SCT - Scott Tech

[Snoopy]

The headline after tax profit of $6.110m, I am disappointed with. But if the Appliance Line side of the business had turned in even an average year, the result would have well exceeded my expectations. I think this result was better than the headline figure suggests.


I have now had an opportunity to peruse my 'hard copy' of the annual report for FY2012.

I see the operational profit is not $6.110m, the headline figure, but actually:

$6.211-(0.72)($0.846)= $5.501m

This is the tax adjusted effect of taking off a one off not repeatable $846,000 foreign exchange gain. Using that figure ROE has slipped to 13.6%. I use the term 'slipped' here loosely as ROE has improved from the 7.5% based on end of year equity last year, but is significantly down on the 18.1% ROE from FY2010. This can be partly explained by SCT having a lot of new capital from the recent rights issue and dividend reinvestment plans. New capital often takes some time to allocate efficiently.

Another thing that should be watched is the rapidly slowing growth of earnings per share, even as the earnings growth itself is impressive in a headline way. eps for FY2012 was 13.5cps, not a great leap on the 12.4cps in FY2010, before all the capital raising took place. At $2.28, SCT is on a PE of 16.9 which no longer looks like an obvious bargain.

If the appliance line manufacturing business can get off the canvas in FY2013 then $2.28 may in hindsight look an attractive entry point. But SCT has a policy of hedging these big projects once the purchase order is signed and the business is reasonably certain. Under note 28d, foreign currency forward contracts in USD are down by half, and the Euro bucket is empty. Also under Note 22 the payment guarantees and performance bond figure is only 1/3 of last year. This all points to a weaker year for Appliance production systems in FY2013.

Of course all these figures are snapshot indicators and cannot be used as absolute predictors of earnings. However without a significant breakthrough in one of the SCT incubator divisions, it is hard to paint a picture of improved profits for SCT in FY2013. Long term I believe the outlook is still good. Short to medium term, the SCT share price may just take a breather, IMO.

SNOOPY

discl: Hold SCT and will continue to do so

[Snoopy]

At $2.28, SCT is on a PE of 16.9 which no longer looks like an obvious bargain.


Others who did not agree with me have now pushed the SCT share price up to $2.55.

The 'new' event to trigger this was the announcement that the joint venture milking venture was ready to go commercial with an invitation only media day launch to be held on December 5th. This SCT joint venture ' Scott Milktech Limited' is about 18 months behind the original launch schedule. Obviously the extra time was needed to get everything working as it should.

The market targeted is herds of over 500 cows. I guess this means the largest obvious potential market is right here in New Zealand. The timing is maybe not the best with dairy farmers facing a much lower payout price than last year. Nevertheless building up slowly is the strategy that SCT has used in meat industry robotics. So perhaps it is all for the best?

For a contribution to profit I expect SCT to have to wait until FY2014. I guess it must be market potential potential, and maybe Dunedinites reinvesting their FPA cash in a local technology business that is driving the share price higher?

SNOOPY

discl: Hold SCT as once again my second biggest NZX holding

[Marilyn Munroe]

I was chatting with MD Chris Hopkins at the after match function following the AGM.

The Integrated Conveyors product shows good potential. It can do things the normal rubber belt over rollers type can not.

Here's hoping that the acquisition can be done on favourable terms and the product finds wide market acceptance.

Boop boop de do

Marilyn

[Snoopy]

I would whole heartedly recommend the SCT AGM to fellow shareholders. Next year is the big one with the centennial of the business. The 29th and 30th of November 2013 has been set aside for a two day celebration in Dunedin culminating in the AGM. So if you ever thought about attending an SCT AGM, this would be the one to plan for.

I was impressed with the shareholder numbers who had driven up from Dunedin to attend this year's meeting in Christchurch. SCT make a habit of showing off a current production project. So much more can be gained from seeing it 'in the flesh' and talking to the switched on employees that make it happen, rather than just seeing the finished object on a printed page as in the annual report.

This year we got to see a cooktop manufacturing plant destined for the USA. This was ordered in April designed by October. And the plan is to ship it before the end of the year. The factory was on double shift to meet the tight deadline. If everything goes according to plan this will be one production line out of two for the same customer.

No specific mention was made of China in the AGM market releases. A supplementary question asked about this, and in particular how the Haier takeover of Fisher and Paykel Appliances might affect future work with Haier. For those who do not know FPA has a subsidiary PML which produces in house production lines and there was some concern that with Haier now owning this, they may choose to 'go it alone' in the future. Chairman Mclaughlan answered that sub contracting work on lathe tooling was going well and that he saw increased opportunities for SCT to work in partnership with PML on future projects.

SNOOPY

[Snoopy]

The principal development under this header is 'meat industry robotics'. CEO Hopkins told us that the 'automated boning room' vision of 2002 was now a marketable concept. The poster boy installation at Silver Fern Farms Finegand (Balclutha) was due for its first full season this year. Furthermore orders for the machinery had already been received from Australia. Robotic Technologies is set to double its turnover in the FY2013 year.

Despite the very rapid payback time of 18 months (due to both labour savings and yield improvements from more precise cutting), Hopkins told the AGM that convincing meat companies to part with their cash is still a hard sell. The industry has what Hopkins described as a 'band saw mentality'. By this he meant that something as simple as a band saw was effectively paying its way from day one on the job, and all paid off within six months. Getting management's head around something that would take more than a season to pay off was asking for a change in management mentality.

A press release came out a few months ago on American interest in this technology. I wondered if Scotts had been a bit premature with their expansion plans when this came out in the press release. But as revealed at the AGM, it was telling that it was the Americans that sought them out, rather than the other way around. And the recommendation came via two different X-ray technology companies in the USA. Both independently recommended Scotts! The Scott Technology reputation grows!

SNOOPY

[Snoopy]

Milking shed technology is already significantly automated. I am taking here about rotary milking sheds, and the automatic release of the udder suction devices at the end of the milking session.

What SCT are doing is putting the udder sucker attachments on the cows by purely robotic means. Management now have a promotional video that was being continuously shown at the AGM. The Rangatata dairy farm, where this system is in final trials, has achieved a 95% deployment success rate to date (success being defined as hooking up with four teats per cow). The mechanism is to first use visualization technology to 'eye up' the udder. Then move in your six degrees of freedom industrial robot connector to make the mechanical-biological link, before the pumping starts. Currently hooking up one cow takes 14-20 seconds. The target time for production units is 12 seconds per cow.

I was at the AGM two years ago where is was announced that 'everything going according to plan' commercialization would begin within six months. Obviously everything didn't go according to plan. But now it does seem we are here. Payback time it is suggested will be three years for farmers who want to shell out the cash to get this system retrofitted to their existing milking sheds. The aim of the technology is to allow farmers to spend their time more productively on other farm management jobs. That doesn't include sleeping in, in the mornings!

Unlike other SCT projects -normally direct company to company sales-, SCT envisages hooking up with an existing industry player to promote automated milking. I do see this as an execution risk for shareholders, as SCT will not have full control of their marketing channel. And presumably there will be a cut to the merchant. Ultimately that will come from shareholders pockets. Nevertheless although sales are forecast for calendar year 2013, this is very much the new income stream for the year. Shareholders should not expect any 'bottom line' return from this division soon.

SNOOPY

[Snoopy]

My fears that the inevitable downturn in mining would see what has become the 'golden goose' for Scotts slow down have proved unwarranted. Some 80% of sales of sample reference material (as an aside SCT has some 85% of this market in Russia, courtesy of an on the ball Russian agent!) are sold to gold explorers. While the price of gold remains high, this is set to continue!

The annual report noted that some of the increased workload from the Rocklabs mining division had been farmed out to other Scott business units around the country. At the AGM we saw two automated sample analysis units that had been built in Christchurch. I had visions of these things requiring a truck to take them away. In practice you could fit a unit inside a large van. So perhaps all profits would not evaporate if you had to ship these things around the country after all! Also on display was one of the new liquid oxygen manufacturing machines, complete with the cryogenic unit from the Wellington superconductor division. Similar technology can be used to produce liquid nitrogen on a reliable industrial scale.

The meeting clarified for me how the Scott Technology relationship with XRF Scientific in Australia works. Scotts (Rocklabs) were supplying the sample analysis equipment. That spews out heaps of data that must be interpreted. Who better to do that than the university boffins at XRF scientific? So with Rocklabs and XRF Scientific working together, what SCT have is a turnkey package solution for the mining industry. Clever!

SNOOPY

[Snoopy]

I was chatting with MD Chris Hopkins at the after match function following the AGM.

The Integrated Conveyors product shows good potential. It can do things the normal rubber belt over rollers type can not.

Here's hoping that the acquisition can be done on favourable terms and the product finds wide market acceptance.

Boop boop de do

Marilyn

And I didn't even touch on the integrated conveyors in my meeting summary Marilyn! That just shows how much there is to take in at an SCT meeting. Some other companies build whole business plans about just one of these technological opportunities. Are we not lucky to be investing in just one company that covers such a smorgasbord of innovative technology and is conservatively financed. The upside of all this is available to shareholders, plus we get to sleep at night!

BTW it was good to run into you after all this time corresponding via the forum. Very sorry about the bite marks on your ankle, but I wasn't looking out for long blond hair. Hopefully it will all heal up by Christmas, and I guess it was fortunate in some way that you were wearing your lucky red stockings!

SNOOPY

[Lizard]

Thanks for the update, Snoopy!

I am very happy with the performance from SCT this year - and so are my children. All I regret is that I allocated them so many shares for their pocket money when I hadn't bought enough in the first place. Although, they have inspired one of my daughters to consider becoming a "robot engineer". Considering that at kindy, she wanted to be a farmer and milk cows, SCT is right up her alley!

[Snoopy]

OK, time for me to stick my neck out. Barring some disaster at Rocklabs, I predict the full year net profit at SCT will be near to $7m. That would equate to a net profit of some 30cps and an historic PE of 5.5 (based on a share price of $1.65). Look for the SCT share price to track up to $2 by Christmas.


Actual profit was $6.1m, although strip out the one off exchange gain and I get an operational profit of $5.5m. In headline terms that $6.1m was a record profit. However due to the number of new shares issued there were several years in the early noughties that in earnings per share terms profits were better.

Looking back at my previous forecast from the interim result viewpoint, it seems I assumed Rocklabs would perform even better than it did! The market however has rerated the share well above the $2 I was expecting by year end.

So what about FY2013?

Sales growth at Rocklabs has been 19.8%, 48% and 56% over the last three calendar year comparisons. I am expecting slower growth in FY2013 ( +10%, or $3.5m of incremental sales) But due to the 'standard nature of products' I think Rocklabs will have high margins on these new earnings, as high as 50%. This equates to $1.7m of new NPBT.

The meat industry robots I believe will at last make some real money for SCT. Management have forecast sales to double and I am looking at a NPBT increase of $1.1m. That is calculated assuming a 10% margin..

The Appliance line production business I believe will make $0.5m in FY2013, up from nothing in FY2012. This is based on the amount earned by SCT when turnover in that division dropped to $15m ish in 2001.

I am predicting a fall in earnings from 'other automation' as resources are redirected to meat industry robotics. If turnover halves to $2m (still up 100% on FY2011) then NPBT will fall by $0.2m here.

So to summarize:

Profit Increment = 0.72x ($1.7m+$1.1m+$0.5m-$0.2m) = $1.6m.

Of course we have to remove from that the one off exchange rate gain that will probably not be repeated.

$1.6m - 0.72($0.846m) = $1.0m.

That sums to a forecast FY2013 profit of $6.1m + $1.0m = $7.1m

However, unlike the last two years this profit is all real and repeatable. A 16% gain YOY is not be be sneezed at. However I don't see the share price gaining 16% as the PE based on last years results is already a heady 18.5 (sp=$2.50). Time for that PER to come back a bit to better reflect potential forward growth, I believe.

SNOOPY

[Snoopy]

I am still a little nervous about the outlook for FY2013. With the SCT share price at its highest point for several years, I took a few more profits yesterday at $2.25. Taking a layer of profit off the top is a strategy I call "peeling the onion" - taking off just the top layer doesn't make that much difference to the weight of your overall holding. Even though it may produce a few tears! I have a gut feeling the SCT share price has run up a little too hard too quickly. Plus the rather frothy press release on meat line automation struck me as a mostly head and little body brew up. My average acquisition price is now down to 90c as a result of my 'peel'.


Referring to my post 160, the actual profit for FY2012 of $5.5m was a little shy of my prediction of $7m. Nevertheless Mr Market didn't mind and the share price has been bid up to $2.60 today, a post dividend high.

There are now 40,983,443 shares on issue. So historical earnings per share is now 13.4c. At $2.60 this represents a PE of 19.4. This looks close to full value to me based on past results. So over the last week I have taken the opportunity to 'peel another layer off the onion'. Despite what I sold being barely an economical parcel to sell it has taken a week to get my order through. There are real pitfalls in holding a share where the liquidity is as low as this one! My back of the envelope calculation now shows that I have an average entry price of just 70c.

SCT has been a sensationally good investment for me, and I expect it will continue to be so into the future. In a years time there is every chance that $2.60 will not look so expensive. Yet I will sleep a little better at night now knowing that my portfolio has been brought more into balance.

SNOOPY

[Taijon]

[
SCT has been a sensationally good investment for me, and I expect it will continue to be so into the future. In a years time there is every chance that $2.60 will not look so expensive. Yet I will sleep a little better at night now knowing that my portfolio has been brought more into balance.

SNOOPY[/QUOTE]

Snoopy, I just want to thank you for all the time and analysis you put into this stock (and others). I really enjoy your posts. I have held SCT for goodness knows how many years. During that time there have been highs and lows with 2009 being a particularly bad year - thats when I sold out some of my holding at quite a loss. However 3 years on and the share price has more than doubled from the price I sold for. I too think the price is on the high side now, and like you I have been peeling the onion, but at prices a bit lower than you pre-dividend.

I've still got a reasonable number of SCT shares and plan to buy back in should the price weaken but as you have pointed out many times, liquidity is a problem with this share. The centennial year will be good and will probably mean it will be even more difficult to buy back in unless you get lucky on a day there is a major total market fall and a loyal SCT holder gets the jitters. 260 now could well be cheap as you say.

Have a happy christmas and all the best for your investing in 2013.

[Snoopy]

I've still got a reasonable number of SCT shares and plan to buy back in should the price weaken but as you have pointed out many times, liquidity is a problem with this share. The centennial year will be good and will probably mean it will be even more difficult to buy back in unless you get lucky on a day there is a major total market fall and a loyal SCT holder gets the jitters. 260 now could well be cheap as you say.


It didn't take long for SCT to start 'looking cheap' at $2.60. Buyers now in the market at $2.81 and no sellers until $3.

The upward momentum may have been continued by the following announcement made to the market on 28 January 2013

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A World First Gift for NZ Researchers

New Zealand company HTS-110 is gifting world-leading technology to support NZ researchers and scientists for a year.

Wellington-based HTS-110 manufactures cryogen-free superconducting magnets for applications in high-tech manufacturing, materials research and particle physics. HTS-110 is the only company in the world dedicated to the development and commercialisation of high temperature superconducting magnet systems. These systems are already in place in some of the world’s highest- tech facilities in Asia, Europe and the Americas.

This latest-generation HTS-110 magnet is for use in NMR, a technique that provides highly specific chemical information from a variety of materials and can be used to greatly increase the understanding of chemical reactions in both industry and research.

HTS-110 wants to give Kiwi researchers the opportunity to be among the first in the world to get access to this technology and to help share and promote the advances that Kiwi researchers will make with this new magnet.

CTO and Co-CEO of HTS-110 Dr Donald Pooke says “Our HTS-NMR product has been in development for over 5 years and we now have installed systems at key global reference sites delivering the same benefits as all our other HTS devices, including compact size, low installation cost and extremely flexible operation compared to existing technology. We are very excited to be able to offer this same leading technology to the New Zealand research community through this trial scheme”.

Managing Director of Scott Technology, HTS-110’s major shareholder, Chris Hopkins says “We are very proud of what we have achieved and we wanted to make this world leading technology that has been developed in New Zealand available to leading organisations in this country. Recently, the unique nature of the technology has been highlighted through uptake and trials in the Pharmaceutical, medical and other associated industries in the USA, Japan and Italy”.

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To which I might ask the question, if the technology is really world leading then why are SCT simply giving it away? I can't see that increasing the wealth of SCT shareholders! Is this a question of the culture of the old government controlled Industrial Research Limited still being fully engrained at HTS-110? Or am I thinking too short term?

SNOOPY

[Snoopy]

The meeting clarified for me how the Scott Technology relationship with XRF Scientific in Australia works. Scotts (Rocklabs) were supplying the sample analysis equipment. That spews out heaps of data that must be interpreted. Who better to do that than the university boffins at XRF scientific? So with Rocklabs and XRF Scientific working together, what SCT have is a turnkey package solution for the mining industry. Clever!


Very good headline number for SCT's Australian partner XRF Scientific in their half year result. Yet on closer inspection almost all of the increase could be put down to the ongoing restructure of the Capital Equipment division. That is unrelated to the SCT joint venture 'XRock Automation' of which the following was said:

"XRock Automation generated a modest profit for its first contribution to XRF’s results, after paying for all start-up costs. Significant automation work is expected to be obtained during the next half, mainly in the area of sample preparation (automated crushing and pulverising) which is manufactured by Rocklabs Ltd. The joint venture has allowed XRF to strengthen its relationship with Scott Technology Ltd and its subsidiary Rocklabs Ltd, leaders in their retrospective fields."

Nevertheless I like the idea of creating a new joint venture and paying off all start up costs within six months. Even if that leaves me uninformed about what sort of numbers of Rocklab salers we SCT sharehodlers will be getting in the future.

SNOOPY

[ace5715]

Scott technologies took a bit of beating down 13c today and off a high of $2.70 a few weeks back. A bit of profit taking after a pretty good run or more to it? I haven't seen any market news to indicate that there are bad things on the horizon. If anything I wouldn't thought the future looks good.

[Snoopy]

Scott technologies took a bit of beating down 13c today and off a high of $2.70 a few weeks back. A bit of profit taking after a pretty good run or more to it? I haven't seen any market news to indicate that there are bad things on the horizon. If anything I wouldn't thought the future looks good.


I think that SCT looks to be still on track Ace.

I was surprised to see a big jump in trade debtors, up at $3.881m compared to only $814m in the pcp. But Scotts business is lumpy and the underlying balance sheet is strong, so I don't think we shareholders should be worried yet.

I further note a jump in the maximum penalty clause exposure from $0.580m to $2.827m. But this is not entirely unexpected given SCT has just completed a big appliance system installation.

Trying hard to look for negatives here, I note the 'standard equipment' segmental profit is down from $NZ3.574m to $NZ2.644m. That could indicate that growth at Rocklabs has stalled. Then again the superconductor products and milking equipment systems, both part of this category are due to bounce back.

Overall I can't see any real reason that the long term growth plan is not on track. But with the underlying PE being 19 before this result release, the market for SCT may indeed have got a little ahead of itself.

SNOOPY

[ace5715]

Cheers for the insight Snoopy, Looking forward to watching how Scott's do over the next year or so. I'm expecting the appliance business to pick up, I've heard that Scott's are close to or have signed up a number of projects with GE in the USA and Rheem in Australia. Also with PML fully focused on Haier work a lot of Scott's competition for other work has been reduced. Whilst I believe they could go from competitor to sub contractor to PML for Haier work. Interesting times in the south.

