SCT - Scott Tech

[Snoopy]

At $2.70 SCT is on an historic normalized PE approaching 20. That means quite a lot of growth is already built into the share price.

OK I have to give some credit to CEO Hopkins for managing to convince the government that it was worth putting that extra R&D money into our company. But I would be happier to see operational profits increase because of this extra R&D money, not go down!

There is something else quite negative hidden inside those segmental results. Those at the AGM last November will have seen a new production line on the way to being dispatched to the Americas. The segmental result shows that the appliance line manufacturing unit (largely this one project) actually lost $174k in the half year. What! While this is an 'improvement' on the $432k lost in the pcp, it really isn't good enough for a unit that has a tradition of very positive contributions to profits.

Nevertheless the effect of this 'improvement' has masked a deteriorating position in the 'standard equipment' part of the business. This is largely Rocklabs, and this is a problem going forward because it is Rocklabs that has been driving all the growth in recent years. Once Rocklabs stalls, the rest of the company will be exposed for what it really is: a technically advanced but bottom line bereft collection of small project futurism.

What will the institutional shareholders think of that when the find out! The problem is no growth and an underlying PE of 20 do not really stack up. Long term I still have the faith. Short term, I am pleased that Mr Market has allowed me to lighten up!

SNOOPY

[Snoopy]

Looks like one of those deals came up today. The share price is up 5c to $1.80, and at close there were buyers at $1.82.

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HEADS OF AGREEMENT – INTEGRATED CONVEYOR SYSTEMS
The Board of Scott Technology Ltd (“Scott”) are pleased to announce that the Company has
entered into an agreement to acquire the assets and intellectual property of Integrated
Conveyor Systems Ltd (“ICSL”).
The agreement allows the company time to complete due diligence on the technology whilst
enabling Scott to take effective control during the due diligence period. The due diligence
period ends in June 2013, at which time Scott has the option to acquire ICSL. The due
diligence period can be extended at Scott’s option for a further 12 months.
ICSL is based in Western Australia and has developed patented conveyor technology. ICSL
design, manufacture and distribute their flexible enclosed belt conveying system to meet the
global conveying demands for a wide range of industries. ICSL’s conveyor technology is a
logical extension for Scott with our progress in the mining automation market where the
technology is aimed at improving speed, OSH and labour costs, particularly in remote areas
or over difficult terrain. Of key interest to Scott is the work that ICSL is undertaking in
conjunction with a major mining company who is using and trialling the innovative conveyor
for a technically advanced project.
The immediate commitment is less than A$0.5m and is supported by tangible assets.

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A slightly sad follow up to a promising stock exchange release made in September 2012

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INTEGRATED CONVEYOR SYSTEMS
On 19 September 2012 the Board of Scott Technology Ltd (“Scott”) announced that the Company had entered into an agreement to acquire the assets and intellectual property of
Integrated Conveyor Systems Ltd (“ICSL”) subject to due diligence. The due diligence period is coming to an end. Scott has determined that ICSL in its present form, does not meet Scott’s focused investment criteria and has advised ICSL that it will not be proceeding with the option to acquire ICS

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Reading between the lines of both releases, I would say Scott's just wrote off $500k on this aerial conveyor venture. I am not too concerned. $500k will not break the company, and not all innovative ideas pan out in practice. Best to quit sometimes before the pigheadedness takes over.

SNOOPY

[Snoopy]

I have looked at Scott tech several times lately.
Would be more inclined to give them money if the directors reinvested in the stock rather than cashed in on the divy payment.

I think in fairness most of the directors have reasonable shareholdings in SCT already.

I take the cash from the dividend payment too, rather than participate in the DRP. This is not because I have no confidence in the future of the company though. It is because I already have a good size helping of shares, and I don't want to go overweight on such a low liquidity share.

SNOOPY

[Snoopy]

Here you are, invested in a stock that you have held for 11 years, one that has recently doubled in price, and you report that you are "at last" in profit"! To me, this is a spectacularly damning indictment of the methods you have been using. Eleven years of "investment", most of that time during the biggest Bull run we have ever had, for........nothing! (it's about here you start talking about dividends, right? I can but continue to marvel at your fortitude and dogged perseverance. Don't you have any doubts? Have you ever wondered if your approach might perhaps be improved upon? Ever entertained a sneaking suspicion that market sentiment just might be worth taking into account?

I'm not knocking SCT as a stock. You had in fact tripled your capital at one point, but in the absence of any discernable exit strategy, coupled with a dogged refusal to sell at any price, you gave all your profits back to the market. It seems to be a point of honour for you to ignore prevailing market sentiment - indeed you take a perverse pride in acting contrary to it. This approach has cost you very, very dearly. A quick easy example of this is where you were buying "value", adding to your SCT holdings when it was in a very clear downtrend. Brave - but foolish.

Here is what Phaedrus said about my SCT investment five years ago. Interestingly although my total holding time for SCT is now 16 years, my median holding time is only 5.25 years. This is because most of my buying (and selling) has been done since 2008. I may have achieved 'nothing' in terms of share price improvement for 11 years, but look how I have used that experience and made things turn around. Average buy in price 43.4c. Current market price $2.20.

43.4(1+i)^5.25=220

Return over the term my median capital has been invested is 'i', and that works out at 36% compounding, for over five years. Add in the dividends received along the way (over the past five years) and that return equates to 38% compounding. There wouldn't be many companies on the NZX paying dividends that have produced a sweeter return than that! And all over that difficult time that the GFC unfolded when many traders left the market. All my share purchases were in downtrends and all my share sales were in uptrends. Sell into strength, buy into weakness! With a low liquidity share IMO, this is the only way to go, because with SCT selling even a minimal economic parcel to keep brokerage to a minimum can see you flood the market and change the supply demand balance for shares. It sounds crazy but more than once selling a minimally sized parcel of shares took several weeks at the price I wanted. Average sale price since the cash issue was $2.25, with the best sale price I achieved on a small parcel $2.70. Of course for most chartists such a process would be far too painful. But for someone like me who barely uses charts it was very doable.

