SCT - Scott Tech

[forest]

Great post Snoopy comparing SCT and SKL. Interesting also to see that SKL reducing the number of employees and are making more $ compared to last year.

[percy]

Great post Snoopy comparing SCT and SKL. Interesting also to see that SKL reducing the number of employees and are making more $ compared to last year.

Agree a great post Snoopy.

[Snoopy]

A 136% (normalised earnings) 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.

This is my observations on the data in post 1110

An 83% (normalised earnings) growth rate at SKL over a five year period equates to an averaged annual growth rate of:
1.830^0.2 = 1.128 or 12.8% per year.

Perform the same exercise on SCT with their 5 year 52.8% earnings growth and you get
1.528^0.2 = 1.0884, or 8.84% per year.

Of note, and in complete contrast to the previous year, at our reference date both companies were trading on the market at almost identical PERs. Distorting the picture was that Scotts had announced that a board solicited buyout of the whole company was being investigated. On the day before my reference date, it was announced that no offer for the group as a whole at a satisfactory price had been forthcoming. But other early stage initiatives that had presented themselves were being worked on.

Resulting snapshots of the respective share price, and the implied historical price earnings ratios, on comparative dates are in the table below:

Date	27/11/2022	14/11/2023	16/11/2023
SCT Share Price	$2.65	$3.49	$3.35
SCT historical PER	16.6	18.0	17.3
SKL Share Price	$5.45	$4.96	$5.18
SKL historical PER	22.3	18.1	18.8

One thing we have to remember is that while the recent past can provide a hint about the performance of the near future, sharemarkets are always forward looking. Scotts PER would suggest that, takeover aside, the market perceived 'percentage growth prospects' of Scotts have not changed much 'year to year'. By contrast the equivalent numbers at Skellerup have declined, but from a much higher level to a slightly higher level than found at Scotts today. IOW it is Skellerup's perceived decline (albeit from high levels) that has seen the PER comparison between the two 'close up'.

Some more observations:

a/ The SKL share price has declined by a further 9% between 2022 and 2023 reference dates, whereas over the same time the SCT share price rose by 32%.
b/ Both companies continue to hold their company debt, as measured by the Minimum Debt Repayment Time, at low levels.
c/ ROE at SKL is just shy of double that at SCT, although while both improved over FY2023, the ROE at SCT improved a little faster.
d/ From a staffing perspective, SKL shrunk their workforce (62 jobs shed) as key customers reduced their inventories in line with what they used to be in the pre-Covid era. I am not sure what aspect of the business required Scotts to modestly increase their workforce (23 jobs added) over the same period. But Scotts did highlight that service and aftermarket revenue was up 28% over the year before.
e/ 'Net profit margins' were roughly consistent compared to the previous year, with SKL's a tick higher while SCT was a tick lower. Nevertheless SKLs more standardised product manufacturing allows a net profit margin 2.7 times that of Scotts (c.f. 2.5 times that of SCT in the previous year and 3 times in the year before that).

Neither company makes a good yield play investment, now that interest rates have well and truly risen.
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 expectation) price. This difference is one way of measuring any 'growth premium' the market attaches to each share.

SKL: Growth Premium = $4.96 - $3.38 = $1.58 => Growth Premium is 32% of share price
SCT: Growth Premium = $3.49 - $1.09 = $2.40 => Growth Premium is 69% of share price

No surprise in the year on year trend here. A boost in the dividend at SKL, while the share price declined, has lead to smaller proportion of the share price making up a growth premium. Likewise, but in reverse, a static dividend at SCT (on increasing earnings I might add) and a higher share price means the growth premium part of the market share price has gone up. This is a good indication, even leaving aside the potential SCT takeover offer (now deflating), that the market sees SCT as the company more likely to grow over 2024. The same indicator (although far less pronounced) suggested that SCT would grow profits faster than SKL over FY2023 and that is what happened.

SNOOPY

[Snoopy]

3/ The 'standard product line' based in the Americas - Robotworx - looks to have had a poor year, given the other substantive US based business, Transbotics Automated Guided Vehicles, seems to have had a good year with the tyre manufacturers (AR2021 p10). Although maybe the closing remark on Transbotics "we see a positive future'" means that the present is not yet so positive?

Assuming Transbotics revenue of $20.3m (my post 798, Note B, assume no growth over FY2020) and an EBITDA margin of 20%, this translates to a Transbotics EBITDA of 0.2x$20.3m=$4.06m. Total depreciable capital assets acquired when the business was purchased in FY2018 were valued at just $0.144m (AR2018 p61). So I am estimating the annual depreciation charge on these assets to be close to zero. Much more significant is the goodwill acquired on acquisition of $7.100m. This goodwill is revalued annually because the value of overseas goodwill, even if constant in its home currency, varies with exchange rates. (It would also vary if the goodwill was amortised, but this has not happened). I intend to ignore the annual exchange rate related amortisation fluctuations.

For interest charges, and to be conservative, I will apportion all of this years US funding cost of $0.194m to Transbotics. I can therefore estimate EBT for Transbotics to be:

NPBT(Transbotics) = EBT(Transbotics) = EBITDA - I - D - A = $4.06m - $0.194m - $0m - $0m = $3.866m = $3.9m

If my estimates are anywhere near correct, this would suggest that 'Robotworx', -the second hand robot refurbishment and resale company-, operated at an EBT loss over FY2021 of around $0.300m. (Ref AR2021 p43, Total 'America's NPBT' was $3.332m. $3.3m-$3.9m = -$0.300m.)

