2019)	8.96c+7.76c	0c+2c
Historical Gross Dividend Yield (using Share Price 27-11-2021)	2.76%	0.59%
Shareholder Equity (based on equity at EOFY2021)	$196.149m	$98.195m
ROE (based on equity at EOFY2021)	20.5%	11.4%
Sales (FY2021)	$279.615m	$216.234m
Net Profit Margin (FY2021)	14.4%	5.2%
Total Bank Debt (last balance date EOFY2021)	$24.409m	$10.920m
MDRT (Based on bank debt at balance date EOFY2021)	0.61 years	1.0 years

A 72.3% growth rate at SKL over a five year period equates to an averaged annual growth rate of:

1.723^0.2 = 1.115, or 11.5% per year.

Perform the same exercise on SCT and you get

1.183^0.2 = 1.034, or 3.42% per year.

This goes some way to explaining why SKL is sitting on a PE of 29.5 verses 23.7 for Scotts.

Some more observations:

a/ If you compare my quoted reference exercise from the FY2019 perspective, both companies have reduced their bank debt to something that is almost insignificant.
b/ ROE at SKL remains about double that at SCT, although both have improved.
c/ SKL coped with the initial Covid-19 hit better than SCT, because SKL mainly supplied essential components whereas SCT 'capital projects' were deferred. But SCT took the opportunity to 'right size' the business, losing around 200 staff compared to the FY2019 pcp.
d/ Net profit margin at SKL remains around triple that of SCT (c.f. pcp), although both have improved.

Another comparison of note is to see by how much the market price exceeds the 'capitalised dividend valuation' price. This difference is one measure of the 'growth premium' accorded to each company by the market.

SKL: Growth Premium = $6.06 - $2.25 = $3.81 => Growth Premium is 63% of share price
SCT: Growth Premium = $3.37- $1.27 = $2.10 => Growth Premium is 62% of share price

Depending on how you see the outlook for both companies, you might interpret these figures as showing both companies being equally overvalued ;-P

The one difference that does not show in these figures is the effect of the 'change of direction' for Scotts, under their new CEO. This is steering the company towards more standardised products, away from one off builds. It will take a couple of years for this change to flow through to margins, bar no more shock Covid-19 interruptions (gulp!)

Concluding the Comparison

Both companies are conservatively financed, which is always good in a world where business opportunities are uncertain. Scott's cut their dividend payout drastically to achieve this, but Skellerup did not have to. I see Skellerup as the more resilient earner. The growth story at Skellerup is around incremental improvement and bolt on acquisitions. Whereas at Scotts, growth is more around 'executing the Scott 2025 vision plan' (more repeat sales of modularised products). I see the Skellerup path as more certain (they have a great knack of retaining customers as development partners), whereas Scotts are being more affected by macro-economic events. But I think if Scott's can co-ordinate the growth in their diverse international 'centres of excellence', then it is Scott's that have the most growth potential over the next two to three years. Looking beyond that time frame though, it is hard to imagine that Skellerup will be bettered on the long term growth path. If Skellerup are overvalued, there is a case to be made that they are not significantly more overvalued than Scott's are. The bonus for Scott shareholders is that they are always on the verge of cashing in a figurative 'mega lottery ticket'. If Scott's automated beef boning room project can be nailed, then there are a good decade of highly profitable installation projects lined up in Australia and the USA to follow up. So far, the 'mega lottery ticket application' (of which the automated beef boning room is simply the current one) has not kicked in for Scott shareholders. But we always live in hope! Being a 'glass half full' person, I am calling Scotts as the better value investment on the market today. Yet as a long term holder, I would feel more comfortable with Skellerup in my portfolio. Yes the price is dear, for both. But good things tend not to come cheap!

discl: hold SCT and SKL

Time to bring a measuring stick to Scotts via my annual 'battle of the manufacturers' with Skellerup. Scotts is different in that it sells complete package solutions and not components. But it is the same in that both companies have a similar geographic market spread and rely on Intellectual Property and trusted staff that can turn that knowledge into profits.