[Snoopy]

Interesting to see Fisher Funds now holding close to 8% of SCT, although it looks like this is a result of acquiring Tower, not buying the shares themselves. I see Fishers as rather flighty holders,so we could be in for a bit of share price volatility in coming months.

SNOOPY

[Snoopy]

Interesting to see Fisher Funds now holding close to 8% of SCT, although it looks like this is a result of acquiring Tower, not buying the shares themselves.


Peeled another slice off the onion the other day at $2.70. Still holding a reasonable bag of SCT shares though, and my average acquisition price has reduced to just 44c. I expect that will be the end of my onion peeling now, as I don't want to shed any more tears over my SCT holding. That means I am selling down with some regret.

So why did I sell down again? Some cynics might say it was it he "Fisher Funds effect" at work. For those who came in late, this is where any small cap Fisher get into, with the associated:

"buy high to force up the share price to make their end of period NTA look good."

you get out of. And when Fishers sell out (invariably at the bottom) this is your best signal to buy. However, this Fisher holding was actually accumulated by Tower, bought on the assumption IIRC that:

"some well performed smallcaps can easily double in value."

Perhaps there is some truth in that, but it is rather shallow analysis in my book. Want to wade in deeper? Then let the Snoop clear some of that muddy water for you...

SNOOPY

[Snoopy]

This holding was actually accumulated by Tower, bought on the assumption IIRC that:

"some well performed smallcaps can easily double in value."

Perhaps there is some truth in that, but it is rather shallow analysis in my book. Want to wade in deeper? Then let the Snoop clear some of that muddy water for you...


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.

On the positive side, HTS-110 Limited - the superconductivity application side of the business - is really only just getting started as is Milktech, the automated milking robotics for existing cowsheds. Historically though, these new business arms are much slower to reflect financial success than technical success. Just look at how long the much vaunted meat industry, which only earned 56k across three continents in HY2013, is taking to deliver after nearly a decade's incubation.

On the negative side, I saw some speed bumps in the half year result which means we shareholders might be in for some speed wobbles.

Ostensibly the HY2013 ($2.96m profit) result was an improvement on HY2012 ($2.82m profit). But look in the Statement of Comprehensive income in the half year annual report. and you will see that 'other income' went from $0.626m to $1.130m. Now go the the segment information (note 6) and look at the government grants income going from $0.600k to $1.097m.

The glass half full interpretation of this is that the innovation at SCT continues to impress the government so much that they have increased their cash contribution to SCT over the period by $497k. This is good. But if we subtract the after tax effect of this bumped up grant from the first half result (0.72*$497k= $357k) you can see that this is greater than reported increased profit for the period. ($2.96m-$2.82m= $140k). That means at the operational level after tax profit reduced by $217k or 8%.

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!

SNOOPY

[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.

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

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.

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



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

----

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.

-----

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

SNOOPY

[Snoopy]

:eek2::):(:scared::t_up::ohmy::p <---- 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,

[noodles]

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

Are you referring to pg.44 of the annual report?

$26,939 is the profit. twenty six thousand (not million)

Immaterial I think.

Still, looking forward to see how the automated milking is going.

[Snoopy]

Are you referring to pg.44 of the annual report?

$26,939 is the profit. twenty six thousand (not million)

Immaterial I think.


Ah, thanks Noodles. I get so used to thinking in millions, that a figure in the mere thousands did not register as that! Still, any start up venture that registers a profit straight away has made a good start in my view. I am looking forward to better and brighter things from the SCT association with XRF.

SNOOPY

[percy]

Poor result.
EPS down 18.5% to 13.6 cents from 16.7cents.
Nett surplus well down after paying 23.67% less tax.
Major concern is the negative cash flow from operating activities of-$1,933,000.

[Under Surveillance]

Poor result.
EPS down 18.5% to 13.6 cents from 16.7cents.
Nett surplus well down after paying 23.67% less tax.
Major concern is the negative cash flow from operating activities of-$1,933,000.
Very poor. You've nailed the vital comparisons. Yet some punters either expected worse, or have been seduced by the flim flam in the announcement and the "special centenary dividend", as the price jumped from 222 pre-announcement to 230 at the close today.

[noodles]

Very poor. You've nailed the vital comparisons. Yet some punters either expected worse, or have been seduced by the flim flam in the announcement and the "special centenary dividend", as the price jumped from 222 pre-announcement to 230 at the close today.

No guidance either. No indication that the downward trend will be reversed.

[Snoopy]

Poor result.
EPS down 18.5% to 13.6 cents from 16.7cents.
Nett surplus well down after paying 23.67% less tax.
Major concern is the negative cash flow from operating activities of-$1,933,000.


I have to respectfully disagree with Under Surveillence about the right comparisons being made. Last year the profit figure contained a one off $0.846m foreign exchange rate gain. This year it contained two small foreign exchange rate losses. So the real year on year comparison is $5.501m (FY201) verses $5.384m (FY2013). The number of shares on issue have changed as well. So the normalized eps comparison is by may calculations 13.5cps (FY2012) vs 12.8cps (FY2013). That is a decline of just over 5%., not 18.5%. Not good, but actually better than I expected.

You should also understand that SCT sell capital intensive projects. Variations of cashflow like Percy has highlighted are part of normal business and nothing to be concerned about when you have no term debt.

SNOOPY

[noodles]

I have to respectfully disagree with Under Surveillence about the right comparisons being made. Last year the profit figure contained a one off $0.846m foreign exchange rate gain. This year it contained two small foreign exchange rate losses. So the real year on year comparison is $5.501m (FY201) verses $5.384m (FY2013). The number of shares on issue have changed as well. So the normalized eps comparison is by may calculations 13.5cps (FY2012) vs 12.8cps (FY2013). That is a decline of just over 5%., not 18.5%. Not good, but actually better than I expected.

You should also understand that SCT sell capital intensive projects. Variations of cashflow like Percy has highlighted are part of normal business and nothing to be concerned about when you have no term debt.

SNOOPY

Nicely pointed out Snoopy.

However, I feel the valuation is currently too high given it is just a project driven engineering company. I'd expect a pe of around 10-12. Perhaps the negative cashflow's means they will have a good year next year, but they have given no strong indication that this is the case.

[percy]

Long led times,distance from customers,few customers,lumpy earnings,and forex concerns,make this unstable company too high risk for the majority of sensible investors.

Posted 26-05-2012.
Maybe I should have said prudent instead of sensible?

[Snoopy]

Nicely pointed out Snoopy.

However, I feel the valuation is currently too high given it is just a project driven engineering company. I'd expect a pe of around 10-12. Perhaps the negative cashflow's means they will have a good year next year, but they have given no strong indication that this is the case.

For a 'project driven engineering company' I would agree with you Noodles. A PE of 10-12 sounds about right. However, Scott Technology have a lot of intellectual property. The most highly developed being the meat industry robotics which effectively you are getting for free. Granted it hardly generates a profit at the moment. But one day I feel the full value will be recognized. I think of SCT as a project engineering company with some free lotto tickets thrown in. For that I am prepared to pay a (small) premium.

SNOOPY

[percy]

For a 'project driven engineering company' I would agree with you Noodles. A PE of 10-12 sounds about right. However, Scott Technology have a lot of intellectual property. The most highly developed being the meat industry robotics which effectively you are getting for free. Granted it hardly generates a profit at the moment. But one day I feel the full value will be recognized. I think of SCT as a project engineering company with some free lotto tickets thrown in. For that I am prepared to pay a (small) premium.

SNOOPY

Premium!!????
On your EPS of 12.8cents todays PE at SP of $2.24 is 17.5.!!!!!!
On PE of 10 the SP would be $1.28 and on a PE of 12 the SP would be $1.53.
So looks a rather large premium to me.

[Snoopy]

Premium!!????
On your EPS of 12.8cents todays PE at SP of $2.24 is 17.5.!!!!!!
On PE of 10 the SP would be $1.28 and on a PE of 12 the SP would be $1.53.
So looks a rather large premium to me.


I think it all depends on what you see as a 'normal operating point' for SCT. To me the most interesting part of the accounts is note 25, the segment information. Standard Equipment (mainly Rocklabs) has suffered a profit fall from $8.556m to $5.413m. But automated equipment (mainly appliance production line systems) has gone from a mere $34k to $2.099m. To me the company looks a lot more balanced now than it did last year.

There were many years in the past when the appliance production line profits have been 50% higher than FY2013. And if Rocklabs can get back to FY2012 levels of profitability we are looking at a 50% rise in profit from that part of the company as well. So pretty big growth potential from the core business plus all the high tech projects thrown in for free. $2.24 to me looks in no way expensive. But $2.60 potentially was a little dear, which is why I offloaded some shares at those levels. I won't be selling any more at $2.24!

SNOOPY

[percy]

I think it all depends on what you see as a 'normal operating point' for SCT. To me the most interesting part of the accounts is note 25, the segment information. Standard Equipment (mainly Rocklabs) has suffered a profit fall from $8.556m to $5.413m. But automated equipment (mainly appliance production line systems) has gone from a mere $34k to $2.099m. To me the company looks a lot more balanced now than it did last year.

There were many years in the past when the appliance production line profits have been 50% higher than FY2013. And if Rocklabs can get back to FY2012 levels of profitability we are looking at a 50% rise in profit from that part of the company as well. So pretty big growth potential from the core business plus all the high tech projects thrown in for free. $2.24 to me looks in no way expensive. But $2.60 potentially was a little dear, which is why I offloaded some shares at those levels. I won't be selling any more at $2.24!

SNOOPY

I think your post is important as it shows there is a lot more to SCT than just figures.
When any of us have a full understanding of the business we are investing in,then the risks reduce.
The main part of good research/knowledge is being able to react to it before the market fully understands it,whether it means buying more shares or selling shares if the results are not what we expect.
I do not fully understand SCT,so am more inclined to look at the figures,rather than the business.
I may have to get to an AGM,met the people and hear what they have to say.Going to Cavotec meetings,getting to understand the business,meeting management and listening to them has been most profitable.

[Snoopy]

I do not fully understand SCT, so am more inclined to look at the figures, rather than the business.


Entirely understandable Percy and may I say I would do exactly the same thing with a company that I am not well acquainted with [ like HNZ for example ;-) ]

However, I do appreciate being challenged on my views of SCT. My instinctive line of defence is to behave as a management parrot. But on further reflection I do get around to double checking that management rhetoric just to see that what they are telling me is really true. I have done a bit more homework on the 'standard equipment' side of the business (mainly Rocklabs). Here are the half yearly profit and revenue figures as far back as they are quoted:

1HY2010: $0.372m, $6.073m
2HY2010: $1.468m, $9.716m
1HY2011: $1.766m, $2.538m
2HY2011: $2.538m, $11.739m
1HY2012: $4.304m, $9.714m
2HY2012: $4.252m, $24.565m
2HY2013: $2.644m, $14.425m
2HY2013: $2.708m, $13.270m

That shows me that FY2012 was a bit of a blip in sales and profits. I think much of that time was a boom time for gold producers which is apparently the main industry that Rocklabs sells to. I guess it is no surprise that eventually the 'end of the golden weather' (sic) is upon us. Whether the gold producer market will recover, or whether Rocklabs will be able to recalibrate their equipment to better suit analysis of other metals will be interesting to see. However, it does seem for the moment that the substantial growth engine that was driving the SCT share price (Rocklabs) has been derailed.

The other half of the business that makes profits, 'Automated Production Systems for Appliances' fortunately for we shareholders is undergoing a good revival. So despite the derailing of Rocklabs from its recent stellar trajectory, my feeling is that we already holding SCT will be OK. If I didn't hold any SCT shares though, I think I would be tempted to sit on the sidelines just in case the share price got a bit cheaper!

SNOOPY

[Snoopy]

The other half of the business that makes profits, 'Automated Production Systems for Appliances' fortunately for we shareholders is undergoing a good revival.


The one jarring statistic from the segmental results is the decline in sales to Asia

FY2013: $1.624m
FY2012: $4.155m

Yet didn't Scott's relocate their head of appliances to China only two short years ago? Has he frightened off the Chinese customers!

SNOOPY

[ace5715]

The cyclic nature of the appliance equipment business means these figures will go up and down depending on projects, most customers needs machinery in approx 35-50 weeks depending on size of project. The 4 automated lines going to the USA means they probably don't have capacity and any Asian work would need to be placed in a queue until resource is available hence the decline in Asian sales for FY2013.

With Fisher and Paykel now owned by Haier Scott's will struggle to get direct sales from Haier who they have previously worked for.

[Snoopy]

The cyclic nature of the appliance equipment business means these figures will go up and down depending on projects, most customers needs machinery in approx 35-50 weeks depending on size of project. The 4 automated lines going to the USA means they probably don't have capacity and any Asian work would need to be placed in a queue until resource is available hence the decline in Asian sales for FY2013.

With Fisher and Paykel now owned by Haier Scott's will struggle to get direct sales from Haier who they have previously worked for.

Yes good points Ace. Have come back from the Dunedin AGM now, and was surprised to see an appliance production line system on the floor down there, not too far away from being shipped. I was told that Christchurch, where these production lines are normally put together, was currently 'at capacity'. While 'at a pinch' they could squeeze in another production line in Dunedin they are fairly busy with their own projects at Kaikouri valley. Your 'working to capacity' argument looks like the explanation for the imagined slowdown in Asia!

SNOOPY

[Snoopy]

Have come back from the Dunedin AGM now

ODT as usual has the best write up on the AGM

http://www.odt.co.nz/news/business/283541/scott-boasts-28m-orders-5m-rd-grant

Not too much more than I can add. Chairman Stuart McLauchlan was clear that with 5 existing divisions (Appliance Lines, Mining Services, Meat industry robotics, Milk industry robotics and General industrial robotics) Scott's aren't planning to spread their circle of competence any further. There is more than enough potential now to just concentrate on what they have got going.

SNOOPY

[Marilyn Munroe]

I too was at the AGM.

During the factory tour following the meeting I had the chance to chat with the big pooh-bar from their joint venture into superconducting magnets.

The most impressive thing he told me is that these magnets are likely a disruptive technology in magnetic resonance imaging machines(MRI).

Current MRI machines require super cooling to operate. The only means of doing this currently is to use liquid helium. This creates several problems.

Helium is an expensive gas, supplies are becoming constrained and source countries are beginning to regard it as a strategic material.

When helium escapes containment it reacts in a manner that resembles an explosive. This means means MRI machines must be housed in expensive specialised buildings.

You can not turn off MRI machines even if they are not being used.

The magnets being developed by the Scott joint venture can be cooled with liquid nitrogen, This has several advantages;

Liquid nitrogen is cheap and abundant. just suck if from the air around you.

It behaves in a less vigorous manner when it escapes containment so the building housing it need not be as specialised or expensive.

When you are not using it it can be turned off.

The technology is not yet sufficiently advanced to enable it to be used in the full scale MRI machines which you are probably familiar where the patient is feed through the hole in the do-nut shaped machine for a full body scan. They are currently developing a prototype machine which can perform an MRI on hand sized parts of the body. When they are able to scale up this technology I beleave they will be on to a winner.

Boop boop de do
Marilyn

[Snoopy]

I too was at the AGM.

During the factory tour following the meeting I had the chance to chat with the big pooh-bar from their joint venture into superconducting magnets.

The most impressive thing he told me is that these magnets are likely a disruptive technology in magnetic resonance imaging machines(MRI).


Yes it was such a comprehensive display of capability laid on after the meeting it was quite hard to take it all in. I overheard a bit of what Ty Hasheer, otherwise known as the big pooh-bar of superconducting technology, said and it promptly went out my other ear so I am glad Marilyn was paying attention!

Stuart McLauchlan commented that Ty's section had seven new lines of products aimed at seven all new markets. Normally one new product in an existing market or an existing product sold into a new market is challenge enough. So Ty will certainly have his hands full!

We were also told not to be too expectant over the speed of adoption of all the new technology.

The automated meat room project has been running for near on ten years and was divided into five sub projects:

1/ X-ray
2/ Primal cutting
3/ Middle machine
4/ Forequarter
5/ Hindquarter

The first middle machine was only installed commercially last week. Sorting out robot wrist moving issues was one of the unexpected technical delays. So it is really only now that a complete 'automated meat room package' has been available.

Our expectations were also dampened on the "automated milking system add on" joint venture. The 80 bail rotary milking shed is now up and running. A limited number of commercial sites should roll out in 2015. But serious profits might have to wait for a few years beyond that.

SNOOPY

[percy]

With the share price falling over 34% in the past year it appears a lot of share holders are not prepared to wait.
We may see SCT trading at a more modest PE of 10 or 12.
Would appear Fisher Funds announcement that they had brought into SCT on 4/4/2013 shows bad timing on their part,unless they don't mind waiting for years!!!!!.
Interesting to see that while SCT is down over 34% in the past year our Heartland are up over 31%.!!!!!!
Big difference.$1,000 in SCT now $660.00 while $1,000 in HNZ is now $1,310.So you would be twice as well off by being in HNZ.
Disc.Hold no SCT,but enjoy holding HNZ.

[Under Surveillance]

With the share price falling over 34% in the past year it appears a lot of share holders are not prepared to wait.
We may see SCT trading at a more modest PE of 10 or 12.
Would appear Fisher Funds announcement that they had brought into SCT on 4/4/2013 shows bad timing on their part,unless they don't mind waiting for years!!!!!.
Interesting to see that while SCT is down over 34% in the past year our Heartland are up over 31%.!!!!!!
Big difference.$1,000 in SCT now $660.00 while $1,000 in HNZ is now $1,310.So you would be twice as well off by being in HNZ.
Disc.Hold no SCT,but enjoy holding HNZ.
In fairness to Fisher Funds, their SCT holding came as the bad with whatever was the good when they bought out the TWR component previously run by Stubbs.
I've been waiting for Snoopy to apply his penetrating analysis to SCT, a company into which he has deep insights (which would be a much more valuable pursuit, to him and others, than his obsessive attempts to find or magnify issues with HNZ).

[percy]

Thank you ,I forgot it was Tower who brought the holding.For some reason I thought it was Milford,but then when I checked I was surprised it was Fisher.Now I remember.
"Penetrating analysis" ? Yeah right.!! lol.

[Snoopy]

With the share price falling over 34% in the past year it appears a lot of share holders are not prepared to wait.
We may see SCT trading at a more modest PE of 10 or 12.


Yes I have noted the haircut that the SCT share price has taken. No news from the company to justify it, so we are forced to speculate. SCT have been growing their business in recent years largely around Rocklabs and a large part of that is supplying the gold mining companies. Many gold mining companies have been retrenching their activities of late. So maybe there is less demand for the sampling equipment that Rocklabs produce? There was more than a hint of that in the full year result to September 2013 with 'standard equipment' (mostly Rocklabs) sharply down and Appliance Line manufacturing sharply up. For those who just looked at the headline figure the overall profit picture was a flat result while the underlying picture at divisional level was anything but that.

However, I keep an eye on XRF Scientific which has become Rocklabs Aussie marketing partner. Not much sign of a reduction in share price there. So perhaps gold mining is holding up in Australia at the operating level after all? Without any announcement from the company it is difficult to say more. But these thinly traded shares are subject to getting their share prices pushed around a bit.

SNOOPY

[percy]

I note XRF's share price is only down 10.61% for the year.
SCT does not enjoy the steady cash flow of a retailer,utility or finance company,so the earnings will always be lumpy. A great deal of ducks to line up! You were right to sell down.Just hope you brought some HNZ?!!! lol.