Of course a pure chartist might say my return is still theoretical because I haven't fully sold out. But this highlights a philosophical difference between traders and investors. The investors goal is to stay invested. The traders goal is to sell out. I have no plans to sell out of SCT, because I get a far better dividend return by staying in that I would ever get at the bank.

SNOOPY

[Snoopy]

More details of the payment to Rocklabs has come out. 3,313,452 shares have been issued at a price of $1.2072. I calculate that 'payment' to be worth.

3,313,452 x $1.2072 = $4m

Some of those shares are temporarily in escrow pending the profit performance of the new acquisition. That is all the information we know for sure. But I'm prepared to guess some more details. Say half of those shares will only be released upon profits reaching a certain level. That means $2m worth of shares now and $2m worth shares later. Possibly the cash part of the deal matched the initial shares issued, let's say $2m. That makes a nice ultimate retirement nest egg for Rocklab's founder, Devereaux. A $2m cash payment is quite manageable by SCT,without moving them too far from their previous 'debt free' position.

Annual earnings of some 0.08 x $2m = $160,000 would be needed to cover a $2m debt and we can assume that Rocklabs as a stand alone business unit is capable of banking that much right now.

The above relates to the purchase of the 'Rocklabs' business in 2008.

On 2nd October 2013, Rocklabs founder Devereaux, via his firm Inchinnam, has received another big payout from Scott Technology

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On 30th September 2013, Scott Technology Limited purchased the properties at 155-161 Neilson Street, Onehunga Auckland which were leased by the Rocklabs division. The properties were purchased from Inchinnam Limited, the previous owner of the Rocklabs business. The purchase price was $3.2million and fully funded by a bank loan from the ANZ bank. The properties are closely situated to key suppliers and transport links and there is scope for the redevelopment of the properties to improve the overall presentation along with efficiencies within the Rocklabs manufacturing process.

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They almost paid as much for the property as the underlying business back in 2008!

SNOOPY

[Snoopy]

<---- I displayed all these emotions trying to read that!

For some reason the cut and paste I did on the press release pdf scrambled the text. Fixed now by retyping the relevant text by hand.

The following is the trend of "lease payments and rental costs" over the last six years.

2007: $218k
2008: $414k
2009: $432k
2010: $420k
2011: $568k
2012: $639k

The salient year here is 2008, the year in which Scott Technology acquired Rocklabs. A superficial analysis might suggest the jump in lease payments of nearly $200k in that year might reflect the Rocklabs acquisition. However, Rocklabs was acquired on 9th July with the EOFY being 31st August. Overlaying all of this was the Dunedin headquarters moving to the Kaikouri valley site. Although the address did not formally move until 23rd October 2008 (after EOFY) there may have been transitional payments based around terminating the previous premises lease, or an upfront payment required before SCT moved into their new premises at Kaikouri valley.

There was quite a steep rise in lease payments from FY2010 to FY2011 (+35%). These doesn't correspond to any major premises upgrade or acquisition as far as I can work out. It may even include establishing an increased footprint overseas, or even more vehicle or equipment leasing. There isn't enough information disclosed in the annual results to be sure.

My best guess at the value of the Rocklabs lease payment is the difference between lease payments in 2007 and 2009. That is an increase of $214k. Assuming some kind of inflation adjustment since then, say 3% per annum, that puts the Rocklabs rent for FY2012 at $240.9k.

At a purchase price of $3.2m, this gives an implied yield of:

$240.9k / $3,200k = 7.5%

Does that sound about right for an Auckland industrial rental?

I don't really have much concern over this deal, as those things have a habit of being fairly financially neutral (rent saved is offset by rates payable). I do have a concern that the best use of cash by one of NZs leading high tech companies is to purchase a property in Auckland. is that really the best use of shareholder funds?

SNOOPY

[Snoopy]

I don't really have much concern over this deal, as those things have a habit of being fairly financially neutral (rent saved is offset by rates payable). I do have a concern that the best use of cash by one of NZs leading high tech companies is to purchase a property in Auckland. is that really the best use of shareholder funds?

Results for FY2013 should be out next week. It is hard to know how SCT will go, but their joint venture in Australia with XRF scientific has reported. Note 5 in the XRF annual report shows "Investment in Joint Venture" to be contributing $A26.939m in profit, and AFAICT the only joint venture that XRF have is with Rocklabs.

Translate that figure to $NZ and the Scott Technology half of the joint venture has earned some $NZ30m (!). This seems far too good to be true. I feel that I must have made a mistake, and maybe this is just the revenue figure, despite being labelled as otherwise. Anyone care to double check my research here?

SNOOPY

[percy]

SCT share price has not done too well this year.I note it is down 12.94% since 1st January.
Glad I hold Cavotec.CCC.ST which is up 37.34% since 1st January.

[Snoopy]

SCT share price has not done too well this year.I note it is down 12.94% since 1st January.

I have been reducing my SCT holding over the last year, so the 12.94% fall is not reflective of my own SCT position. However, the coming year is a new game. I am much more interested in what will happen in FY2014 than FY2013.

SNOOPY

[percy]

I have been reducing my SCT holding over the last year, so the 12.94% fall is not reflective of my own SCT position. However, the coming year is a new game. I am much more interested in what will happen in FY2014 than FY2013.

SNOOPY

So am I.!!! lol,