	Skellerup (SKL)	Scott Technology (SCT)
Operational Sector	Manufacturing	Manufacturing
Total Employees	869	633
Manufacturing Hubs	NZ, Australia, Europe, North America, Asia	NZ, Australia, Europe, North America, Asia
Share Price 29-11-2022	$5.45	$2.65
Market Capitalisation 27-11-2022	$1,064m	$212m
Capitalised Dividend Valuation per share (2018.5 to 2022.5)	$2.57	$1.10
Declared earnings (FY2022)	$47.813m	$12.657m
Normalised earnings (FY2022)	$47.205m	$13.510m
Normalised eps (FY2022)	24.1c	16.9c
Normalised eps growth over 5 year period (FY2017 to FY2022)	+136%	+40.8%
Historical PE (FY2022)	22.3	16.6
dps (paid during FY2022)	10.5c+7.5c	4c+4c
Earnings Payout Ratio (excluding DRP)	75%	47%
Gross dps (paid during FY2022)	12.54c+8.96c	4c+4c
Historical Gross Dividend Yield (using Share Price 29-11-2022)	3.94%	3.02%
Shareholder Equity (based on equity at EOFY2022)	$211.208m	$100.406m
ROE (based on equity at EOFY2022)	22.4%	13.5%
Sales (FY2022)	$316.829m	$221.757m
Net Profit Margin (FY2022)	14.9%	6.1%
Total Bank Debt (last balance date EOFY2022)	$40.000m	$11.970m
MDRT (Based on bank debt at balance date EOFY2022)	0.84 years	0.94 years

-------------------------

A 136% growth rate at SKL over a five year period equates to an averaged annual growth rate of:

2.36^0.2 = 1.187 or 18.7% per year.

Perform the same exercise on SCT and you get

1.408^0.2 = 1.0708, or 7.08% per year.

This goes some way to explaining why SKL is sitting on an historical PE of 22.3 verses 16.6 for Scotts.

Some more observations:

a/ The SKL share price has declined by 10% between study periods (refer quoted post), whereas over the same time the SCT share has price declined by 21%.
b/ If you compare my quoted reference exercise from the FY2021 perspective, both companies continue to hold their company debt at low levels.
c/ ROE at SKL remains about double that at SCT, although while both improved the ROE at SCT improved a little faster.
d/ From a staffing perspective both SKL and SCT are on a 'growth trajectory'. But Scott's had a more modest growth rate, because the growth period included the closure of the US based Robotworx business. By contrast, 'investment rival' Skellerup bought a whole new bolt on business unit, Talbot Plastics with 18 employees, to add to their organic growth during the year.
e/ Net profit margin at SKL is now around 2.5 times that of SCT (c.f. 3 times over the pcp). The relative improvement at Scotts is because of SCT selling more standardized higher margin products. Nevertheless margins at both companies have improved.

Neither company makes a good yield play investment, now that interest rates are well and truly on the rise.
But it is interesting to see by how much the market prices of the shares exceeds the 'capitalised dividend valuation' (a proxy for dividend paying ability) price. This difference is one way of measuring any 'growth premium' the market attaches to each share.

SKL: Growth Premium = $5.45 - $2.57 = $2.88 => Growth Premium is 53% of share price
SCT: Growth Premium = $2.65 - $1.10 = $1.55 => Growth Premium is 58% of share price

The growth premium for both has decreased as the dividend payment for each share has increased. This 'growth premium' measure is Mr Market's one year snapshot of growth potential. Given Scotts are expecting some big projects, deferred by material shortages, to come to fruition over FY2023, then this measure is probably a fair reflection of the 'current guru opinion growth prospects' of each company. I would agree and expect SCT to grow profits faster than SKL over FY2023.

Concluding the Comparison

The growth story at Skellerup is around incremental improvement and bolt on acquisitions. Acquiring Talbot Advanced Technologies of Christchurch NZ on 31-07-2021 meant SKL increased their annualised after tax earnings for FY2022 by: $1.126m x 12/11 x 0.72 = $0.884m. Yet total annualised profit increased, between FY2022 and FY2023, by: [$47.205m+(1/12 x $0.884m)-$40.243m] = $7.036m. This shows by far the majority (87%) of SKL's NPAT growth was organic: ($7.036-$0.884)/$7.036m= 87%. This organic growth over the last two years in particular has come from:

a/ Better utilisation of existing factory resources, indirectly fuelled by strong commodity prices in dairy and oil.
b/ Site consolidation and the use of more energy efficient technology in both manufacturing and distribution.

However, I would argue that riding macro trends in commodities cannot continue indefinitely. Furthermore the 'easy pickings' in internal company costs are likely already in the bank. I can see growth for SKL continuing, but not at the stellar rate of the last couple of years.

Meanwhile at Scotts, growth is more around 'executing the Scott 2025 vision plan' (more repeat sales of modularised products), which is still very much a 'work in progress'. Successes are well trumpeted with the automated lamb processing room. Even better, work on the automatic beef boning room project, - potentially a much larger market- is progressing well. While full automation of the beef boning room is 'not yet there', the Bladestop band-saw product has been very successful as an 'interim step sale' to potential beef industry customers.