[Snoopy]

I have noted the haircut that the SCT share price has taken. No news from the company to justify it, so we are forced to speculate. SCT have been growing their business in recent years largely around Rocklabs and a large part of that is supplying the gold mining companies. Many gold mining companies have been retrenching their activities of late. So maybe there is less demand for the sampling equipment that Rocklabs produce? There was more than a hint of that in the full year result to September 2013 with 'standard equipment' (mostly Rocklabs) sharply down and Appliance Line manufacturing sharply up. For those who just looked at the headline figure the overall profit picture was a flat result while the underlying picture at divisional level was anything but that.


My suspicions about a Rocklabs slow down have been confirmed

"The Directors of Scott Technology wish to advise that due to the fast changing environment we are experiencing, it is appropriate to provide a trading update."

"Scott Technology’s revenue line remains solid and our order book is at good levels, providing us with a level of comfort over our forward work situation. The rapid appreciation of the New Zealand dollar, combined with the continuation of the global slow down in the Mining sector, is having an impact on our margins in the short term.
The company continues to review its operations with a view to mitigating the risk of further New Zealand dollar appreciation."

Shouldn't affect the share price though, because revenues have held up and customers are happy. Or am I getting confused with Xero there?

SNOOPY

[percy]

No surprises there.!!!
"Shouldn't affect the share price." Yeah right!!!!! lol.

[Bobcat.]

This stock is again starting to look more attractive at these prices.

Soon after the US Equity markets hit the shoulder and self-correct again (yes, it's not finished) then I'll be looking to buy again into this well managed company. Next month?

[Snoopy]

This stock is again starting to look more attractive at these prices.

Soon after the US Equity markets hit the shoulder and self-correct again (yes, it's not finished) then I'll be looking to buy again into this well managed company. Next month?


Darn you Bobcat! I was just about to pick up some more SCT shares, then you alert everyone to the opportunity and blow it for me! No matter in the end. The SCT share price took a leg down today and I bought my shares after all.

So why buy 'in the downtrend'? Because SCT is so thinly traded it isn't possible to buy the number of shares I am after (even though it is only a minimumly economical parcel) at the price I want when the share price reverses. BUY into weakness and SELL into strength is the only practical way to handle any SCT investment. So far for me doing exactly that has worked very well, contrary to the experience of Phaedrus (very early in this thread) who tried doing the opposite and got burnt.

However, buying in a downtrend is not an objective of mine. It is only a natural result of my growth investment strategy, which is rather different to the way others do it. My preconditions for buying a growth investment are:

1/ Make sure of a potential profit rise of at least 40% being on the table.
2/ Buy on a dividend yield that means that even if growth fails, you will still get an income equivalent to what is on offer at the bank.

So how does this stack up when you are looking at investing in SCT today?

SNOOPY

[Snoopy]

My growth investment strategy, which is rather different to the way others do it. My preconditions for buying a growth investment are:

1/ Make sure of a potential profit rise of at least 40% being on the table.
2/ Buy on a dividend yield that means that even if growth fails, you will still get an income equivalent to what is on offer at the bank.

So how does this stack up when you are looking at investing in SCT today?


My first growth investment requirement is easily satisfied. SCT was trading around $2.70 just a few months ago. Nothing has fundamentally changed about the company since then. So buying at $1.90 or below satisfies my first requirement.

I don't know when the SCT share price will return to $2.70 of course. It may take years. But I am certain as I can be that as the currency and market for the products go through their respective cycles it will get there. The no term debt policy always ensures that SCT is exceptionally good at weathering the investment cycle.

Now the dividend requirement. Because the SCT business has been volatile in the past, I always consider what has happened over the last ten years so that I can gauge a full business cycle picture. Complicating this picture was the acquisition of Rocklabs in FY2008, which was bought in a shares and cash deal. In recent years Rocklabs has been the star in the SCT investment portfolio. So any 10 year assessment of the SCT portfolio wouldn't be correct without factoring in Rocklabs. But it was a private company in FY2007 and before, so no earnings figures are available for those periods. We do know the first years segmented profit for Rocklabs was some $700,000. So I have assumed an average profitability level of some $500,000 for the years 2003 to 2007 inclusive. I have also assume that half of that profit would have been available to pay out as dividends over those years. Based on the number of SCT shares on issue during FY2007 (24,964m) this conveniently works out as a dividend of 1c per share.

Now to deal with the elephant in any SCT investment pie. By the end of FY2013, the number of SCT share on issue had ballooned to 41,122m. That means it would be misleading to look at previous years dividends in terms of dividends per share, because the number of shares today is so much higher. The solution is to apply a 'scaling factor' for previous year's dividends, so that dps in today's number of shares terms is recognized.

A sample calculation:

The 2010 dividend paid was 5.25cps. The number of shares on issue just after the time of the FY2010 result was 31,322m. So the equivalent dps for FY2013 was:

5.25c x (31,322m/41,122m ) = 4.0cps

Thinking of it in another way scaling factor on the 2010 5.25c dividend works out at

31,322/41,122 = 0.7612

OK there is the method. So how does this business cycle dividend yield model work out in practice?

SNOOPY

[percy]

Total number of SCT shares traded so far today. 23,001.Total value $40,154.
First sale was $1.77.Last sale was $1.71.Seller still there at $1.71 with 7236 for sale.One buyer for 750 shares at $1.60.
No comment.!!!!!

[Snoopy]

Total number of SCT shares traded so far today. 23,001.Total value $40,154.
First sale was $1.77.Last sale was $1.71.Seller still there at $1.71 with 7236 for sale.One buyer for 750 shares at $1.60.
No comment.!!!!!

The trouble with that kind of supply/demand analysis Percy, is that it doesn't reflect the true picture. I will almost certainly be increasing my holding in SCT further over the next few months. I might wait three months to buy. Or I might buy tomorrow. But either way, a single small order will throw all of your figures out of whack. I am not telling exactly when I will buy, and I haven't told my broker either. With a thinly traded share like SCT, the figures you quote do not represent the actual behind the scenes supply demand situation.

SNOOPY

[Snow Leopard]

Certainly an illiquid stock the best short term (16 day) average only just about hits 20,000 a day and the current long term (256 day) average is 6566 by my calculations.
Add the buy/sell spread and I can see how trying to move shares is a cat and mouse game.

Apart from Sept-Nov 12 period liquidity seems to be fairly constant.

Chart for the last year is horrible I can imagine Phaedrus ticking you off Snoopy!

Best Wishes
Paper Tiger

[Snoopy]

OK there is the method. So how does this business cycle dividend yield model work out in practice?


Apologies for the rather crude table. One day I'll learn to do it properly, I promise.

Year, Dividend, Scaling Factor, Scaled Dividend

2004, 13.0 +1.0(*), 0.6071, 7.9 + 0.6
2005, 4.0 +1.0(*), 0.6071, 2.4 +0.6
2006, 0 +1.0(*), 0.6071, 0.6
2007, 9.0 +1.0(*), 0.6071, 5.4 +0.6
2008, 0 + 1.0(*), 0.6071, 0.6
2009, 1.0, 0.6924, 0.7
2010, 5.25, 0.7612, 4.0
2011, 7.0, 0.9659, 6.7
2012, 8.0, 0.9895, 8.1
2013, 10.0, 1.0000, 10.0

(*) represents the dividend from Rocklabs for the period before Scotts acquired the company

If I add that final column of scaled dividends up, it comes to 48.2c. That works out at an average of 4.82cps per year over my ten year business cycle. Taking into account the tax paid, the gross dividend return is 4.82/0.7= 6.9cps.

Current bank interest rates are around 4.0% gross.

6.9 / (Target Share Price) = 0.04 => Target Share Price is $1.73

So what does this all mean? It means that if I buy SCT shares at $1.73, then over the long term and assuming no business growth I should get a 4.0% gross return, on average. Put another way if all the SCT growth strategies go wrong I should end up earning about the same as if I had just left the money in a term deposit. I have locked in a dividend return, and I get any growth over and above that for free. So for me SCT at $1.73 is a compelling investment proposition.

Of course some would say, the share price is on the way down so why not wait? You might get an even better bargain! This is true and it is why I didn't play all my investment cards today. But of course the share price might reverse and go up too. That would mean I would have missed my chance to buy shares at today's prices, and that would have been too great a bargain to pass up.

SNOOPY

[In4a$]

I'm with you snoopy. Have topped up but holding a reserve in case goes lower. $1.60 would be nice. Cant see why this stock wont get back to $2.20 or so over the next 12 months, excepting some un-forseen disaster.

[percy]

The trouble with that kind of supply/demand analysis Percy, is that it doesn't reflect the true picture. I will almost certainly be increasing my holding in SCT further over the next few months. I might wait three months to buy. Or I might buy tomorrow. But either way, a single small order will throw all of your figures out of whack. I am not telling exactly when I will buy, and I haven't told my broker either. With a thinly traded share like SCT, the figures you quote do not represent the actual behind the scenes supply demand situation.

SNOOPY

You must be joking!!!
The true picture !!????? lol.
Figures quoted were Direct Broking for depth.
Buyer wants 750 at $1.60.!!!!

[Snoopy]

You must be joking!!!
The true picture !!????? lol.
Figures quoted were Direct Broking for depth.
Buyer wants 750 at $1.60.!!!!


As of one day later 5236 SCT shares have been sold at $1.70 and $1.71. The buyers appeared 'like magic', or maybe the Direct Broking Site wasn't showing the whole picture?

This is not meant to be a criticism of Direct Broking. It is just showing how quickly buyers can come out of the woodwork. Quickly enough to make any declared 'buying depth' meaningless with a thinly traded share such as this.

SNOOPY

PS It wasn't me buying the shares either!

[percy]

Fantastic effort.!!!!!
5200 shares traded at $1.71 and 36 at $1.70.
Seller still there at $1.71.
Flock of buyers;7264 at $1.70
2000 at $1.69
2500 at $1.62
And our old friend 750 at $1.60.

[Snoopy]

My suspicions about a Rocklabs slow down have been confirmed

"The Directors of Scott Technology wish to advise that due to the fast changing environment we are experiencing, it is appropriate to provide a trading update."

"Scott Technology’s revenue line remains solid and our order book is at good levels, providing us with a level of comfort over our forward work situation. The rapid appreciation of the New Zealand dollar, combined with the continuation of the global slow down in the Mining sector, is having an impact on our margins in the short term. The company continues to review its operations with a view to mitigating the risk of further New Zealand dollar appreciation."


SCT didn't quantify the profit downturn, but I am prepared to make a guess.

Sister JV company XRF in Australia has just taken a hit with their latest result.

"Revenue, down 21% to $10.7 million when compared to PCP (1H13: $13.6 million)"

"The revenue and underlying earnings for this half year are broadly in line with expectations which, as
highlighted at the AGM in November, were that the market conditions experienced in the second half of
FY13 would continue in FY14."

"The result reflects the difficult conditions currently being experienced in the mining industry, in particular
for capital equipment and exploration budgets."

Rocklabs of course has the extra factor of the high NZ dollar to contend with. A small cost saving will be achieved through SCT ownership of Rocklab's Auckland premises, in place of renting the same. Nevertheless I am predicting that Rocklabs will make no money at all this half year. By contrast the amount of hedging on the books and full workshops in Dunedin and Christchurch leads me to believe the profit from appliance production lines will largely be maintained.

My back of the envelope calculation shows a profit of $2m for the half year, or 4.9cps. That is still more than enough profit to retain the interim dividend at 2.5cps.

SNOOPY

[Snoopy]

Fantastic effort.!!!!!
5200 shares traded at $1.71 and 36 at $1.70.
Seller still there at $1.71.
Flock of buyers;7264 at $1.70
2000 at $1.69
2500 at $1.62
And our old friend 750 at $1.60.


Thanks for the update Percy, but I'm not sure what your point is. This type of liquidity is typical for SCT, perhaps even a bit better than average.

I used to worry about not being able to sell my total SCT holding in an emergency quickly. But I decided that was more of a worry for traders than investors. Chances are I could still get some money out at a decent price over a reasonable time-frame (since proven true). As a long term investor, and with a company managed as conservatively as Scotts (no term debt) I would be very surprised if things deteriorated so quickly that I needed to sell. So why worry? I don't.

SNOOPY

[janner]

Chart for the last year is horrible I can imagine Phaedrus ticking you off Snoopy!

Best Wishes
Paper Tiger

As is your wont PT.. A slight understatement there ..

I have two indicators showing " Buy " .. With two showing " Sell "..

As you said.. " Certainly an illiquid stock "..

Will keep watching .. In the meantime it is a Pass for me..

[percy]

Thanks for the update Percy, but I'm not sure what your point is. This type of liquidity is typical for SCT, perhaps even a bit better than average.

I used to worry about not being able to sell my total SCT holding in an emergency quickly. But I decided that was more of a worry for traders than investors. Chances are I could still get some money out at a decent price over a reasonable time-frame (since proven true). As a long term investor, and with a company managed as conservatively as Scotts (no term debt) I would be very surprised if things deteriorated so quickly that I needed to sell. So why worry? I don't.

SNOOPY
Yes I must admit I have no worries with Scott,as I don't own any.!!! lol.

[Snoopy]

With a company managed as conservatively as Scotts (no term debt) I would be very surprised if things deteriorated so quickly that I needed to sell.


I am not quite so confident the half year result will continue to show 'no term debt'. The acquisition of the company's industrial site in Auckland was justified because it was cash flow positive, vis a vis the alternative of continuing renting.

Then on 24th February we got this:

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

HTS-110 – EQUITY INCREASE TO 100%

Scott Technology is pleased to announce that the company has entered into agreements to acquire the 49% of HTS-110 Ltd held by Callaghan Industrial Research Ltd and American Superconductor Corporation. This will take our shareholding to 100% and will enable us to fully integrate the business into Group operations. We expect the transfers to be complete by 31st March 2014.

The consideration is a combination of cash and intangibles in the form of agreements that release, modify and create obligations between the parties.

-----------

The HTS consolidation will be completed by 31st March which is within the current half year that ends on that date. So more cash out before HTS starts generating any real income. It would be fascinating to know more about the timing of this acquisition. Callaghan Industrial Research Ltd under pressure to realise some assets under directive from the government? If so we SCT shareholders might have just got a bargain.

SNOOPY

[percy]

Well I hope they do get a bargain, as they need something to cheer them up,as SCT share price is not looking too flash.
Down 22.22% in the past 6months and 36.36% for the past year.

[Under Surveillance]

I am not quite so confident the half year result will continue to show 'no term debt'. The acquisition of the company's industrial site in Auckland was justified because it was cash flow positive, vis a vis the alternative of continuing renting.

Then on 24th February we got this:

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

HTS-110 – EQUITY INCREASE TO 100%

Scott Technology is pleased to announce that the company has entered into agreements to acquire the 49% of HTS-110 Ltd held by Callaghan Industrial Research Ltd and American Superconductor Corporation. This will take our shareholding to 100% and will enable us to fully integrate the business into Group operations. We expect the transfers to be complete by 31st March 2014.

The consideration is a combination of cash and intangibles in the form of agreements that release, modify and create obligations between the parties.

-----------

The HTS consolidation will be completed by 31st March which is within the current half year that ends on that date. So more cash out before HTS starts generating any real income. It would be fascinating to know more about the timing of this acquisition. Callaghan Industrial Research Ltd under pressure to realise some assets under directive from the government? If so we SCT shareholders might have just got a bargain.

SNOOPY
It's a quibble, but the first half ends on 28 February, not 31 March.
I'm more interested in why the American Superconductor Corporation sold out to SCT than why Callaghan did.
Time will tell who got a bargain, probably a lot of time. HTS-110 had revenues of just $1.56M in the year to 30 June 2013, according to a Fairfax item in the Dominion-Post yesterday, so it could be yonks before HTS generates any real revenue, never mind profit.

[Snoopy]

It's a quibble, but the first half ends on 28 February, not 31 March.


Away from my annual report library today US. So actually the money paid for taking out the remaining 49% of HTS will probably be settled out of the half year and only appear in the full annual report. Thanks for pointing this out US.



I'm more interested in why the American Superconductor Corporation sold out to SCT than why Callaghan did.


I'm picking that American Superconductor Corporation was brought on board by Callaghan, well before SCT was involved. So probably it was only a token investment for them and Callaghan were in the driving seat.

Just because the equity partnership has ended, doesn't mean that Callaghan and American Superconductor Corporation are no longer involved at all. They are still part of the:

"intangibles in the form of agreements that release, modify and create obligations between the parties."

SNOOPY

[percy]

The thread may need to be renamed;Scott Tech looking EVEN cheaper.$1.61 ? Oh dear!!!

[In4a$]

I have a buy in at $1.47, just in case it gets even cheaper !!

[percy]

I have a buy in at $1.47, just in case it gets even cheaper !!

I dear not comment!! lol.

[Bobcat.]

I like this company and the way it's been managed over the past many years. Not holding now but on my watchlist for a buy at a good price after world equity markets get their next correction - this month?

Even if they are no longer debt free, their management is astute w.r.t. gearing and I have confidence that this latest investment has been soundly investigated.

I expect to be holding again by month-end. Fundamentally some good upside IMO...but of course timing the trade is also important.
BC

[percy]

Net cash OUTFLOW from operating actives up from $1,737,000 last year to $4,180,000 this year is not good.
Bank overdraft up fom nil last year to $6,388,000 this year is not good.
Yet company is going to pay a 2.5cent dividend in May.May not be a good idea?

[noodles]

Net cash OUTFLOW from operating actives up from $1,737,000 last year to $4,180,000 this year is not good.
Bank overdraft up fom nil last year to $6,388,000 this year is not good.
Yet company is going to pay a 2.5cent dividend in May.May not be a good idea?

Scott definitely need to up their game. Weak companies are weeded out in recessions and (in this case) when the currency appreciates.

I agree on the dividend. They should be in survival mode.

Pity for shareholders.

[Carpenterjoe]

I know my accounting skills are lousy, but didn't their accounts receivable increase by ten million dollars? Wouldn't this difference cover the over draft and dividend in the next period?

I agree tho, as I very minor shareholder I wouldn't mind missing a dividend or two to juice up the cash holdings

Joe

[percy]

Yes liability growth is largely offset by receivable growth.
The next set of accounts will show whether it is just a timing issue or a more serious problem.
Caution is still required.
The selling pressure is reflecting in the downward share price trend.

[Snoopy]

SCT didn't quantify the profit downturn, but I am prepared to make a guess.

Sister JV company XRF in Australia has just taken a hit with their latest result.

"Revenue, down 21% to $10.7 million when compared to PCP (1H13: $13.6 million)"

"The revenue and underlying earnings for this half year are broadly in line with expectations which, as
highlighted at the AGM in November, were that the market conditions experienced in the second half of
FY13 would continue in FY14."

"The result reflects the difficult conditions currently being experienced in the mining industry, in particular
for capital equipment and exploration budgets."

Rocklabs of course has the extra factor of the high NZ dollar to contend with. A small cost saving will be achieved through SCT ownership of Rocklab's Auckland premises, in place of renting the same. Nevertheless I am predicting that Rocklabs will make no money at all this half year. By contrast the amount of hedging on the books and full workshops in Dunedin and Christchurch leads me to believe the profit from appliance production lines will largely be maintained.

My back of the envelope calculation shows a profit of $2m for the half year, or 4.9cps. That is still more than enough profit to retain the interim dividend at 2.5cps.