Standard Product' (I believe largely 'Robotworx') revenue slumped from $22.860m in FY2019 down to $15.198m (FY2020) before recovering $17.153m (FY2021).

Just returned from the Scott AGM and after chatting with CEO JK afterwards, I found out a bit more information on the demise of 'Robotworx', the former subsidiary -US based- that covered the reselling and refurbishment of second hand industrial robots . It looks like my calculations from FY2021 (quoted above) were close to the money. In fact Robotworx had not made money for the last 3-4 years of operations. The cause was an improvement of supply of new industrial robots from the OEM industrial robot manufacturers, both in terms of logistical product logistics supply and new product at lower price points. That coupled with rising costs of refurbishing older robots meant that the 'used robot market' became a much more difficult commercial proposition. Scott's had to ask themselves if this was really a market space they wanted to continue in for the longer term. And the answer they gave themselves was a clear 'no'. Result: Robotworx - exit stage left - at a $12.612m loss for Scott shareholders . An historic loss booked in FY2022.

SNOOPY

[Snoopy]

Sometimes in 'cutting edge' technology it is necessary to 'wield the axe'. JK has ended a couple of my dreams with a final meltdown of the Milktech project, and the selling off of HTS-110. But I guess it had to be done?

During my post AGM chat with CEO JK, he touched on the exit from the HTS (High Temperature Superconductor) business during FY2021. For those who have forgotten about it:
https://www.hts-110.com/

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

Why HTS-110?

HTS-110 is the only company worldwide dedicated to the design and manufacture of HTS magnets and components, with over 18 years’ experience in HTS machine design.

HTS-110 specialises in HTS coil, current lead, and custom magnet projects and will work closely with your technical team to define and implement class-leading superconducting systems. Or select from a number of specialist applications and product areas where our HTS technology has already demonstrated clear user advantage and acceptance.

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

In short, the HTS-110 company is run by ex-university boffins, selling their hi-tech to other university boffins still in universities. There is nothing wrong with the products, and they are cutting edge. Nor is there a problem with 'university boffins'. The problem is that, as far as Scott is concerned, the immediate market potential is just too small and the growth potential time horizon for more commercial applications is too uncertain,. Given the automated robotics markets opening up in the sub sectors of 'protein' 'mining' and 'materials handling', it made more sense to sell this business into private ownership. This Scott did, with ownership now resting with senior management in conjunction with the 'Booster Tahi Limited Partnership', a kiwisaver growth fund.

SNOOPY

[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

[winner69]

Saw an article on Rocklabs opening in Auckland the other day and wondered how SCT shareprice going.

Currently $3.00, well off high of $3.91 not that long ago. Seems strategic review to find a buyer failed and punters not too confident of an offer coming out of the blue

Is share price heading back to pre-covid levels?

[Snoopy]

Saw an article on Rocklabs opening in Auckland the other day and wondered how SCT shareprice going.

Currently $3.00, well off high of $3.91 not that long ago. Seems strategic review to find a buyer failed and punters not too confident of an offer coming out of the blue

Is share price heading back to pre-covid levels?

I have had a buy order in for several months at $3 Winner, that was finally executed this afternoon. $3 represents an historic PE of 15 on FY2023 earnings. Not cheap, but the PE has not been that low since 2015. I think $3 equates to a good price to top up, because that share price can be justified purely on operational grounds, leaving aside any fancy transactions (takeovers included). SCT seems at last to be on a steady growth path with their new more focussed 'standardised product' strategy. So I have been looking to accumulate at a fair price.

How would I expect the individual Scott business units to be going?
a/ There could be a slow down in the automated meat processing units ordered in Oz and NZ, due to the beef and lamb downturn.
b/ But Rocklabs seems 'on the tear' (hence the new facilities in the Airport precinct).
c/ Appliance line production is always a bit up and down.
d/ But there is a pretty full order book for the automated packaging facilities built in Europe.
e/ Bladestop safety bandsaws are doing well everywhere.

The half year has just closed off as at the end of February. So the half-year guidance would be expected to be reported in mid-April. Personally I am not too worried what they report, as I believe any downturn will be more likely 'orders delayed' rather than 'orders cancelled'.

SNOOPY

[winner69]

CEO on way out

http://nzx-prod-s7fsd7f98s.s3-websit...170/415126.pdf

[Snoopy]

CEO on way out

http://nzx-prod-s7fsd7f98s.s3-websit...170/415126.pdf

That resignation by JK is a bit of a shock. But on reflection not too much of a surprise. 4.5 years is probably the sort of tenure you might expect from a transformative CEO. Come in with your ''re-imagining the business' plan. Execute, then leave. JK an Aucklander of course. So with all the dirty work done any residual resentment also goes out the door with JK. Time to appoint a true 'southern man' to the CEO role now. What about Brent from Invercargill? Surely he is sick of Australia where he has been leading JBS Australia for a while? After being a Scott director for that many years, he certainly knows the business. But instead the interim CEO (will he be invited to permanently step into the top job?) Aaron Vanwalleghem - President of Europe and North America - is about as 'northern a man' as you can get.

SNOOPY