Offsetting this is the 'shuffling under the carpet' of robot wheeler dealer 'Robotworx', once the front line of SCT's USA expansion plans. Meanwhile the driver-less factory transport solution acquisition 'Transbotics' looks not to be living up to expectations on the revenue front. But rather than being a veiled criticism of Scott's management, I see my observations here as being a reflection of investment in technology generally: For every big winner a technology company creates, the path to success in one area will be strewn with many more losers that ultimately don't make the business case. I have confidence in CEO John Kippenberger's plan to co-ordinate the growth in their diverse international 'centres of excellence', and I think it is Scott's that has the more growth potential over the next two to three years.

The bonus for Scott shareholders is that they are always on the verge of cashing in a figurative 'mega lottery ticket'.
The latest deal with US heavy vehicle giant Caterpillar, to develop stationary automated robotic 'filling stations' to power giant electric earth moving equipment at mining sites globally is the latest example of this. Whether any real profits will ever come from this project is not certain (hydrogen fuelled electric power must be a real challenge to battery fuelled electric power for heavy vehicles in the future). But at today's SCT share price, shareholders are effectively getting a 'free option' on heavy vehicle battery refuelling technology. If it doesn't work out, it won't be a disaster for existing SCT shareholders.

Both companies are conservatively financed, which is always good in a world where business opportunities are uncertain. I see Skellerup as the more resilient earner, which is now fully (over?) priced as a result. But at current share prices I see Scotts as the better growth prospect. I will be looking to accumulate more SCT shares on any significant share price weakness, and unload some of my SKL shares into any significant share price strength.

SNOOPY

discl: hold SCT and SKL

[Snoopy]

It has been a long time between drinks for me at Scott's new expanded factory in Kaikouri Valley in Dunedin. It was five years ago that I was last there at an AGM! This was the first 'live' AGM meeting since 2019 due to Covid-19, although it was a hybrid meeting with a whole row of techno-kids with their electronics along the back row of the meeting room, simulcasting the meeting 'live on the net'. There was a single reporter/photographer from the ODT too, not something guaranteed at AGMs these days, where 'reporting on the AGM' often consists of rehashing the company's own press release.

I think it is worth recording the 'departures' of a couple of Scott Technology stalwarts that I became aware of during the meeting, even though nothing was said officially.

1/ "Greame James Marsh" former director of Scotts for 38 years (1969-2007) and chairman for 32 of those, has died aged 88 in June 2022. https://www.tributes.co.nz/ViewMyTribute.aspx?id=17483

2/ "Ian Devereux" died aged 80 early in the first lock-down in April 2020. Ian was the founder of Rocklabs, the globally significant "mining resource adjunct" company acquired by Scott Technology in 2008, upon Ian's retirement from the business. I think it is fair to say that since acquisition, Rocklabs has been the star performing division of Scotts.
https://notices.nzherald.co.nz/nz/ob...?pid=196083539

Details of the AGM addresses, I could not find on the Scott Investor Relations website. However, they are here:
https://www.nzx.com/announcements/402921

I don't see any point in rehashing what was said when you can go to the link of the original. One clarification made was of the $190m of forward orders reported (the highest in the company's history), $50m was from controlling shareholder JBS, $60m fitted under the header of 'standard equipment' (which means higher profit margins), leaving $80m worth of 'other business'.

During question time.

1/ A shareholder named "David Marsh", who looked like a younger edition of whom I later determined to be his father Graeme Marsh, asked for some more details on the Caterpillar deal. I have summarised CEO JKs answer to this, along with some thoughts of my own, in post 1022.

2/ A shareholder, who later identified herself as the late Ian Devereux's sister, said she was pleased to see two women at the top table and that she would be returning next year to press for more gender equality on the board. Gender equality on the day was boosted by the three male JBS appointees only being represented via video link, as was Australian based director Derek Charge. And the fact that one top desk person, company no.3, director of marketing and people, Casey Jenkins, wasn't actually a board member.

Nevertheless Scott Technology, in partnership with the University of Canterbury, did launch a "Women in Engineering Scholarship", showing that their push for more women to be involved in the company was not just lip service.

3/ A shareholder asked what was the underlying 'market force' in companies ordering new packaging solutions from Scott's Alvey division in Europe. The answer: A trend to much larger 'mega warehouses', with more and a greater variety of goods being shipped through one site. JK let slip that Pfizer in Europe was one of their customers.

4/ A shareholder asked about material cost over-runs and how this might affect the profitability of these larger installations. JK said that in Europe they were now including a 'steel index clause' that allowed variability in the contract price, depending on where the global steel price was at the time of project construction and delivery.

After the meeting we had a brief tour of the expanded workshop. I had a chat to Andrew Arnold, head of meat processing that lead the tour. He was very satisfied with progress being made on the automated beef boning room. The workshop floor employees had gone home by this point. But we saw a couple of robots being evaluated for beef boning in what looked like a small R&D section of the workshop. There was also a very large piece of pork boning equipment being lined up ready to ship.