I got it wrong with my profit prediction. $1.085m divided by 41.520m shares on issue equates to 2.6cps. I had expected the downturn in mining to affect Rocklabs. The segmented NPAT of $1.026m was above my expectations. I had not expected the profit from Appliance Line Manufacturing to fall to just $0.354m for the half year though.

Her is what management said about that:

"The Appliance sector performed strongly in terms of sales and forward work. Significant contracts have been won from customers in North America, China and Germany. However, the rapid increase in value of the New Zealand dollar and the associated higher cost of manufacture in New Zealand has impacted on the margin we are able to obtain and deliver."

That pesky high dollar again! The one criticism I might make of SCT is that they seem unable to consistently get the price premium the company developed innovations surely deserve. Very easy for me to say. Much harder if you are the sales manager, balancing long term customer relationships and the need to keep your skilled workforce fully engaged to execute.

I was correct about the dividend though. Unchanged from last year at 2.5cps, and at least SCT aren't borrowing from the bank to pay it!

SNOOPY

discl: hold SCT and am accumulating around the $1.50 level.

[percy]

[QUOTE=Snoopy;470524I was correct about the dividend though. Unchanged from last year at 2.5cps, and at least SCT aren't borrowing from the bank to pay it!

Dividend 2.5cents per share......EPS 1.3cents......Difference;The Tooth Fairy? lol.

[Snoopy]

Net cash OUTFLOW from operating actives up from $1,737,000 last year to $4,180,000 this year is not good.


This big difference in the cashflow is further explained under note 2. Trade debtors poured $3.881m of cash into the company in the pcp. This year the trade debtors are sitting in the accounts with money yet to be paid totalling $6.034m. That is a $9.915m turnaround for the worse! However the contract work in progress has jumped from a negative cashflow position of $0.205m to a positive of $3.945m. That partially offsets the trade debtors figure. I can't see any more information that would further explain things in this half year release. But given the rather large projects that SCT undertakes, I am picking it is just a timing issue. But as Percy says, the cashflow needs watching.



Bank overdraft up fom nil last year to $6,388,000 this year is not good.


$3.2m of that is explained by the purchase of their Rocklabs buildings and land in Auckland.



Yet company is going to pay a 2.5cent dividend in May.May not be a good idea?


"Despite the challenging trading environment, the Directors have confidence in the strategic direction of the company and have maintained the interim dividend at the same rate as last year."

SNOOPY

[Snoopy]

Dividend 2.5cents per share......EPS 1.3cents......Difference;The Tooth Fairy? lol.


$1.085m divided by 41.520m shares on issue equates to 2.6cps (half year earnings). I see that 1.3cps earnings figure in the accounts for SCT as released Percy. But I think it might be a mistake.

One thing I didn't like as an explanation of the profit difficulties was this:

"The company’s research and development expensed during the first half of 2014 was $0.9 million. Taking this into account, the company’s result for the half year before reinvestment in research and development is $2.0 million, equating to an annualised return of 10% on average shareholders’ funds."

From where I come from the R&D was spent. If it wasn't worth spending then why was it spent? This type of thing is just BSing shareholders IMO.

SNOOPY

[percy]

$1.085m divided by 41.520m shares on issue equates to 2.6cps (half year earnings). I see that 1.3cps earnings figure in the accounts Percy. But I think it might be a mistake.

SNOOPY

Thank you I took it from the accounts.

[Snoopy]

Cynics would say the price has already collapsed from two year highs of $2.70 down to around $1.50. But at least SCT is still making a profit and is about to pay a dividend. The imminent arrival of a dividend is always good to support a share price. I wonder if any directors of those startup Saas companies know what a dividend is? I guess if you don't make profits, you don't have to know that!

SNOOPY

[In4a$]

Nice rebound yesterday, up 7%, good news for all of us who have been buying in the recent dip. Be $2 soon, maybe !.

[Snoopy]

Nice rebound yesterday, up 7%, good news for all of us who have been buying in the recent dip. Be $2 soon, maybe !.


My recent purchases were at $1.75 and $1.51. So average purchase price was $1.63. But that 7% rise yesterday was on tiny volume. And it would be reversed if the price goes back to the bottom of the bid offer spread (currently $1.63 buy, $1.75 sell). I would say $2 by the end of the year was a near certainty. My crystal ball is a bit hazy in determining what that year is though!

SNOOPY

discl: Long term holder, with average overall purchase price now 69c.

[In4a$]

My recent purchases were at $1.75 and $1.51. So average purchase price was $1.63. But that 7% rise yesterday was on tiny volume. And it would be reversed if the price goes back to the bottom of the bid offer spread (currently $1.63 buy, $1.75 sell). I would say $2 by the end of the year was a near certainty. My crystal ball is a bit hazy in determining what that year is though!

SNOOPY

discl: Long term holder, with average overall purchase price now 69c.
Yes I think you might be right, $2 might be a while away. I happy to wait a year. My avg is 1.51c

[Lizard]

Yes I think you might be right, $2 might be a while away. I happy to wait a year. My avg is 1.51c

I bought a few more at $1.59 on Wednesday... not many going and I didn't want many for now. Still, happy to see the bounce. Watched the selling for a long time and it felt like a reasonable bottom as it came off the low $1.50's, but guess we will see. I don't hold out a lot of hope for the exchange rate helping them out any in the short-medium term though.

[percy]

The acquisition of RobotWorx should offer good opportunities for SCT.
Liked the announcement so much I brought some shares at $1.82.!!!!

[Snoopy]

The acquisition of RobotWorx should offer good opportunities for SCT.
Liked the announcement so much I brought some shares at $1.82.!!!!


Welcome on board Percy. So you finally followed your mate Mark Waller across. You took your time, but then again no-one can accuse you of not doing due diligence!

I had never heard of "ROBOTWORX" before today. But the acquisition does fit within the wider vision of Scott's becoming the world's leading automation company.

Here is what SCT said about 'Robotworx' in the press release:

-----

RobotWorx is one of the most well-known industrial robot integrators in North America, with an internet presence that dominates its competitors worldwide. Their internet presence is driven by an extensive portfolio of URL's including www.robots.com. RobotWorx has the capability of integrating multiple manufacturers’ robots, such as FANUC, Motoman, Kuka and ABB, and has implemented thousands of successful robotic installations for applications ranging from welding to palletizing

RobotWorx has been in business for over 21 years and is unique and differentiates itself from all other integrators and from their competitors in their industry. While most robot integrators in North America focus on the automotive industry, RobotWorx is more diverse.

Currently many enquiries are received from businesses looking to install robotic solutions which RobotWorx is unable to supply because it is beyond their current level of expertise. These enquiries provide opportunities to grow the business by applying the vast skill, expertise and experience gained by Scott in providing its innovative solutions to the appliance, mining and meat processing industries.
RobotWorx also receives over 270,000 foreign visits annually to their main website that they have not catered to in the past. These foregone opportunities show great potential to be converted into engineered solutions with the additional skills contributed by Scott.

By applying the RobotWorx digital marketing strategy to the Scott business model, Scott will also have the ability to dominate the internet in areas of Scott expertise, significantly raising its profile in both its key North American market and beyond.

The robot industry is expected to grow substantially, due to its promising output of high quality products at a lower price. With the ability to offer robotic automation for a wide variety of industries RobotWorx, together with Scott, have significant ability to tap into this profitable growing market.

RobotWorx’ CEO and owner, Keith Wanner, will be working closely with Scott to ensure a smooth transition, while the staff at RobotWorx are looking forward to working with the Scott team and to the opportunities that lie ahead.

------

SNOOPY

[percy]

Taken a very very long time.Ian Urqhart told me about the company a good number of years ago.He was a pretty big shareholder at the time.I have certainly done very well following Mark Waller at EBO.A businessman I greatly admire.
I went straight to the net and looked up RobotWorx, and putting it together with SCT's announcement ,I can see the sense of it.
I look forward to seeing which performers better over the next 5 years, CCC.ST .Cavotec [SEK 30.20] or SCT.

[Snoopy]

I had never heard of "ROBOTWORX" before today. But the acquisition does fit within the wider vision of Scott's becoming the world's leading automation company.


The acquisition of "Robotworx" is for US$5.4 million, funded by a combination of bank debt (US$4.5 million) and 646,301 shares in Scott (US$0.9 million). I should point out that this will easily be handled by the Scott balance sheet. But it nevertheless signals a clear departure from the 'no term debt' policy of previous Chairman Graeme Marsh. I am not worried, but I would suggest to SCT shareholders that Marsh's fiscal conservatism has served them well through many cyclical industry downturns of the past.

The new policy of diversification is the now evolved board's answer to managing the ups and downs of the various markets that SCT now finds itself in.

The first step in this diversification was the acquisition of Rocklabs, which in hindsight was a master stroke. This acquisition had a very similar structure to the acquisition of 'Robotworx' announced today. Namely, some cash, some shares and an additional basket of shares that would be paid to the company founder if certain earnings targets were reached. Founder CEO of Rocklabs Ian Devreaux, basically worked his butt off during the acquisition period to the extent that prior to FY2014, Rocklabs entirely drove the earnings of SCT for the earn out period to last year. Will this effect be repeated at Robotworx under founder Robotworx CEO Keith Warner? As a shareholder, I sure hope so! Nevertheless I must express some caution at this stage of the acquisition process.

SCTs other attempts at diversification into meat industry and milk industry robotics have so far not developed any material profit at all. Yes I know new things take time. But is still staggers me that upteen years on, and despite the obvious technical success of the automated boning room, the return to shareholders has been effectively zero. I am realistic enough to know that not all technological breakthroughs are easy or make quick profits. Some by the law of averages I expect to fail. But so far all of SCTs diversification success has been achieved thanks to the hard work of Ian Devreaux, former CEO of Rocklabs. SCT have yet to develop any commercial success with any of their other diversifications!

I am now watching SCT with increased viligence.

SNOOPY

[percy]

I prefer viligance.!! lol.

[Snoopy]

I prefer viligance.!! lol.

"Viligence". A combination of 'viligance' and 'vengence' ;-)

SNOOPY

[percy]

"Viligence". A combination of 'viligance' and 'vengence' ;-)

SNOOPY

Right, viligence sounds perfect.!!

[percy]

Another small earnings positive acquisition by SCT announced today.AST [Applied Sorting Technologies] of Melbourne acquired for $1.3mil.
SP has decreased nearly 15% since I purchased my small parcel not long ago!!.

[Snoopy]

Another small earnings positive acquisition by SCT announced today.AST [Applied Sorting Technologies] of Melbourne acquired for $1.3mil.


"AST is based in Melbourne Australia and has skills and expertise in advanced sensing and imaging technologies including X-ray, DEXA and CT scanning. These technologies are included in a range of x-ray inspection products and applications for the mining and meat processing sectors which complement and add to Scott’s portfolio of skills and capabilities.

The total purchase price of around NZ$1.3 million consists of an amount for the net tangible assets and an amount for the transfer of intangible assets subject to earn-out over the next 18 months."

This deal has the stamp of Mark Waller all over it. Mark I know makes a big thing about not expanding outside of your core competance and business mission strategy. There are enough technical people on the board to make sure SCT is not acquiring a pup. And we have the twin guiding hands of Mclauchlan and Hopkins to keep the deal profit focussed. I like the payment subject to earn out aspect of the deal.

"It is expected that AST will be earnings positive from acquisition."

I am never totally comfortable with this 'earnings positive ' thing as it always gets me thinking. I wonder how profitable SCT is right now with the high exchange rate, to make the comparative benchmark? And I wonder if buying "Joes Ice Cream Caravan" at St Kilda beach might be an even more profitable eps acquisition!

"AST has contracts that will provide a base workload for the next two years and Scott will add resource to expand the reach into the mining and meat processing sectors."

Good stuff sounds like the newly acquired subsidairy is busy enough to gently transition into the Scott fold.



SP has decreased nearly 15% since I purchased my small parcel not long ago!!.


The hazards of a thinly traded share in a market where people react to the new 'latest thing'. Nothing really changed for SCT I think, but I am keeping half an eye on that exchange rate.

SNOOPY

[percy]

The more overseas acquisitions they do,the less the exchange rate concerns me.

[Snoopy]

On 13th September2010, Ian Urquhart second largest shareholder in SCT with 15.1% of shares on issue (source 2009 Annual Report) passed away. He was 76. The death notice in the Press named no living family, but Ian seemed to have been a bit of a mentor to younger investors in his last few years according to the article in Saturday 25ths Press. Looks like he will be sadly missed. Perhaps this represents the start of a real passing of the baton to a younger generation of investor at SCT? In any event I will be watching with interest to see what happens to Ian's strategic stake.


Four years on and through cash issues and bonus shares the J.I Urquart Family A/C has reduced their share in Scott Technology to 12.25% as at the last reporting date (23rd September 2013).

I wonder how many shareholders noticed that last week saw the biggest number of SCT shares traded all year. On one day alone the volume was over 450,000. There are only 5 shareholders who could have sold that many shares: Oakwood Securities (associated with former Chairman Marsh), JI Urquart A/C, Fisher Funds, Southern Capital Limited (associated with former director Trevor Scott) and SIL Long term holdings (associated with Dunedinites Eion Edgar and Alan McKenzie). Of those SIL Long Term holdings most closely matches the number of shares sold. Eion Edgar cashing up? It will be interesting to double check against the top 20 shareholder list in the annual report.

SNOOPY

[Snoopy]

Not sure if a non person can have a biography, but if they can the SCT biography came out last year, commemorating 100 years of being in business.

“Scott Technology, 100 years of Engineering” by Jim Sullivan ISBN 978-0-473-25532-3"

It was on sale to shareholders at last years AGM, so perhaps worth checking out if you are new to the share register. The company has changed so much since inception. But one little story I couldn't resist quoting, showing the kiwi way of doing things, relates to former CEO, now director, Graham Batts when he was chasing down a new US contract. Quoting from p108:

------

About 1993 the association with Maytag came about through some old fashioned pig headedness on the part of Graham Batts (CEO of the day) when he decided to visit the head office of the company at Newton, Iowa. He fronted up with no appointment and no name to ask for. Not surprisingly the receptionist was not helpful and Graham left empty handed. But not to be deterred he returned the next day.

While hoping for a different receptionist from the day before, he noted a number of visiting Maytag executives, milling about waiting for the lift. On impulse he moved into the lift with them, got out on the 6th Floor and asked the first person he met if he could see the chief engineer Jim Brown. The puzzled reply was that there was no Jim Brown, the name was Tom Smith.
“ Oh yes, that’s the name, I had his name confused with the engineer from another plant.” said Graham.
He was directed to Tom Smith’s office, and after a few minutes with the bewildered Tom, all was sweetness and light. Credentials were exchanged, new projects and proposals were discussed, and eventually contacts leading to some large orders made.

------

SNOOPY

[Carpenterjoe]

Not sure if a non person can have a biography, but if they can the SCT biography came out last year, commemorating 100 years of being in business.

“Scott Technology, 100 years of Engineering” by Jim Sullivan ISBN 978-0-473-25532-3"

It was on sale to shareholders at last years AGM, so perhaps worth checking out if you are new to the share register. The company has changed so much since inception. But one little story I couldn't resist quoting, showing the kiwi way of doing things, relates to former CEO, now director, Graham Batts when he was chasing down a new US contract. Quoting from p108:

------

About 1993 the association with Maytag came about through some old fashioned pig headedness on the part of Graham Batts (CEO of the day) when he decided to visit the head office of the company at Newton, Iowa. He fronted up with no appointment and no name to ask for. Not surprisingly the receptionist was not helpful and Graham left empty handed. But not to be deterred he returned the next day.

While hoping for a different receptionist from the day before, he noted a number of visiting Maytag executives, milling about waiting for the lift. On impulse he moved into the lift with them, got out on the 6th Floor and asked the first person he met if he could see the chief engineer Jim Brown. The puzzled reply was that there was no Jim Brown, the name was Tom Smith.
“ Oh yes, that’s the name, I had his name confused with the engineer from another plant.” said Graham.
He was directed to Tom Smith’s office, and after a few minutes with the bewildered Tom, all was sweetness and light. Credentials were exchanged, new projects and proposals were discussed, and eventually contacts leading to some large orders made.

------

SNOOPY


Classic,

Love it!

[Snoopy]

Taken a very very long time. Ian Urqhart told me about the company a good number of years ago. He was a pretty big shareholder at the time.


Explanation for the recent share price weakness (15th July announcement). The trustees of the Ian Urqhart estate have reduced their holding from 12.677% to 8.188%. Nearly 1.5m shares dumped on the market. Probably some kind of risk re-balancing going on, as trustees in general seem 'required' to do, even if it lacks all business sense. But I can hear that rotating whir of Ian spinning in his grave!

SNOOPY

[Snoopy]

Explanation for the recent share price weakness (15th July announcement). The trustees of the Ian Urqhart estate have reduced their holding from 12.677% to 8.188%. Nearly 1.5m shares dumped on the market. Probably some kind of risk re-balancing going on, as trustees in general seem 'required' to do, even if it lacks all business sense. But I can hear that rotating whir of Ian spinning in his grave!


Share price down to $1.52 tonight. Maybe those trustees have a point short term.

XRF Scientific, a loose agency partner of SCT in Australia, released their results this week. Annual eps down 38%! But they say, our earnings not as badly affected as other mining suppliers so we have done OK. Well the market didn't like it and pushed XRF down below 20c, a three and one half year low - ouch!

So maybe the Rocklabs division of SCT will disappoint too? Too soon I think for SCT to see any tangible benefit from the expansion of their robotics division. Appliance line manufacturing plant is always a bit up and down. Shareholders might need to brace themselves for the October full year announcement. For we long term investors the SCT story is still on track though. Perhaps a buying opportunity coming up after SCT full year results are announced in October?

SNOOPY

[percy]

The acquisition of RobotWorx should offer good opportunities for SCT.
Liked the announcement so much I brought some shares at $1.82.!!!!

Well Percy old son you certainly got this one wrong.!!!!!!

[Snoopy]

Well Percy old son you certainly got this one wrong.!!!!!!


Depends on the time frame you are investing to. I still don't predict great things for FY2014. But the USA is recovering, and the exchange rate is moving in SCT's favour. The SCT share price could very well hit $1.82 again by the end of the year with a positive profit outlook.

SNOOPY

[percy]

Depends on the time frame you are investing to. I still don't predict great things for FY2014. But the USA is recovering, and the exchange rate is moving in SCT's favour. The SCT share price could very well hit $1.82 again by the end of the year with a positive profit outlook.

SNOOPY

Needed to find funds to increase my DPC holding.
SCT remains on my watch list.

[Zeitgeist]

Not an amazing result for FY14 but not awful either. I’m pleased to see four of five industries grew in revenue, the exception being Mining.

A bit concerned about the payout ratio. D/EPS = 0.08/0.062 = 130% but I won’t complain at this point. Something to keep an eye on? Depreciation was slightly higher and I suppose the Board is confident the acquisitions will shine.

I hope this marks the turning point for SCT. With the NZD (hopefully) depreciating further and some strategic acquisitions I’m bullish on FY15.

[percy]

The spend on R&D at over $3mi is approx. 5% of revenue,so I take that as positive.
The dividend pay out seems to be over generous to me,and with still a lot of headwinds, could prove to be foolish.

