SCT - Scott Tech

[Snoopy]

Now the half year result is out, it is time to find out how accurate my interpretation of Chairman McLaughlin's words really was.

"The business has been performing well during the period and we are expecting to announce double digit growth at both the revenue and EBITDA level. Borrowing, depreciation and lease costs will be higher than for the same period last year due to the positive momentum of the Scott Group’s underlying growth and performance. The company continues to experience positive growth drivers across all core sectors. Further information will be provided when we announce the half year results” commented Mr McLauchlan."

What actually happened:
Underlying EBITDA went from $14.560m to $16.587m, or +13.0%
Revenue went from $126.533m to $140.868m or +11.3%

So yeah, double digit growth as promised, but only just.

Depreciation and Amortisation cost went from $3.920m to $5.889m a rise of $1.969m or 50% - ouch! But were are told that $1.3m of that is 'IFRS16 amortisation', a cost that used to be called rent, in relation to the new rented premises for Rocklabs in Auckland and Alvey in the Czech Republic. These extra costs are incurred now. But the extra growth from these new premises is yet to come.

Borrowing Costs have risen from $1.025m to $2.226m a rise of $1.201m or 117% - double ouch! $0.3m of that was related to IFRS16, which is incremental rent on the new larger premises. The remaining $0.9m of increase was attributable to higher interest rates on long term borrowings.

The comment about 'growth in all core sectors' (which includes protein, minerals and materials handling and logistics) is collectively true. But actually revenue was down 10% in the protein section subsection, while margins reduced as well.

I am not surprised that lease costs will be higher, given over the last year Scott Europe have moved their Czech Republic unit to a much more spacious site in Podivin. Furthermore Rocklabs seems to have moved to a new leased site in the Auckland Airport precinct, from what I believe were company owned facilities also in Auckland. I am not sure of the fate of the company owned industrial premises in Auckland following this move. Under IFRS16 reporting standards, what used to be called rent has been 'split reclassified' as both a finance expense and a depreciation of a right to lease asset.

It looks like I was spot on about what was behind the rising lease costs

Chairman McLauchlan was careful not to mention 'net profit after tax' in his announcement. That and the fact that the last major contract win (something that Scott's are usually keen to 'get out there' by way of a press release) was announced in the previous half year (3rd August) would suggest that even if Scott's have been 'trucking along fine' for six months, the next year may have a more sombre growth profile. So I would not be surprised if earnings go into a 'holding pattern' for the next 12-18 months. Adding to my speculation here is McLauchlan's use of the word 'core'.

Actual NPAT was $4.460m, down from $7.826m of the previous period. That is a drop of $3.366m or 57%. No wonder Chairman Stuart was coy! But included in that figure was the one off 'MacQuarie Capital Structural review', which cost the company $2.448m. Add that back in and the normalised result becomes: $4.460+0.72($2.448m)=$6.223m. That represents a profit drop of $1.603m. Add up the after tax effects of the rise in rent and interest rates and I get 0.72($1.6m+$1.2m)= $2.0m. These after tax increased costs more than exceed the NPAT profit drop. So there is definite growth in the revenue side of the business before incremental operating costs cast shadow on the result. To me this means the fall in operational NPAT of $1.743m for the half year is not cause for concern.

Yet is does add up to 'no growth' for FY2024. So my 'holding pattern' remark looks spot on as well, or perhaps even optimistic?.

"The company continues to experience positive growth drivers across all core sectors."

It is well known that under Chief Executive JK's leadership, the appliance production line business, that used to provide the majority of company earnings not that many years ago has been labelled 'non-core'. So if all of those clever engineering staff that put together these things are not being fully utilised, we have a temporary hit on profits right there.

I don't find it easy to pick out what the appliance production line side of the business is doing from the half year report. China sales (100% appliance line manufacturing) are certainly up from $4.086m to $6.120m, It looks like all of the income in NZ in that sector over the half was $1.030m in servicing costs. But I don't think any North American sourced projects, that would have been built in New Zealand, and then shipped to the USA for installation, are included in that figure. Forward work contracts revenue outside of the Material Handling Business in Europe, totalled $48m at the half year balance date. Perhaps half of that, or $24m, relates to appliance line manufacturing contracts?

I think if there was growth in the appliance line manufacturing business, somewhere in that interim report, it would have been mentioned.

Whether overall profits will be up or down this year, i think depends on the overall utilisation of the new larger Scott factory footprint.

SNOOPY