After the meeting there was the usual 'superior spread' of small eats and drinks. But the turnout of shareholders to indulge was only around half that of previous pre-Covid years. I reckon the workers on the floor would have enjoyed a pretty impressive array of 'leftover lunch' the next day.

Chairman's address:
https://scottautomation.com/assets/I...ns-Address.pdf

CEO's address
https://scottautomation.com/assets/I...Os-Address.pdf

AGM Presentation slides
https://scottautomation.com/assets/I...ember-2023.pdf

Unlike last year, with the announcement of the Caterpillar heavy duty electric mining vehicle project, there was no ground breaking new project announcements to get the shareholders excited. If there had been the wider public would not have known, because, for the first time I can remember, the ODT did not send out a reporter to cover the meeting. There was a reasonable turnout of shareholders, around 30 by my count, in the 'Graham Batts Meeting room' (Graham a stalwart of the company for many decades is retired but still alive and in good form) with another 50 shareholders looking in on-line.

The non executive director turn out was a bit light though, with only Chairman Stuart McLaughlin and John Thorman making it. It was very disappointing not to see the Australian JBS contingent there, given the ownership shake up instituted by them during the year was obviously going to be a point of contention. However, there were other unspecified JBS matters requiring their attention in Australia apparently. Nevertheless JBS Australia CEO Brent Eastwood at least, had the good grace to look in on the meeting AGM via the hybrid webcast, that was broadcast on line.

Come question time, one shareholder did get stuck into Chairman Stuart regarding the JBS position. Were they still a supportive shareholder? Were they even still a supportive customer? (I must admit I had doubts about this, given the seemingly glacial progress of the automated beef boning room, while other products like the chicken trussing machine for other customers forge ahead). However, the answer to both questions was 'yes' and 'yes', with Brent Eastwood himself giving an audio address from across the Tasman, confirming Chairman Stuart's own affirmation. I have to admit I found the clarification of the JBS position a great relief.

During the 'after AGM workshop tour' with the head of the Dunedin headquarters Andrew Arnold, I found out that the Australian development partner of the the automated beef boning project, Teys Australia, a leading protein processor, had quit. And JBS had stepped in as the new development partner to ensure that the project continued. This isn't as disruptive as it appears. Scotts were doing all of the production engineering line development, and Tey's were to do the real world evaluation of the technology on the processing line. All the change means is that, next month, the evaluation prototypes get shipped off the JBS in Australia rather than to Teys. I suspect the change of heart at Teys was in response to corporate cost pressures, rather than a loss of confidence in the technology. But 'time will tell' on that.

The workshop tour was primarily to show off a 'working display' of the chicken trussing processing machinery in Scott's Kaikouri Valley workshop - (but without the chicken carcasses on the moving production line at the time of course). In real life installations, the chickens must still be 'manually loaded'. But everything is fully automated after that. Scott's envisages that the poultry trussing machines will be built in Dunedin for now. But there are plans to establish an alternative construction facility in Christchurch, should demand expand according to plan.

Another shareholder had a question on the automated fish de-boning project. CEO JK said it had proved a difficult engineering challenge, with all the small fish bones to deal with, and the project was now dead.

A further shareholder, asked about progress on the Caterpillar deal, announced with much fanfare at last years AGM. He bemoaned the fact that there had been no update since. JK noted that he had met with representatives of caterpillar in Christchurch just last month and the project was progressing well. (Personally I was of the opinion that putting hydrogen into fuel cells and using those to drive electric motors is a far better green heavy transport solution than batteries. But then again, there is the issue of transporting hydrogen fuel to the outback mines -where it is required-, which in itself requires specialised equipment). I guess the fact that Caterpillar have considered the hydrogen power route, and this has not put them off battery technology (heavy batteries reduce the payload of mining trucks, which is an issue) means the gamble of going into this partnership with Caterpillar is not the long-shot I thought it was. Nevertheless I would not be holding my breath on any translation from automated re-fuelling for electric mega-dump trucks to profit at Scotts just yet!

On the move of the three at the top management table from Dunedin to Auckland, apparently CEO JK has his family based there. Funny, I always thought that JK was a Dunedinite, but apparently not! So you can understand JK not wanted to wrench his family from their Auckland base to Dunedin.

There was a fine spread at the end of the Dunedin factory tour with both liquid and solid refreshments. I got stuck in to the red wine and crumbed fish bites and the rye bread salad club sandwiches. Someone told me it was one of the local hotels that puts on the catering. The certainly do a fine job.

SNOOPY