[Hawkeye]

http://www.nbr.co.nz/article/scott-technology-annual-profit-falls-41-strong-kiwi-competition-erodes-margins-bd-163728

[percy]

Thanks for the link.
The dividend does look really out of place when looking at the very modest cash flow from operating activities.

[Snoopy]

The spend on R&D at over $3mi is approx. 5% of revenue,so I take that as positive.
The dividend pay out seems to be over generous to me,and with still a lot of headwinds, could prove to be foolish.

Here is how the result was reported in the Dunedin home base Percy.

http://www.odt.co.nz/news/business/319038/scott-result-affected-slowdown

CEO Hopkins has taken a leaf out of your business lexicon.

----

He was confident the company was was ''well positioned'' to take advantage of the increased demand for its technology and services, which was evident in global economies.

----

SNOOPY

[Snoopy]

A bit concerned about the payout ratio. D/EPS = 0.08/0.062 = 130% but I won’t complain at this point. Something to keep an eye on?


SCT has lumpy cashflows Zeitgeist. Sometimes projects are close to completion, yet the final payment (which contains the profit) doesn't come through until the next reporting period. Sometimes you might get the reverse: namely a profit has been booked, but more than that profit is required as working capital for the next big project.

Nevertheless, in this instance not only is profit down, but cashflow is strongly negative. SCT were effectively borrowing to pay the last dividend and they may be borrowing to pay the final dividend as well. I share Percy's concern that in times of business market volatility, this is not a great move. Could it be a bribe to soften shareholders up for another small capital raising? I note that borrowing headroom (note 15) is down to a rather slender $3m, down from nearly $8m last year.

Well spotted on the payout ratio though, and definitely something to watch!



Depreciation was slightly higher and I suppose the Board is confident the acquisitions will shine.


Only one acquisition has ever shone for SCT, and that was Rocklabs. All the other acquisitions and joint ventures are, so far, a perpetual work in progress.

1/ Robotic Tehnologies (the joint venture with Silver Fern farms) have halved their profit. The joint venture for meat industry robotics in Australia makes no money (again) despite generating lots of interest and revenue.
2/ The joint venture automated milking system has been delayed with the launch now taking place in 2015, the worst dairy season for some considerable time.
3/ The Scott Separation Technology (the fancy centrifuge) has gone from a very modest profit to a loss.
4/ X Rock auotmation, the joint venture with XRF Scientific, making automated equipment for analysing mining samples has gone into a loss.
5/ Rocklabs Automation Canada, a joint venture with local company STG holdings is now loss making, losing $50k in FY2014, and has swallowed more than that in new capital requirements.
6/ The Robot Vision Limited joint venture has widened their loss for the year.

One bright spot: the joint venture with STG in Chile has contributed a $6,000 profit and repaid $118k in capital during the year. Overall though, the joint ventures are not a pretty picture.



I hope this marks the turning point for SCT. With the NZD (hopefully) depreciating further and some strategic acquisitions I’m bullish on FY15.

No more acquisitions please, until SCT managment can prove they can turn around the acquisitions and joint ventures they already have!

SNOOPY

[Snoopy]

I note that borrowing headroom (note 15) is down to a rather slender $3m, down from nearly $8m last year.


The declared dividend at 5.5cps will cost the company $2.42m dollars. That reduces the company's borrowing headroom to less than $600k. Blimey, I hope some positive cashflow comes into the coffers following balance date. This is getting tight.

(Edit: $2.966m of a slightly aged balance between 30-60 days is due according to Note 7, beyond balance date of 31st August. So hopefully that is now in the bank, and SCT will indeed be Ok cashflow wise)

The former Chairman, the conservative accountant Graeme Marsh, might be spinning in his grave. Except he isn't dead. Maybe when Graeme reads the results, that will send him spinning towards his grave.

SNOOPY

PS I guess shareholders taking their dividend in shares rather than cash is becoming more important to SCT. The discount to the DRP is 5%. I will be taking my dividend in cash though.

Last year (FY2014), 602,363 new shares were issued in lieu of dividends. That equated to a cash injection of $1.029m for the company.

[percy]

The declared dividend at 5.5cps will cost the company $2.42m dollars. That reduces the company's borrowing headroom to less than $600k. Blimey, I hope some positive cashflow has come into the coffers since balance date. This is getting tight.

The former Chairman, the conservative accountant Graeme Marsh, might be spinning in his grave. Except he isn't dead. Maybe when Graeme reads the results, that will send him spinning towards his grave.

SNOOPY
I see a lot of SCT's future wealth being dependant on RobotWorx.As this is a very recent acquisition, it may take time and money for it to reach its potential.Looking for growth requires a strong capital base,a good bank,and usually very strong cashflow.
Playing around with R&D,and depreciation can improve things in the short term,but will hinder things it the long term.
Must be difficult being a director,
knowing that so many shareholders want/require big divies. Cut the divie,and you upset
"the owners",keep it up and you compound your debt position.
Only comfort shareholders have is that the CEO has told them they are "well positioned". [chuckle lol]
The ODT article was pretty fair to the company.I would think G Marsh would be phoning the present chairman, and expressing his views strongly.!!!!!!!!!!!!!!!!!!!!!!!!

[Snoopy]

I see a lot of SCT's future wealth being dependant on RobotWorx. As this is a very recent acquisition, it may take time and money for it to reach its potential.


I thought note 23f was of interest with respect to "RobotWorx", and the much smaller "Applied Sorting Technologies" acquisition in Australia.

"Had these acquisitions been effected 1st September 2013, the revenue from the group would have been approximately $67m (c.f. actual $60.316m for FY2014) and the profit from the group after taxation and non-controlling interests from continuing operations would have been $3.1m (c.f actual $3.0m)."

So profit brought into the fold from the new acquisitions (mainly RobotWorx) was a mere $100k on $67m of sales!



Must be difficult being a director,
knowing that so many shareholders want/require big divies. Cut the divie,and you upset
"the owners",keep it up and you compound your debt position.


The DRP does go some way to addressing this.

SNOOPY

[percy]

I thought note 23f was of interest with respect to "RobotWorx", and the much smaller "Applied Sorting Technologies" acquisition in Australia.

"Had these acquisitions been effected 1st September 2013, the revenue from the group would have been approximately $67m (c.f. actual $60.316m for FY2014) and the profit from the group after taxation and non-controlling interests from continuing operations would have been $3.1m (c.f actual $3.0m)."

So profit brought into the fold from the new acquisitions (mainly RobotWorx) was a mere $100k on $67m of sales!



The DRP does go some way to addressing this.

SNOOPY

I forgot DRP.
That will most probably be why the directors kept the divie up.

[Chaowee88]

I forgot DRP.
That will most probably be why the directors kept the divie up.

Not sustainable though. Look at Just Water, they also had a DRP going before it eventually blew the books out so bad they had to go 5 years without a divie.

In fact I'm not a big fan of DRP because it more a sign of weakness in which it to keep returns going to investors but long term wise it compounding the damage as further dilution takes it toll.

I see the odd companies who have a DRP going and also a buyback to reward "long term" faithful investors which is how a DRP should be utilized.

[percy]

Not sustainable though. Look at Just Water, they also had a DRP going before it eventually blew the books out so bad they had to go 5 years without a divie.

In fact I'm not a big fan of DRP because it more a sign of weakness in which it to keep returns going to investors but long term wise it compounding the damage as further dilution takes it toll.

I see the odd companies who have a DRP going and also a buyback to reward "long term" faithful investors which is how a DRP should be utilized.

Very valid points.
Thank you for your post.

[Snoopy]

I thought note 23f was of interest with respect to "RobotWorx", and the much smaller "Applied Sorting Technologies" acquisition in Australia.

"Had these acquisitions been effected 1st September 2013, the revenue from the group would have been approximately $67m (c.f. actual $60.316m for FY2014) and the profit from the group after taxation and non-controlling interests from continuing operations would have been $3.1m (c.f actual $3.0m)."

So profit brought into the fold from the new acquisitions (mainly RobotWorx) was a mere $100k on $67m of sales!


Incrementally 'RobotWorx' and 'Applied Sorting Technologies' would have increased SCT profitability by $0.1m/$67m = 0.15% (not a misprint, way less than 1%) if owned for the full year. (AR2014, note 23f).

We are told that during this year (FY2014), RobotWorx generated a profit of $NZ492k on revenue of $NZ2.6m and 'Applied Sorting Technologies' generated a loss of $NZ69k on revenue of $NZ113k.

Based on its own turnover, the margin for 'RobotWorx' and 'Applied Sorting Technologies' combined earnings for FY2014 was:

($0.1m+$0.492m-$0.069m)/($7m + $2.6m + $0.113m)
= $0.523m / $9.713m
= 5.4%

Within rounding error, you could say that figure is a good reflection on the performance of RobotWorx alone (because the contribution of Applied Sorting Technologies is so small)

From the RobotWorkx acquisition NZX announcement:

"The acquisition is for an initial consideration of US$5.4 million, funded by a combination of bank debt (US$4.5 million) and 646,301 shares in Scott (US$0.9 million) issued to the vendor. An additional 1,648,068 shares in Scott (representing further consideration US$2.3million) will be issued to be held under an escrow arrangement and to vest with the vendor over a period of three years if specified earnings targets are achieved. The shares have been issued at NZ$1.6157 per share, the volume weighted average price for the 5 days prior to settlement. The transaction will be earnings positive for the Scott Group, while the earnout arrangement will provide a strong incentive for the vendor and RobotWorx’ management to continue to grow the business. "

We know from note 15 of FY2014 the (floating) interest rate on that US borrowing stood at 2.65%. The actual US loan seems to be $US4.375m So the interest bill for one year going forwards is:

0.0265 x $4.375m = $115.9k

I guess there is also a 'cost of equity', reflecting the SCT shares issued to RobotWorx management. However, I don't know how to calculate that, or even if it has been included in the 'earnings positive' calculation.

The annual cash cost of the new US loan is considerably less than the annualised $NZ0.523m net profit after tax contribution from the new robotics acquisitions. On the surface this acquisition looks good.

New SCT shares were issued in part payment as well. No claim was made as to whether the acquisition was 'earnings per share positive'.

If things go well an additional 1,648,068 SCT shares will be issued to RobotWorx management, to go with the 646,301 shares already paid to them (2,294,369 total).

Incremental earnings of $0.523m on these new incremental shares gives an eps figure of:

$0.523m/2.294m =22.8cps

That is a higher eps figure than SCT has achieved at any time its listed history. So if profitability can be maintained at RobotWorx, then this acquisition is eps positive as well.

Being 'eps positive' is much more important than being 'earnings positive' from an investor perspective.

SNOOPY

[Snoopy]

Incrementally 'RobotWorx' and 'Applied Sorting Technologies' would have increased SCT profitability by $0.1m/$67m = 0.15% (not a misprint, way less than 1%) if owned for the full year. (AR2014, note 23f).

We are told that during this year (FY2014), RobotWorx generated a profit of $NZ492k on revenue of $NZ2.6m and 'Applied Sorting Technologies' generated a loss of $NZ69k on revenue of $NZ113k.

Based on its own turnover, the margin for 'RobotWorx' and 'Applied Sorting Technologies' combined earnings for FY2014 was:

($0.1m+$0.492m-$0.069m)/($7m + $2.6m + $0.113m)
= $0.523m / $9.713m
= 5.4%

Within rounding error, you could say that figure is a good reflection on the performance of RobotWorx alone (because the contribution of Applied Sorting Technologies is so small)


The RobotWorx acquisition was announced to be 'settled today' on the market as at 14th May 2014. That means three and one half months of RobotWorx's operations was consolidated into the SCT FY2014, which ended 31st August 2014. During that 3.5 months RobotWorx contributed $NZ0.492m NPAT.

However, if RobotWorx had been consolidated for a full year we are told that SCT would have booked $NZ0.1m extra profit, which must have been earned (by subtraction) over the other 8.5 months. This shows the RobotWorx profit is probably inherently very lumpy. Something to be considered when doing future forecasts.

SNOOPY

[okay]

Who's behind this one?

http://www.stuff.co.nz/business/farming/dairy/10610178/22m-robotic-dairy-shed-among-worlds-biggest

[Under Surveillance]

Who's behind this one?

http://www.stuff.co.nz/business/farming/dairy/10610178/22m-robotic-dairy-shed-among-worlds-biggest

The answer is in the second sentence of the article, i.e. DeLaval. Used to be Alpha Laval.

[okay]

Cheers. Swedish company. Shame Scott Tech weren't able to pick up this one.

[Snoopy]

Cheers. Swedish company. Shame Scott Tech weren't able to pick up this one.


I don't think Scott's Milktech system is competing in the all singing and dancing new dairy shed market. The Scott system is an add on to milking sheds that already exist IIRC.

http://www.scottech.co.nz/scott-milktech/

SNOOPY

PS I see the above link says they will put the Scott System into new sheds. But I am sure the focus was (and still is?) on retrofitting existing dairy sheds.

[Snoopy]

Not an amazing result for FY14 but not awful either. I’m pleased to see four of five industries grew in revenue, the exception being Mining.

A bit concerned about the payout ratio. D/EPS = 0.08/0.062 = 130% but I won’t complain at this point. Something to keep an eye on? Depreciation was slightly higher and I suppose the Board is confident the acquisitions will shine.

I hope this marks the turning point for SCT. With the NZD (hopefully) depreciating further and some strategic acquisitions I’m bullish on FY15.


I have had a chance to review the annual report 2014 at leisure.

Under note 29a, on Financial Instruments, there is the following comment:

"The group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes."

It is disappointing then to see many financial instrument transactions pay a large part in the headline result. The statement of comprehensive income (AR2014, p20) shows 'TOTAL COMPREHENSIVE INCOME FOR THE YEAR NET OF TAX" to be $2.925m. However, that includes 'Other comprehensive income' which is the net movement in the cash flow hedge reserve and a translation from foreign operations. Back those figures out and we have 'NET SURPLUS FOR THE YEAR AFTER TAX' of $3.026m, This most readers might take as the 'operational result', net of hedge movements and foreign currency translations out of the control of management, but they would be wrong.

If shareholders turn to Note 3b, we find that the 'net surplus before taxation' already includes:



Fair value losses on firm commitments-$0.324m


Foreign exchange losses-$0.118m


Fair value gains on derivatives held as fair value hedges$0.324mm


Unrealised fair value gains on foreign exchange derivatives$0.864m


Gain on sale of property plant and equipment$0.026m


Total$0.722m



At a 28% tax rate, these transactions have boosted profit by:

(1-0.28)*$0.722m= $0.556m

So the operational profit was really:

$3.026m - $0.556m = $2.470m

This is more than 15% less than the $2.925m headline figure. Why do SCT make the calculation of the operational profit so hard?

Based on 44.002m shares on issue, the eps figure is:

$2.47m/ 44.002m = 5.61cps.

Based on a share price of $1.70, SCT is trading on an historical PE of:

170/5.61 = 30.3

Given there is no imminent recovery in the mining sector, this looks very fully priced IMO.

SNOOPY

[Snoopy]

Percy wrote on the Methven thread
"SCT has also turned up. Must admit I am puzzled."


Percy, traditionally SCT has turned up early in the economic cycle. That is because they benefit from the lead time that an appliance manufacturer must build in to the launch of a new appliance production line. It is only when the new product is lauched that the consumer will start spending, But SCT gets paid a couple of years before that.

My guess is the upturn is because the US economy may be looking stronger in two years time, so SCT benefits now.

I am not so sure that this effect still holds as strongly, now only half of the company's business is in the traditional appliance line production area.

Of course the other way to look at this is to say the last 'downturn' (from $1.80 to $150) was caused by the JI Urquart Family Account substantial shareholder dumping around 4% of the company on market. With a big parcel like that and a relatively illiquid share, the price has no choice but to go down. I would argue that this last downturn was irrational. The recent price action is only restoring the share to where it should have been all along.

SNOOPY

[Snoopy]

From the RobotWorkx acquisition NZX announcement:

"The acquisition is for an initial consideration of US$5.4 million, funded by a combination of bank debt (US$4.5 million) and 646,301 shares in Scott (US$0.9 million) issued to the vendor. An additional 1,648,068 shares in Scott (representing further consideration US$2.3million) will be issued to be held under an escrow arrangement and to vest with the vendor over a period of three years if specified earnings targets are achieved. The shares have been issued at NZ$1.6157 per share, the volume weighted average price for the 5 days prior to settlement.


Closer examination of the SCT balance sheet (AR2014 p22) shows that the debt to acquire Robotworx and the Rocklabs property have resulted in substantial term and current debt being recorded.



Bank Overdraft$6.258m


Current Portion of bank loans$0.982m


Non Current Portion of bank loans$7.442m


Total$14.682m




Based on a normalised profit of $2.480m, this gives a minimum debt repayment time of:

$14.682m/$2.480m= 6 years

That is manageable, but certainly not low. What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!
I wonder what ex Chairman Graeme Marsh would say?

SNOOPY

[Snoopy]

What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!


Money borrowed is tax deductable. That means the after tax interest rate paid on overdraft by SCT is:

0.72 x 11.4% = 8.2%

At a share price of $1.70, SCT is on an FY2014 dividend yield of:

(2.5c+5.5c)/170 = 4.7% (net, after tax)

So the cost of paying you, an SCT shareholder, an annual dividend of 9c, will decrease your share of SCTs cash balance by (8.2/4.7) x 9c = 15.7c.

Shareholders get their 9c dividend in their bank account (great to have that in the right pocket), but to do that SCT have had to pull 15.7c out of you left pocket. Great eh?

SNOOPY

[Lizard]

Not so sure about this agm. Although it seems an exciting business, it is difficult to get a sense of profit growth in the immediate future. However, at some point, the exchange rates will be in their favour again and the underlying historic growth in sales may be reflected in some catch-up growth of the bottom-line.

[percy]

With SCT needing to come back to shareholders for more capital, I don't think you will see any sp growth for sometime.

[Snoopy]

With SCT needing to come back to shareholders for more capital, I don't think you will see any sp growth for sometime.


And yet the share price is up 1c today. Perhaps investors have not taken in that they will be reaching into their pockets for 'quite a few dollars' early in 2015? Or maybe a new mindset has taken over. Technology investors 'get' the latest expansion into Australia as part of a global strategy to conquer the robotics market in the Pacific rim? And maybe they like the fact the new acquisition is 'profit accretive' from day one?

SNOOPY

[Snoopy]

Chairman Stuart McLauchlan welcomed shareholders with an international political and economic perspective of where Scott Technology’s markets are headed. Following this, CEO Chris Hopkins highlighted the progress being made in different industry areas in which the company operates.

The star of FY2014 was ‘Appliance Line Manufacturing’. Seven production lines were shipped, four for installation in the USA. Two of these lines were parallel production lines. That allowed higher profit margins. Shareholders were shown a video of a hot water cylinder production line designed and installed for Haier in China. During the contract brief, it became apparent there were some design issues with the hot water cylinder. Scott Technology doesn’t advertise itself as product developer. Yet they do have this capability, and Scott’s were able to partner with Haier to both design and build a better product.

Meat line automation equipment continues to hold promise. The most prolific installations are beef boning units. Forty-six beef boning units are installed globally. Improvements to yield from a beef carcass are worth three to four dollars. Payback on such equipment is less than twelve months.

‘Rocklabs’ was 50% down on turnover year on year. Exploration has slowed globally. Nevertheless, the big producers like BHP and Rio Tinto are still producing. In FY2014, ‘Rocklabs’ supplied part of an ‘automated grade benefication’ iron ore plant. This was a first for the division. ‘Rocklabs’ are adapting to the new global mining environment.

‘Robotic Technologies’ is building a multi in country capability to expand what has up until now been a team servicing the world from just their Dunedin headquarters. Robotworx, based in Ohio USA, is sited in the heartland of American manufacturing. It is within 250 miles of 95% of the robotic industrial production lines in the USA. Australia will be similarly served soon.

Hopkins told shareholders the HTS-110 superconductivity project, recently bought 100% in house, is proving difficult to commercialize. The most serious impediment is the prime customer target base, overseas universities, are at cyclical lows in terms of the funding cycle. This I interpret as executive code for this business unit being in some difficulty.

A second installation of the cup-attaching robot for milking sheds has been completed. Milktech development was slowed by the cyclical nature of the milking industry. A seasonal industrial has reduced time for trialing.

Back to a more general overview of all the business units. 60% of industrial robots purchased in 2014 were purchased around the Pacific rim. Most of those were in China. This is driving a planned move to larger premises in China.

SNOOPY

[Snoopy]

A shareholder questioned the segment reporting under the broad umbrellas of ‘automated systems’ and ‘standard systems’. This has been the case since 2007 (when Rocklabs was acquired) and the business has become involved in many more industries since. In particular, there was no profitability disclosure in the industry information. CEO Hopkins noted that, yes Scott’s had moved into other industries. Nevertheless, operationally, they remained an ‘industrial robotics’ company. All work-sites could contribute to all projects. Moreover, work could be, and on occasion was, distributed across different sites. ‘Automated systems’ and ‘Standard systems’ was still a representative breakdown of how the company operates. Finally, Chairman McLauchlan noticed Scott’s work in ‘competitive markets’. That meant that further industry group disclosure might give more away to competitors than shareholders would gain.

A shareholder asked about potential patent infringement because of the expansion of business in China. CEO Hopkins noted that patents were becoming more respected in China. Hopkins added that the patent protection process meant that for a modest cost (some $2500) 2.5 years of global patent protection was available. During this time, Scotts could evaluate the importance of particular patents in different markets. Scotts would formalize their patents only in what they deem as important markets. Global protection could cost some $25,000. However, a patent for Australia and New Zealand might cost just $2,500. The total ‘patent protection bill’ for the year was of the order of $100,000. In addition, those patents in the meat industry joint ventures were jointly funded by Scott’s and their industry partners.

During the year, Scott’s claimed that a potential infringement of some meat industry patents occurred, not in China, but in Europe. This involves a Dutch company supplying equipment to a Danish company. Compensation is under investigation.

Over the years, there has been a rapid increase in the value of the Intellectual Property patent portfolio. All has been expensed and so is ‘off balance sheet’.

Scott considers that trademark protection was equally important as patent protection. Trademark protection is cheaper and easier to protect than patents.

SNOOPY

[Snoopy]

A shareholder questioned the segment reporting under the broad umbrellas of ‘automated systems’ and ‘standard systems’.


Just what is a 'standard system'? I have never been sure. Some clarity was shone on this in the CEO presentation. Under the 'Project Activities' slide we got:



Standard Equipment Revenue


Mining Sector Equipment$10m


Mining(Reference Materials)$2m


Australia Meat Equipment $3m


Robots & Robot Cells -USA $3m


China Manufacturing $3m


Total$21m



That ties in with the $21.239m of 'Standard Equipment' revenue on p49 of the annual report.

SNOOPY

[Snoopy]

SCT plans a cash issue for early 2015. The purchase of Machinery Automation and Robotics (MA&R) in Australia will be cash positive from 31st January 2015, the proposed deal date. The cash issue will pay for MA&R. It will also fund other purchases made over FY2014, the largest being Robotworx in the USA. Bank debt on the FY2014 balance sheet is listed as:

$6.258m + $0.982m + $7.442m = $14.682m

Add that to the $A13m ($NZ14m) acquisition bill for MA&R, and the potential size of the capital raising could be up to $30m. The current market capitalization of SCT is around $70m. So this proposed cash issue is significant: A 1 for 2 share offer at $1.20 would raise $26m. For potential new SCT investors, the coming rights issue looks to be a smart time to buy into the company at a good price! Since listing 0n the NZX in 1997, SCT has grown, but has had a dividend to earnings payout ratio of 70%.

SNOOPY

[Under Surveillance]

Thanks for the report, Snoopy.

Did the AGM presentations and aftermatch function give you confidence the board/CEO know what they're doing? The comments on the robot for dairy sheds suggest they are bunnies as to the fundamentals as to the dairy season, after many years developing the robot, and I wonder whether they are grounded as to realities elsewhere. It's all very well buying businesses left right and centre, but the sole buy of recent years which is obviously a good one seems to me to have been Rocklabs (a cracker).

[Snoopy]

Hope I haven't blown the faith US. Here is another angle on valuing SCT, based on dividend payments alone.

It is not an easy job to value a share with a patchy earnings history. As a long-term investor I am always interested in the dividend yield over the business cycle as a return that is very tangible. In mom and pop investor terms, this is the cash in bank account received by the long-term investor.

I favour looking at ten years of operating result history. This is a compromise between averaging out over the business cycle and dropping payments from so long ago that they are no longer indicative of today.

For Scott Technology, I have added together all of the dividends paid in each current financial year ended 31st August. In annual terms from FY2011 looking backwards the dividends paid out were as follows:

6.0, 1.8, 0, 4.4, 4.4, 0, 9.5, 10.2, 8.5, 2.9

That comes out to a grand total of 47.7cps over ten years. I should note that the per-share earnings have been retrospectively adjusted to reflect the number of shares on issue today. Significant changes in the number of shares without the addition of any cash earning business unit were as follows:

1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
3/ A 1:8 bonus issue on 4th December 2003
4/ A 1:8 bonus issue on 8th December 2002

Assume a Scott Technology share price of $1.65, and an average annual over the business cycle cash payout of 4.77cps

4.77c/$1.65= 2.89% net = 4.1% gross

That compares favourably with term deposit rates in this current low interest rate environment. Therefore I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline for any less than $1.65, for no improvement in cash return. For me $1.65 has become the bottom line indicative price that I would consider selling at.


Scott Technology is unusual on the NZX: A high technology company that makes a profit and pays a good dividend. Notice I said ‘makes a profit’ not ‘makes a consistent’ profit. Despite diversification over the last seven years, Scott Technology has a patchy earnings and an inconsistent dividend record.

My favoured way to look at a company with ‘inconsistent dividends’ is to try and take an overview over a full business cycle. I choose ten years as a reasonable full business cycle to consider.

Starting with the December 2010 full year dividend, shareholders have had the option of participating in a dividend reinvestment plan. This has increased the liquidity of shares and incrementally increased the capital of the company. But it also has had the effect of diluting earnings per share. Because we live in 2014, I find it necessary to discount prior year dividends per share to take account of this. Also taken into account are:

1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010

In tabulated form my adjusted dividend data is calculated as follows:



Financial YearDividend DeclaredAdjustment FactorAdjustedDividendRocklabs Addition


2015(est)8.01.08.0


201410.041.122/44.0099.3


20138.040.689/44.0097.4


20127.039.721/44.0096.3


20115.2531.322/44.0093.4


20101.0028.475/44.0090.6


20090.00N/A0.00


20089.0024.964/44.0095.10.16


20070.00N/A0.000.16


20064.024.964/44.0092.30.16


Total


42.4
0.48



That comes out to a grand total of 42.9cps over ten years.

4.29c/0.7= 6.1cps (gross)
6.1c/$1.65= 3.9% gross

That compares favourably with term deposit rates in this current “low interest rate” environment. Therefore, I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline. The earnings of the automated milking system and even the meat industry robotics are not reflected in the earnings/dividends that I have quoted. Think of SCT as a bank debenture quantum interest return, complete with a series of free lottery tickets in the emerging technologies I have described. That’s why I believe SCT is –still- the best technology investment on the NZX

SNOOPY

[Snoopy]

Thanks for the report, Snoopy.

Did the AGM presentations and aftermatch function give you confidence the board/CEO know what they're doing?


I think the board know what they are doing and are going down the path of a consistent strategy to build a leading Robotics business Under Surveillence. One thing I like about both the Robotworx and MAR businesses acquisitions is that existing senior staff are staying. In the case of MAR I got the impression they had built up a good rapport with management over some years. I also like the fact that both of these businesses are 'earnings accretive'.



The comments on the robot for dairy sheds suggest they are bunnies as to the fundamentals as to the dairy season,


In fairness Milktech is a joint venture with a couple of high profile real farmers. Possibly SCT's managment had a different timeline of expectation of progress than their fellow farmer shareholders!



after many years developing the robot, and I wonder whether they are grounded as to realities elsewhere. It's all very well buying businesses left right and centre, but the sole buy of recent years which is obviously a good one seems to me to have been Rocklabs (a cracker).


Rocklabs has certainly been the best of the diversification acquisitions, even if this year they have fallen on harder times. The high temperature superconductor business may end up being the worst. But I don't think you can expect a company like this to take no risks and get everything right.

My one doubt is that I come from a background where 'customer focus' has always been important. My impression is that SCT are more 'internal process focussed'. OK what we have here is a very specialised business. But I do wonder home much of the back workshop activity is to satisfy engineers dreams rather than building customer focussed systems on time and very importantly for shareholders 'on budget'.

SNOOPY

[ace5715]

As a note about the productions lines for Haier, the hot water cylinder project it's self was a sub contract to Fisher and Paykel, via their PML or Production Machinery Limited division. The washer cabinet line for China was also a sub contract to F&P.




The star of FY2014 was ‘Appliance Line Manufacturing’. Seven production lines were shipped, four for installation in the USA. Two of these lines were parallel production lines. That allowed higher profit margins. Shareholders were shown a video of a hot water cylinder production line designed and installed for Haier in China. During the contract brief, it became apparent there were some design issues with the hot water cylinder. Scott Technology doesn’t advertise itself as product developer. Yet they do have this capability, and Scott’s were able to partner with Haier to both design and build a better product.

[Snoopy]

With Fisher and Paykel now owned by Haier Scott's will struggle to get direct sales from Haier who they have previously worked for.


As a note about the productions lines for Haier, the hot water cylinder project it's self was a sub contract to Fisher and Paykel, via their PML or Production Machinery Limited division. The washer cabinet line for China was also a sub contract to F&P.

Thanks for this clarification Ace.

In light of one of your previous posts on this thread (first quote above) you must be surprised at how Scott's have wangled their way back into servicing Haier, even if it is through a sub contract! Do you have any insight as to how have Scott's been able to achieve this, given that in the past PML would have surely handled this work in house? Are you subtley suggesting that the PML division within Haier's sudsidiary Fisher and Paykel Appliances is having their capability being run down?

SNOOPY

[Snoopy]

I think the board know what they are doing and are going down the path of a consistent strategy to build a leading Robotics business.


I am always on a quest to identify hidden advantages and assets. Chris Hopkins presentation showed a cumulative chart of patents granted by the year. It is not entirely surprising to me that most of these (21 out of a total of 30) are in relation to RTL (Robotic Technologies Limited), th joint venture with Silver Fern Farms. It is also of note that no patents at all have been applied for through NS Innovations, the joint venture through teh Northern Co-operative Meat Company in Australia.

The meat processing robot divisions have earned very little for SCT so far. But all patents have been expensed. You could argue that the patent portfolio is a latent profit bank kept off the books. If each patent had cost $25,000, that amounts to just over $0.5m of assets. Based on 44m shares on issue, that amounts to 1.1c per share that is not on the books.

That compares to a declared NTA of $47m/44m = $1.07 (based on 44m shares on issue)

SNOOPY

PS Other patents granted to date: Scott Milktech 4, High Temperature Semiconductors 1 (I am surprised it is that low), and Scott Engineering in general 3.

[Under Surveillance]

SCT plans a cash issue for early 2015. The purchase of Machinery Automation and Robotics (MA&R) in Australia will be cash positive from 31st January 2015, the proposed deal date. The cash issue will pay for MA&R. It will also fund other purchases made over FY2014, the largest being Robotworx in the USA. Bank debt on the FY2014 balance sheet is listed as:

$6.258m + $0.982m + $7.442m = $14.682m

Add that to the $A13m ($NZ14m) acquisition bill for MA&R, and the potential size of the capital raising could be up to $30m. The current market capitalization of SCT is around $70m. So this proposed cash issue is significant: A 1 for 2 share offer at $1.20 would raise $26m. For potential new SCT investors, the coming rights issue looks to be a smart time to buy into the company at a good price! Since listing 0n the NZX in 1997, SCT has grown, but has had a dividend to earnings payout ratio of 70%.

SNOOPY
A $26 million raising strikes me as an impossible ask.
The SCT 2011 capital raising involved 7.9 million new shares offered at $1.20 each, with entitlements on a 1 for 4 basis, to raise $9.5 million.
You moot an early 2015 capital raising involving 22 million new shares at $1.20 each, with entitlements on a 1:2 basis, to raise $26 million.
The 2011 raising was on the back of FY 2010 NPAT of $2.8 million, and H1 2011 NPAT of $1.6M
An early 2015 raising would be on the back of the FY 2014 NPAT of $3.0 million, including H1 2014 NPAT of $0.8M.
Even a 2015 offer with entitlements on a 2:5 basis at $1.00 to raise $17M might be too ambitious.

[ace5715]

Thanks for this clarification Ace.

In light of one of your previous posts on this thread (first quote above) you must be surprised at how Scott's have wangled their way back into servicing Haier, even if it is through a sub contract! Do you have any insight as to how have Scott's been able to achieve this, given that in the past PML would have surely handled this work in house? Are you subtley suggesting that the PML division within Haier's sudsidiary Fisher and Paykel Appliances is having their capability being run down?

SNOOPY

Not surprised as they were sub contracting to PML, PML is actually growing and were full to capacity otherwise the jobs would of been done in house. Giving the job to Scott's I believe was about PML keeping control of the work and keeping the work in New Zealand and the work not being given to another supplier (not Scott's more than likely a European machinery supplier).

The other point to be made is that PML and Scotts while they have always competed for the same work from the various appliance manufactures have different skill sets and expertise. Scotts have had more recent hot water cylinder line experience as they did a very similar line for Dux Australia a year or so ago and Washer Cabinet lines have also been a strength of theirs, PML "specialise" in different machinery.

I don't see them getting direct work from Haier, only the work PML allows them to do as a sub contractor due to PML capacity restrictions. Certainly not suggesting that PML are being run down but there are only a limited amount of people you can employ with the skills to do the job. The job market for good mechanical designers, control systems engineers and mechanical fitters is very tight at the moment.

[Snoopy]

A $26 million raising strikes me as an impossible ask.
The SCT 2011 capital raising involved 7.9 million new shares offered at $1.20 each, with entitlements on a 1 for 4 basis, to raise $9.5 million.
You moot an early 2015 capital raising involving 22 million new shares at $1.20 each, with entitlements on a 1:2 basis, to raise $26 million.
The 2011 raising was on the back of FY 2010 NPAT of $2.8 million, and H1 2011 NPAT of $1.6M
An early 2015 raising would be on the back of the FY 2014 NPAT of $3.0 million, including H1 2014 NPAT of $0.8M.
Even a 2015 offer with entitlements on a 2:5 basis at $1.00 to raise $17M might be too ambitious.


Yes, well the ODT report on the AGM

http://www.odt.co.nz/news/business/326117/scott-mulls-funding-acquisitions

quoted

"Craigs Investment Partners broker, Peter McIntyre, said a capital raising would ''test shareholder confidence''."

Going back to the Chairman's address where this capital raising was announced:

-----

"The transaction has a value of AUD$13 million, subject to final adjustment, and is expected to contribute to the bottom line from day one."

"The purchase will be funded by bank borrowings and the Board will consider a capital raising in 2015 to reduce the company’s borrowings following this proposed acquisition and the recent acquisition of RobotWorx in the US."

-------

I was thinking along the lines of Scotts of old, where there was a policy of no term debt. It is possible that now the company is more diversified they will consider that some long term debt is appropriate. So maybe my suggested capital raising amount is too high?

Still, I don't see the board 'considering a capital raising' then not doing it. MAR will cost $A13m ($NZ14m) overall. Robotworx cost $US4.5m ($NZ6m) in debt. So if SCT are going to just pay off that debt associated with those two purchases only (reading the Chairmans words carefully) , then "only" $20m in new capital will be required. I guess they could get away with raising $10m. Yet even $10m is quite a large capital raising for SCT judged in historical terms.

My conservatism on debt is being influenced by the profits Scotts have managed to squeeze from industrial robotics so far. To be frank I would judge the profitability of SCTs foray into robotics so far as marginal.

SNOOPY

[Snoopy]

The meat processing robot divisions have earned very little for SCT so far. But all patents have been expensed. You could argue that the patent portfolio is a latent profit bank kept off the books. If each patent had cost $25,000, that amounts to just over $0.5m of assets. Based on 44m shares on issue, that amounts to 1.1c per share that is not on the books.


I have just clicked that all the meat processing robot stuff is a joint venture. SCT only owns 50% of it. So the patent value offf the SCT books is only 0.55cps. I see CEO Hopkins AGM point though. However, way you look at it, $1.1m or $0.55m seems a paltry amount to pay to protect a product line with so much potential. Mind you, I don't suppose finding a lawyer in the Netherlands and going through the Dutch court system will come cheaply!

SNOOPY

[Marilyn Munroe]

The spicy meatballs at the AGM after match function were yumlicous.

Info I picked up; RobotWorxs is basically a store front operation with repair workshop attached. They have not done on-site installations previously. SCT are hoping to leverage their expertise in this area to broaden RobotWorxs scope. RobotWorx is a savvy internet marketer with a good inquiry to sales ratio. Manufacturing costs in the US are less than in Aoteoroa, raising the possibility that if meat robotics takes off and an increase in capacity is required then the US facility will be expanded to a manufacturing operation.

Boop boop de do
Marilyn

[Snoopy]

Info I picked up; RobotWorxs is basically a store front operation with repair workshop attached.


Didn't see a label. But I assuming that line up of robots on the Annual Report cover, in what looked like a giant otherwise empty shed was the 'back office' at Robotworx?



They have not done on-site installations previously. SCT are hoping to leverage their expertise in this area to broaden RobotWorxs scope. RobotWorx is a savvy internet marketer with a good inquiry to sales ratio. Manufacturing costs in the US are less than in Aoteoroa, raising the possibility that if meat robotics takes off and an increase in capacity is required then the US facility will be expanded to a manufacturing operation.


Are you able to expand on my bold highlighted Marilyn? Seems surprising!

SNOOPY

[Marilyn Munroe]

Are you able to expand on my bold highlighted Marilyn? Seems surprising!

SNOOPY

Yes it suprised me as well. The comment was made without any elaboration and I did not query it.

My guess that it is more to do with component costs rather than labour costs. I am aware of comments made by US visitors about how stuff is so much more expensive here in NZ compared with back home. I guess that because the US is a larger market there are more suppliers thus keen price competition for components such as steel, bearings and progammable logic controllers.

Boop boop de do
Marilyn

[percy]

A friend of mine who owns a bookshop here in Christchurch, spent a week working in a bookshop in the US, as part of a research project for Paper Plus group.He told me the rent and wages were a lot lower than here, and the turnover a lot higher.Also they could get any book in for a customer within two days!!

[noodles]

RIGHTS ISSUE alert

https://www.nzx.com/companies/SCT/announcements/260187

[okay]

RIGHTS ISSUE alert

https://www.nzx.com/companies/SCT/announcements/260187

Cheers Noodles.

I don't mind throwing a few more dollars in, I only have a small holding though.

I like to get behind a little bit of NZ tech. It does have something of a charity feel to it at the
moment though as I am only slightly above water:P.

It sure feels like it has been going sideways for quite awhile now:).

Good time for the company to be earning those USD's from it's previous acquisition.

[Under Surveillance]

SCT seem to be in no hurry to release their H1 results and/or reveal details of the heralded rights issue.

On the basis that companies drag their feet releasing poor results, but rush out the good ones, this one must be awful. Even in 2009, when the H1 result was a loss of $474K, the release made it out on 1 April. In 2012 with NPAT $2,080M the H1 result was out on 23 March, and in 2013 with H1 NPAT of $2.197 the result was out on 27 March. At best this year it will be out on 2 April, the day before Easter, which would make it a "dump and run" exercise.

Perhaps I misread things, and the explanation lies in the SCT crew getting totally distracted by the cricket world cup, or something else that is benign.

[Snoopy]

SCT seem to be in no hurry to release their H1 results and/or reveal details of the heralded rights issue.

On the basis that companies drag their feet releasing poor results, but rush out the good ones, this one must be awful. Even in 2009, when the H1 result was a loss of $474K, the release made it out on 1 April. In 2012 with NPAT $2,080M the H1 result was out on 23 March, and in 2013 with H1 NPAT of $2.197 the result was out on 27 March. At best this year it will be out on 2 April, the day before Easter, which would make it a "dump and run" exercise.


In the 30th January 2015 release to the NZX on the acquistion of 'Machinery Automation & Robotics' in Australia, SCT wrote:.

"In our announcement of 4th December, the board signalled a capital raising to reduce overall bank borrowings which have been used to settle the purchase of MAR and last years purchase of Robotworx in the USA. The board is planning a rights issue shortly after the announcement of Scott's half year announcement in March and is currently working on determining details."

You could say they have missed their own March deadline, although with SCT having a major focus on the USA, it is still March 'over there' as I write this :-).

I imagine SCT management will release details of the rights issue along with their half year result. Because of the size of those recent business purchases, I do believe it will have to be a 'proper' rights issue with all the accompanying legal documents. That means dotting the i's and crossing the t's. Also there has been a lot of currency volatility since those business purchases. SCT will have to double check how the NZDs they plan to raise relate to the AUD and USD purchases made.

I am not expecting a great result myself, due to the continuing doldrums of servicing mining companies. As a shareholder though, I am now 'future focussed'. The Robot industry expansion is too new to start showing results as yet.

SNOOPY

[Carpenterjoe]

I'm enjoying the more aggressive approach of Scott,

I hope some of these acquisition come together and improve the future bottom line.

Its a good time to be spending the NZD overseas.

I would prefer dividends be lowered or better on hold. (but I understand alot of holders find dividends important).

Sometimes deadlines have to be broken, no point releasing incorrect information.

No doubt this next report will be ugly and full of reading.

[Under Surveillance]

We have today been graced with the 1H 2015 result.

Better than feared, but that is little consolation.

NPAT improved on 1H 2014, good in itself. But 1H 2014 was the worst six-monthly NPAT in 4 years. Now 1H 2015 is the second worst NPAT six-month NPAT in 5 years. Revenue improved, to the same level as it was in 1H 2012.



Interim dividend is being maintained at 2.5 cents, the payout requiring 99% of NPAT.


No news on the intended capital raising, except that we can expect to hear something in coming months.

[percy]

The capital raising must have been the prime consideration of who ever wrote the flowery commentary;
Surplus increase 40%
EPS up 92%
Revenue up 16%
Dividend,,Directors' confidence in the strategic direction of the company.
Strong operating cash inflow $4mil.Significant turnaround..
All great troop rallying words...
Yet as Under Surveillance points out it is on a terrible performance last year.
NTA has reduced from 71.7 cents ps to 30.8 cents ps.
Intangibles assets [? ] have increased from $186,000 to $12,131,000. !!!! A lot of very valuable intangibles???
Goodwill has nearly doubled going from $10,813,000 to $20,081,000.
Take Intangibles and Goodwill off the equity of $48,078,000 and the reasons for the capital raising become very clear.

[benjitara]

The capital raising must have been the prime consideration of who ever wrote the flowery commentary;
Surplus increase 40%
EPS up 92%
Revenue up 16%
Dividend,,Directors' confidence in the strategic direction of the company.
Strong operating cash inflow $4mil.Significant turnaround..
All great troop rallying words...
Yet as Under Surveillance points out it is on a terrible performance last year.
NTA has reduced from 71.7 cents ps to 30.8 cents ps.
Intangibles assets [? ] have increased from $186,000 to $12,131,000. !!!! A lot of very valuable intangibles???
Goodwill has nearly doubled going from $10,813,000 to $20,081,000.
Take Intangibles and Goodwill off the equity of $48,078,000 and the reasons for the capital raising become very clear.

Yes an interesting report... We'll be brave in acquiring a number of businesses that open up markets but then we'll ask you to dilute your returns by paying off the funds we used to pay for them. .. 15-20% over-valued SP in my book but an interesting company to have alook at in times to come maybe?

[percy]

Yes an interesting report... We'll be brave in acquiring a number of businesses that open up markets but then we'll ask you to dilute your returns by paying off the funds we used to pay for them. .. 15-20% over-valued SP in my book but an interesting company to have alook at in times to come maybe?

Yes an interesting company.
Maybe they would be better off being based and listed in the US.
Trying to run an international company from NZ appears to be an uphill battle.

[GTM 3442]

. . . an interesting company to have alook at in times to come maybe?

Scott have always been a good reminder that "technology" isn't necessarily something that revolves around apps for iPhones.

I look forward to discovering that future purchases of consumer durables were "made by something that was made in New Zealand"

[Snoopy]

Surplus increase 40%


The dollar figures:
$1.462m (HY2015) up from $1.085m (HY2014)



EPS up 92%


Number of SCT shares on issue when HY2015 result was announced: 45,195,317

eps = $1.146m/ 45.195m = 2.54cps

(figure no longer different to the 2.5cps quoted in the half yearly results).

Trying to trace the number of SCT shares on issue at a particular time is a bit of an exercise, because shares on issue notices are filed in a format that disappears into the ether.

That 45,195,317 shares includes 704,952 shares from the MAR acquisition. Before that time 44,490,365 shares existed.

AR2014 says 44,009,178 existed at balance date.

So:

44,490,365 - 44,009,178 = 481,187 shares must have been created as part of the DRP from the final dividend, with those shares issued in December 2014.

Go back to 14th May 2014 and 646,301 new shares were issued with Scott's acquisition of 'Robotworx'.

So number of shares on issue before that was:

44,009,178 - 646,301 = 43,362,877

For the six months ended 28th February 2014, the interim dividend payment resulted in $807,000 worth of new shares being issued on 8th May 2014. The strike price was $1.461. So total number of shares issued as a result of the 2014 interim dividend was.

$807,000 / $1.4161 = 569,875

That means the total number of shares on issue just before the HY2014 interim dividend was declared was:

43,362,877 - 569,875 = 42,793,002

So the eps for HY2014 (the comparative period) was:

$820,000/ 42,793,002 = 1.91cps

Lots of numbers here, probably too many for most readers. But SCT has had a habit in recent years of issuing a lot of new shares. I think it is really important to keep a good handle on the number of shares out there. Indeed an imminent cash issue will see many more new shares come into existence soon. What will happen to 'eps' growth then? SCT has a good record of profit growth over several years. But the growth in earnings per share has been far less impressive. And it is the eps growth figure that is of far more interest to we shareholders.

SNOOPY

[winner69]

The dollar figures:
$1.462m (HY2015) up from $1.085m (HY2014)



Number of SCT shares on issue when HY2015 result was announced: 45,195,317

eps = $1.462m/ 45.195m = 3.2cps

Not sure why that figure is greater than the 2.5cps quoted in the half yearly results.

That includes 704,952 shares from the MAR acquisition. Before that time 44,490,365 shares existed.

AR2014 says 44,009,178 existed at balance date. So:

44,490,365 - 44,009,178 = 481,187 shares must have been created as part of the DRP from the final dividend, with those shares issued in December 2014

SNOOPY

Net Surplus was $1.146m. The EPS calculated from this.

What then was last years EPS calculated on .....did they have heaps more shares or something to make sense of 1.3 cents. Sort of implies 60m plus shares back then. Do you know Snoops?

[winner69]

Snoops, I been replying to your pre-edited post but never mind

I understand the 2.5 cents for this half year but last years 1.3cents has me stuffed

Let me know how last years number was calculated if you can find out.

[winner69]

Snoops, you reckon last years number is wrong? Surely not

[winner69]

Snoops, I have sussed it

The EPS is based on 'Net Surplus attributable to Members of the parent entity' line in the Income statement divided by the Weighted Average Number of shares

The 1.3 cents last year was based on a Net Surplus of $0.541m / this year $1.062M

Non-controlled interests are not included

Got that - easy peasy eh

But no doubt you will just use the reported bottom line (better not to use the Comprehensive Income line, just the Net Surplus line) and period end number of shares

[percy]

Would you have found it easier to understand had it been written in Maori.?
Utu.!

[winner69]

Would you have found it easier to understand had it been written in Maori.?
Utu.!

Don't think so mate

Anyway Scott language seems to be Double Dutch and that is hard to translate into Maori

Maybe clever old Snoops could do it

E noho rā

[Snoopy]

Net Surplus was $1.146m. The EPS calculated from this.


Thanks for the correction Winner. My $1.436m figure included 'cash flow hedge reserve adjustment' and a 'translation of foreign operations' which distorted the operational result. I will use your normalised figure instead.



What then was last years EPS calculated on .....did they have heaps more shares or something to make sense of 1.3 cents. Sort of implies 60m plus shares back then. Do you know Snoops?

Working back through the calculation now Winner.

SNOOPY

[Snoopy]

Snoops, I have sussed it

The EPS is based on 'Net Surplus attributable to Members of the parent entity' line in the Income statement divided by the Weighted Average Number of shares

The 1.3 cents last year was based on a Net Surplus of $0.541m / this year $1.062M

Non-controlled interests are not included

Got that - easy peasy eh


IIRC correctly Winner, I had trouble with this calculation last year and never figured it out. So you have done well to unravel the whole mystery in just an hour or so! I know that in FY2014 Scott's had a number of joint ventures that were technically not under Scott Technology management total control, even if effectively they were.

No doubt Scott's are just following accounting standards and everything is correct. I don't agree with that presentation from an investment perspective though. As a shareholder, surely 'my' share of a non-controlled entities earnings is still mine? Non controlled entity earnings should be included in that eps figure in my view. The controversy is much less in HY2015, because the non-controlled entity bit of the earnings is much smaller, and within the rounding of error margin.



But no doubt you will just use the reported bottom line (better not to use the Comprehensive Income line, just the Net Surplus line) and period end number of shares


Yes 'net surplus' is my preferred figure to look at. Based on that figure 'net surplus' eps is up:

2.54c/1.91c = up 33.0%, not the 92% claimed (when non controlled profits are excluded).

And yes I do use the total number of shares on issue at balance date. Not some kind of 'weighted average' number of shares on issue over the earnings period. As well as being easier to calculate, shares issued during the period remain on issue in future periods. So comparing earnings going forwards, it is really not as useful to have the prior comparative earnings spread over an historical number of shares that are less than the number of shares on issue today.

SNOOPY

[winner69]

Whatever the current numbers are really shocking from what was being achieved a few years ago

Things not going to plan or something ..... I haven't really followed for years

[Snoopy]

Snoops, I have sussed it

The EPS is based on 'Net Surplus attributable to Members of the parent entity' line in the Income statement divided by the Weighted Average Number of shares

The 1.3 cents last year was based on a Net Surplus of $0.541m / this year $1.062M

Non-controlled interests are not included

Got that - easy peasy eh


My working on the HY2014 eps calculation, the way SCT do it (excluding non-controlled entities):

$0.541m/ 42,793,002 = 1.26 cps

Not too different to the 1.3cps claimed (the same within rounding error).

SNOOPY

[Snoopy]

Whatever the current numbers are really shocking from what was being achieved a few years ago

Things not going to plan or something ..... I haven't really followed for years


SCT has been affected by the reducing business in the mining sector (Rocklabs) Winner. Section 6.2 of the interim report shows what is happening.

Most mining equipment sales came under the 'standard equipment' banner. SCT took the high temperature superconductor joint venture business fully in house during the year just gone. That should have added to 'standard equipment' sales. Yet standard equipment sales revenue declined from $8.201m to $7.204m over the comparative period, even as net profit increased. The message here is that without some high margin superconductor sales, maybe Rocklabs is in even worse trouble than the sector comparative figures would lead you to believe? Even so profits are being made. Perhaps the best strategy in the current market is to start losing serious money? Do that and SCT might suddenly be worth billions, just like Xero!

Meanwhile the old chestnut of automated manufacturing lines (most of the 'Automated Equipment' segment) continues to make money for the company.

Of course the real case for investing in SCT (IMO) rests around all those years of toil put into meat industry robotics, truly world leading stuff.

------

"NS Innovations Pty Limited (NSIL) is a joint venture between Scott Technology Limited and Northern Co-Operative Meat Company Limited of Australia. NSIL was formed in August 2010 and has a balance date of 31 August."

"Scott Technology Limited’s share of NSIL’s net surplus was $Nil for the six months ended 28 February 2015."

"Scott Technology Limited’s joint venture with Silver Fern Farms Limited, Robotic Technologies Limited (RTL), was formed in October 2003 and has a balance date of 31 August. RTL’s principal activity is the marketing and development of (primarily lamb) meat processing equipment and the management of the intellectual property associated with these developments. Scott Technology Limited’s share of RTL’s net surplus was $37,000 for the six months ended 28 February 2015."

------

No money being made in Australia five years into the joint venture. But $37,000 banked in NZ after twelve years of work.

$0.037m/45.195m = 0.0c (earnings per share)

All that research and development being made over the years, and all profits disappear into the margin of error. But keep the faith fellow shareholders. One day soon.....

SNOOPY

[Snoopy]

NTA has reduced from 71.7 cents ps to 30.8 cents ps.
Intangibles assets [? ] have increased from $186,000 to $12,131,000. !!!! A lot of very valuable intangibles???
Goodwill has nearly doubled going from $10,813,000 to $20,081,000.
Take Intangibles and Goodwill off the equity of $48,078,000 and the reasons for the capital raising become very clear.


You are being a bit harsh on the intangible front aren't you Percy?

MAR only acquired in January 2015. Robotworx not even on the books for a year. Yet you are already considering what will happen when all this goodwill generated through these robotics acquisitions is written off! I really hope all that goodwill hasn't yet gone down the drain.

SNOOPY

[percy]

You are being a bit harsh on the intangible front aren't you Percy?

SNOOPY

Very harsh....,but am using SCT's figures..
I have found taking intangibles and goodwill out of the balance sheet gives a very clear picture of a company's equity.
It is one of the first things I do when beginning research on a company.It has saved me making big mistakes.
With SCT total assets are $88,235,000.
Total equity is shown as $48,078,000 or 54.48% ...which is healthy.
However when you take off $20,081,000 goodwill and Intangibles of $12,131,000 you are left with Total equity of only $15,866,000 supporting total assets of $88,235,000.Therefore your equity ratio has gone from a healthy 54.48% to a very unhealthy 17.98%.

[Snoopy]

$1.085m divided by 41.520m shares on issue equates to 2.6cps (half year earnings). I see that 1.3cps earnings figure in the accounts for SCT as released Percy. But I think it might be a mistake.


HY2014 eps calculations

$0.820m/41.520m = 2.0cps (using net surplus for period on end of year shares)
$0.541m/41.520m = 1.3cps (using net surplus for period attributable to the parent entity on end of year shares)

As previously suggested, I used the total comprehensive income (including the cash flow hedge reserve and translation of foreign operations) of $1.085m instead. That figure was the best match for the dividend paid over the period.

SNOOPY

[Carpenterjoe]

Shoot Me Dead,

at least 27 mil in debt and still paying a divi?

lets hope the thirteen million spent on a business with sixty grand in its account is worth it.


On the up side, with the way the AU reserve bank is devaluing the dingo dollar, expect the gold miners to start purchasing machinery again.

[Snoopy]

Shoot Me Dead,

at least 27 mil in debt and still paying a divi?




HY2015HY2014


Bank overdraft$5.180m$6.388m


Current portion of bank loan$13.547m0


Term portion of bank loan$7.404m$3.200m


Total$26.131m$9.588m


EBITDA$2.640m$2.102m



Debt has increased by 270% compared to the prior period. However EBITDA, a measure of the earnings of the company independent of the underlying debt, has also increased. So I'm not too worried that the earnings profile of SCT is going the wrong way with these Robotics acquisitions. There is nothing here that the upcoming cash issue can't fix. Nevertheless I do get a slight twist in the gut when a company pays a dividend, even a modest one, and follows this with a cash issue. But I guess the need for a reliable income stream for some shareholders is why SCT management are doing this.



On the up side, with the way the AU reserve bank is devaluing the dingo dollar, expect the gold miners to start purchasing machinery again.


I am not sure that mining equipment sales are that influenced by what is happening in Australia that much. Rocklabs is quite a global business. Sales of reference materials to Russia and South America are equally important.

SNOOPY

[Carpenterjoe]

HY2015

HY2014



Bank overdraft

$5.180m

$6.388m



Current portion of bank loan

$13.547m




Term portion of bank loan

$7.404m

$3.200m



Total

$26.131m

$9.588m



EBITDA

$2.640m

$2.102m




Debt has increased by 270% compared to the prior period. However EBITDA, a measure of the earnings of the company independent of the underlying debt, has also increased. So I'm not too worried that the earnings profile of SCT is going the wrong way with these Robotics acquisitions. There is nothing here that the upcoming cash issue can't fix. Nevertheless I do get a slight twist in the gut when a company pays a dividend, even a modest one, and follows this with a cash issue. But I guess the need for a reliable income stream for some shareholders is why SCT management are doing this.



I am not sure that mining equipment sales are that influenced by what is happening in Australia that much. Rocklabs is quite a global business. Sales of reference materials to Russia and Suoth America are equally important.

SNOOPY

Cheers Snoopy,

Hopefully the new office in Perth can generate a little new dosh.

http://www.scott.co.nz/news/pdf/2015_New_Rocklabs_Office_in_Australia.pdf

http://www.rocklabs.com/tradeshows/

Rocklabs is defiantly spread far and wide.

Hopefully MAR can sell a few of these suckers to the Australian goldies.

http://www.machineryautomation.com.au/mining-2/robotic-refuelling/

[Under Surveillance]

I received today by post from Scott the 2015 half year report.
Amusingly, the stamps making up the $1.60 postage included a 10 cent one marking the centenary of the NZ Law Society, 1869-1969.

[Lizard]

I received today by post from Scott the 2015 half year report.
Amusingly, the stamps making up the $1.60 postage included a 10 cent one marking the centenary of the NZ Law Society, 1869-1969.

Seriously?? That deserves a shareholder enquiry... those 10c stamps would surely have posted off a decent size parcel back in 1969? (Maybe Winner or Percy can remember what postage was worth then... gee, we must have only just got "cents" around then!)

Further to above, I think we should ask why they didn't sell the things - they are worth 70cents each... if this is how they look after our shareholder assets...:ohmy:
https://stampsnz.com/1969_new_zealand_law_society_centenary.html

Did I miss a recent merger with MOW????

[winner69]

The workers just don't get it sometime, they need to realise they are just a dispensable commodity (resource) needed as and when needed to make shareholders rich

http://www.stuff.co.nz/business/68881859/scott-technology-lays-off-13-employees-in-christchurch

Scott Technology lays off 13 employees in Christchurch

[Carpenterjoe]

The workers just don't get it sometime, they need to realise they are just a dispensable commodity (resource) needed as and when needed to make shareholders rich

http://www.stuff.co.nz/business/68881859/scott-technology-lays-off-13-employees-in-christchurch

Scott Technology lays off 13 employees in Christchurch


Yeah, kinda funny. Maybe a mention of the 20 plus million of debt,
What's wrong with using temporary workers to fill peak times? Sounds like
some office bunny slapping an article together to justify his full time employment position.

[percy]

Try finding highly qualified fitters,engineers,and machinists when you want them.
Then try offering then temporary work.
However back to what we can learn from the announcement.It confirms another division of SCT is facing very strong headwinds,with the decline in production at the Christchurch factory.The Christchurch focus was on production systems for manufacturers of home appliances.
Hopefully for shareholders [and the company] we will see the company concentrating on their growing overseas robotics division.I see less lumpy earnings from robotics,more stable cash flow,and less reliance on a small number of customers.
It could be a sign that directors are being more prudent with their limited capital.

[Snoopy]

It could be a sign that directors are being more prudent with their limited capital.


------

JBS has an existing business relationship with Scott and is considered a substantial key customer.
Many of the current technology developments have been undertaken in conjunction with JBS in Australia and beyond.

JBS’s investment offer is in the form of a Scheme of Arrangement (‘the Scheme’) and consists of:

a) A placement of 10 million shares at $1.39 (that's $NZ13.9m) to JBS to provide the capital that Scott was looking to raise;
b) An offer to purchase shares at $1.39 from any shareholder who would like to exit or reduce their shareholding;
c) A 1 for 8 non-renounceable rights issue at $1.39 for shareholders who do not want to sell but would like to increase their shareholding;
d) If required after a) through c) have been completed, a further placement at $1.39 to give JBS a shareholding of 50.1%

------

First reaction is that control of the company is being ceded very cheaply here. I keep thinking I must have made a mistake. But it still looks to me like we existing shareholders are being sold out (50% diluted) for a mere $NZ13.9m. Please someone tell me I have misread today's announcement!

SNOOPY

[GTM 3442]

Sorry Snoopy, but I think you have it right.

But I have faith in New Zealand's technology sector, and so will be getting all I can lay my hands on.

[Under Surveillance]

------
First reaction is that control of the company is being ceded very cheaply here. I keep thinking I must have made a mistake. But it still looks to me like we existing shareholders are being sold out (50% diluted) for a mere $NZ13.9m. Please someone tell me I have misread today's announcement!

SNOOPY
I'll oblige.

My take is that there are now 45.5 million shares issued (in round figures) and BPS will pay $13.9M for a newly-issued 10.0 million. Thus far, JBS will have just under 18% of the expanded 55.5 million shares.

JBS will need to buy another 17.8 million shares (rounded number) under b) or c) or d) of the offer to get to 50.1%. That would see them spend roughly $38.6 million.

[Under Surveillance]

The $38.6 million would be the minimum JBS would have to pay. Should existing shareholders collectively decline to sell under b) of the offer, and act upon c) with enthusiasm, SCT would have to issue new shares under d), upping the ante for JBS.

[percy]

The company's balance sheet is in bad shape.
I doubt shareholders would have had the stomach for the HUGE capital raising that would have been required.
With 45,473,890 shares on issue,they would have been up in arms if SCT had announced a 1 for 1 share issue at 85cents
The company stays afloat,with hopefully a controlling shareholder who can show financial leadership.

[Marilyn Munroe]

JBS are romoured to be kicking the tyres of Siver Fern Farms.

I wonder when doing investigations of SFF they were entranced by the SFF-SCT automated meat processing and decided to go large on automated meat processing also scooping up as much of the IP as they could get their hands on.

Boop boop de do
Marilyn

[percy]

JBS are romoured to be kicking the tyres of Siver Fern Farms.

I wonder when doing investigations of SFF they were entranced by the SFF-SCT automated meat processing and decided to go large on automated meat processing also scooping up as much of the IP as they could get their hands on.

Boop boop de do
Marilyn
I would expect they will find all the tyres are flat.!! lol.

[kiwidollabill]

JBS definately ARE kicking the tyres of SFF, I fear they are going to get it far too cheaply. (I'm going to get flamed here), but of all the NZ primary production companies which talk about 'value add', they are one of the FEW companies which are actually walk the talk and the ONLY one in the meat sector.

If JBS were given control they certainly would be showing 'financial leadership' - I would imagine a number of BUs being sold off (HTS etc).

Same thing would happen to SFF, sadly that would mean going back to the commodity trade...

[Sideshow Bob]

Interesting. $13.9m is chump change for JBS. But most of Scott's products are (currently) orientated towards lamb, and JBS is a primary a beef company, apart from in Australia - which probably already have some Scott lamb units at their plants. Obviously after the know-how, experience etc.

i dont think they they necessarily came across Scott when doing any work on SFF. Scott has an agent in Brazil, and would have an agent in Brazil for a reason. Plus the Australian lamb connection.

However, many of the developments are under Robotic Technologies, JV between SFF and Scott, so not sure how that fits.

As as an aside, JBS would most likely be after SFF's beef business. I would think that most likely trying to flog off the lamb division and them themselves as a beef business. Announcement must be due soon......

[kiwidollabill]

Yea small fry for JBS, they've been doing a big buy up of major companies over the last few years. SFF themselves would be happy to get rid of their lamb business as at the end of the day their primary focus is beef, I find the Co-Op merger arguements with Alliance silly, as they are two different companies, focused on different protein production, with entirely different strategies. If JBS do put capital into SFF, it may be a bit of an uncomfortable alliance as JBS are known not to be farmer friendly.... Is the SFF trading halt still on?

Who knows what brought them to Scott, the lamb cut up robots are quite impressive, I imagine there would be a fair bit of work to build a beef centric plant but if there's production gains in it then I'm sure they will make it happen.

As an aside, how much did the HTS-110 purchase cost them, the Government had put ~$60-80M into that research group over the years....

[Sideshow Bob]

Yes KDB, SFF trading halt still on. Announcement expected within the next week, but don't believe JBS. JBS have been milking it out of Australia in the last year, and as you mention, don't think it would sit comfortably.

[Sideshow Bob]

http://www.odt.co.nz/news/dunedin/353175/scott-sees-growth-50-million-bid

[kiwidollabill]

As an aside, I know some of the managers up at Macraes mine who have their teams using the RockLabs gear - apparently it's not quite as robust as it should be and the 'automation' can be problematic/unreliable.

[Sideshow Bob]

http://www.odt.co.nz/news/business/353378/looking-capital-boost

[Snoopy]

http://www.odt.co.nz/news/business/353378/looking-capital-boost

This quote from the above article sums up the position well for the $20m to $50m cash injection that Scott's want:

---------

Scott chairman Stuart McLauchlan said, when asked last Thursday why capital raising had been dropped, that some of the present larger shareholders were not prepared to inject more capital ''and would prefer to sit back''.

Mr McIntyre said Scott was ''in a funding quandary'' over how to get a financial boost to secure its growth prospects.

Scott was too large for some existing, relatively small shareholders to ''stump up with more cash'' for expansion.

However, Scott was conversely ''too small'' to attract the attention of large institutional investors, which could have offered a large cash injection, he said.

--------

This is really a shame. For our company to spend over a decade on developing world leading technology for the meat industry and then sell out for as little as $20m makes me want to cry. It is IMO, far more valuable technology than something like A2 milk or the likes of what any of our locally listed software companies are developing. And is it commercially proven, not pie in the sky. $20m is just peanuts in institutional terms. It seems incredible that no local institutions have stepped up to back SCT.

SNOOPY

[Carpenterjoe]

This quote from the above article sums up the position well for the $20m to $50m cash injection that Scott's want:

---------

Scott chairman Stuart McLauchlan said, when asked last Thursday why capital raising had been dropped, that some of the present larger shareholders were not prepared to inject more capital ''and would prefer to sit back''.

Mr McIntyre said Scott was ''in a funding quandary'' over how to get a financial boost to secure its growth prospects.

Scott was too large for some existing, relatively small shareholders to ''stump up with more cash'' for expansion.

However, Scott was conversely ''too small'' to attract the attention of large institutional investors, which could have offered a large cash injection, he said.

--------

This is really a shame. For our company to spend over a decade on developing world leading technology for the meat industry and then sell out for as little as $20m makes me want to cry. It is IMO, far more valuable technology than something like A2 milk or the likes of what any of our locally listed software companies are developing. And is it commercially proven, not pie in the sky. $20m is just peanuts in institutional terms. It seems incredible that no local institutions have stepped up to back SCT.

SNOOPY

Snoops,

I've been thinking the same thing, I'm feeling very let down by management. Seems like they either had this planned for years or they lacked the grey matter to manage cash-flow.

I don't feel this partnership is of real value to shareholders.

Anyways

[Marilyn Munroe]

An item in the farming section of today's Christchurch Press about the Alliance Group installing primal cut automation into their Smithfield and Pukeuri works.

No mention is made of the supplier of this equipment but I assume it will be Scott Technology.

http://www.stuff.co.nz/business/farming/agribusiness/72516478/alliance-to-invest-big-in-robotics


Boop boop de do
Marilyn

[Carpenterjoe]

Suppose..... this result is good/ok. Still can't understand selling half of a 125 year old company for 5-10years worth of profit.

[Under Surveillance]

Suppose..... this result is good/ok. Still can't understand selling half of a 125 year old company for 5-10years worth of profit.
To me, the result is a pleasingly surprising turnaround. The second half NPAT of $4.967 million is by far the best for any 6 month period in the 7 years my notes go back.

No doubt the directors now recognise that the $1.39 transaction price they agreed with JBS will be resoundingly rejected by shareholders. If JBS still wants 50.1% and a quick resolution they'll move soon to bump the transaction price up by at least 30%. Otherwise they'll withdraw, and wait for the next time SCT directors blunder and overreach.

By the way, SCT is only 102 years old. 125 years sounds more like the average age of the Dunedin grandees who hold big chunks of the company; they preferred to sit back rather than participate in a share issue and in so doing have done all holders a big favour.

[Sideshow Bob]

"Takeover Bid offers Premium"

http://www.odt.co.nz/news/business/361473/scott-tech-takeover-bid-offers-premium-independent-advisers-say

[Snoopy]

"Takeover Bid offers Premium"

http://www.odt.co.nz/news/business/361473/scott-tech-takeover-bid-offers-premium-independent-advisers-say


Had a quick read of the Northington Partners valuation. It is based on earnings multiples. The problem is the superconductivity based business, the milking systems and yes even the meat industry robotics(*) currently make no profit. So all of these have been assessed as having nil, or even negative value (given cashflow in the early stages of product development means a negative contribution to earnings).

However, this is clearly not true as the Brazilians are prepared to pay a so called premium for the business, even though none of the items to which Northington's ascribe value are wanted by them! I reserve my right to change my mind. But at first glance I can hardly take a valuation seriously that doesn't attempt to value the meat processing side of the business!

SNOOPY

(*) Not quite true. There is profit being made from meat industry robotics, but not as much as there should be.

[Marilyn Munroe]

Had a quick read of the Northington Partners valuation.

SNOOPY

Are Northington Partners the same outfit that produced the independent valuation report on the Lyttelton Port Co takeover?

Boop boop de do
Marilyn

[Snoopy]

Are Northington Partners the same outfit that produced the independent valuation report on the Lyttelton Port Co takeover?

Boop boop de do
Marilyn

The very same! :-(

SNOOPY

[Snoopy]

"Takeover Bid offers Premium"


Today I sent away my acceptance form to acquire more SCT shares at $1.39. I don't want to miss out on that! However, I have retained my voting form for the scheme of arrangement pending attending the Scott Technology investor roadshow.

There are a couple of major weaknesses in the Northington Partner's analysis that I am unhappy with. These are important because Northington's are using an EBITDA metric for valuation purposes. I believe both the 'I' and the 'DA' have not been adequately assessed by Northingtons. The result of these undervaluations is that true underlying EBITDA has been significantly undervalued by Northingtons and that in turn means their fair share valuation for SCT is too low.

SNOOPY

[Snoopy]

There are a couple of major weaknesses in the Northington Partner's analysis that I am unhappy with. These are important because Northington's are using an EBITDA metric for valuation purposes. I believe the 'I' has not been adequately assessed by Northingtons.


To provide the best example to understand this, shareholders need to go all the way back to AR2008 (Something Northingtons did not do) and look at the only clean set of accounts ever present for 'Robotic Technologies Limited' (RTL). RTL was Scott's first foray into robotic meat industry processing with Silver Fern farms. Under note 12 'Investments Under the Equity Method', the balance sheet for for RTL is presented like this:



Total Assets$2.656m


Total Liabilities$2.636m


Net Assets$0.020m



(Note the above figures are for all of RTL . As a 50% owner, SCT have a half share in this debt as displayed)

As you can see RTL was leveraged to the hilt back in 2007. Not sure why. Perhaps is was because it was formed in one of those time periods when Silver Fern farms was short of capital to contribute? However, what is clear is that RTL as a stand alone business is not viable, and only exists in its heavily debt laden form because SCT is there to underwrite the risks.

Back in FY2007, just before SCT bought Rocklabs, SCT had no current or term debt. So where did the debt from the RTL balance sheet go? I contend it was hidden, because of the special accounting rules in conjunction with the introduction of IFRS that come with investment in associates. Quoting from AR2007 under 'Investments in Associates' p17

"Losses in an associate in excess of the groups interest (Snoopy comment: only $10,000 remember, and you can bet RTL cost more to get running that that) are recognised only to the extent that the group has incurred legal or constructive obligations or made payments on behalf of the associate."

I woudl be grateful if an actual accountant could verify if my interpretation is correct. But I can't see the SCT share of the RTL debt ( $2.636m/2= $1.318m ) on the SCT balance sheet for FY2007 anywhere.

So how much in interest charges in FY2007 were hidden? The bank interest rate for SCT in 2008 (when the acquired debt to fund the Rocklabs purchase p41, AR2007) was 9.81%

So: $1.318m x 0.0981 = $0.129m

Now $129,000 may not sound like much. But when you compare that to the loss (that's right loss) of $0.818m for the FY2007 financial year, it is not insignificant. Furthermore the number of associates has greatly increased since FY2007. And it appears that all of the newer associates are debt laden, like RTL, as well.

In summary, I contend that all 'hidden interest' should have been be added in to the EBITDA figures calculated by Northington's to give a more representative EBITDA figure. After all if the robotic technology was sold under the Scott Technology umbrella directly, they would have been added in. It was only the voluntary contruction of RTL by Scott that removed these interest costs from the equation

SNOOPY

[Snoopy]

There are a couple of major weaknesses in the Northington Partner's analysis that I am unhappy with. These are important because Northington's are using an EBITDA metric for valuation purposes. I believe both the 'DA' have not been adequately assessed by Northingtons.


Scott Technology have more many years had a policy of expensing all research and development costs. This is a conservative accounting policy and appropriate when you are unsure that the R&D expenditure you are making will be recovered in a clearly defined future project. I have no argument with the way SCT has implemented this policy.

The problem comes when as a result of the JBS bid, it now appears this investment will pay off big time. Total government grants or income tax credits relating to R&D add to $9.311m since FY2008. This means that on average the profit at SCT was:

0.72* ($9.311/8) = $840,000

less than it would have been if the R&D expenditure had instead been capitalised. To me the fact that JBS are prepared to spend an amount in the tens of millions of dollars to acquire this technology fully justifies giving it some value from hindsight perspective. Instead Northingtons have valued all this R&D spend as worthless (negative as it reducted EBIT) , and that is clearly wrong.

SNOOPY

[Carpenterjoe]

Scott Technology have more many years had a policy of expensing all research and development costs. This is a conservative accounting policy and appropriate when you are unsure that the R&D expenditure you are making will be recovered in a clearly defined future project. I have no argument with the way SCT has implemented this policy.

The problem comes when as a result of the JBS bid, it now appears this investment will pay off big time. Total government grants or income tax credits relating to R&D add to $9.311m since FY2008. This means that on average the profit at SCT was:

0.72* ($9.311/8) = $840,000

less than it would have been if the R&D expenditure had instead been capitalised. To me the fact that JBS are prepared to spend an amount in teh tens of millions of dollars to acquire this technology fully justifies giving it some value from hindsight perspective. Instead Northingtons have valued all this R&D spend as worthless (negative as it reducted EBIT) , and that is clearly wrong.

SNOOPY

To me the whole thing stinks of directors wanting to be the "big man" and "do" the big deal. I'm pretty sure if the small shareholders whom own 30% of this company had the opportunity to give a little, we might not been gifting half this company away!

[Sideshow Bob]

Farmers Weekly Article. Most major shareholders not selling.

http://viewer.zmags.com/publication/1e02a9ad#/1e02a9ad/23

[Carpenterjoe]

Farmers Weekly Article. Most major shareholders not selling.

http://viewer.zmags.com/publication/1e02a9ad#/1e02a9ad/23

Cheers mate,

[Snoopy]

Farmers Weekly Article. Most major shareholders not selling.

http://viewer.zmags.com/publication/1e02a9ad#/1e02a9ad/23


Something doesn't quite add up here. From the above reference:

"Chairman Stuart Mclaughlin says that most larger sharehololders won't be selling their shares and they will take part in the planned capital raising."

Yet, what was the reason for the issue to be structured in the way it was?

http://www.odt.co.nz/news/business/353378/looking-capital-boost

"Scott chairman Stuart McLauchlan said, when asked last Thursday why capital raising had been dropped, that some of the present larger shareholders were not prepared to inject more capital ''and would prefer to sit back''."

It hardly seems credible that both quotes have come from the same man, Stuart McLaughlin, the Chairman of the company!

Is some spin going on here? And if so to what end?

I would like to remind shareholders that the scheme is not a done deal (75% of shareholders need to vote for it) and if you want to vote against it, then you should. Personally I support a rights issue, but this rights issue seems far from ideal. So my inclination is to have a bob each way. Send in my cheque, in case the scheme of arrangement passes, but to vote against the rights issue in the hope that another will be drawn up on fairer terms to existing shareholders.

SNOOPY

[Under Surveillance]

I would like to remind shareholders that the scheme is not a done deal (75% of shareholders need to vote for it) and if you want to vote against it, then you should. Personally I support a rights issue, but this rights issue seems far from ideal. So my inclination is to have a bob each way. Send in my cheque, in case the scheme of arrangement passes, but to vote against the rights issue in the hope that another will be drawn up on fairer terms to existing shareholders.

SNOOPY

Certainly not a done deal, and I think highly unlikely to not become a done deal as it stands.

You get to vote full deal or no deal (i.e. can't vote for or against the rights component on its own).

If you send in your cheque and the full deal gets shot down you'll get your 139 cents back some time in December, no interest paid. If the deal as at present gets approved you might get the shares allocated by Christmas.

I've put my bob on the nose and bought more this morning at 140 (5.5 cent dividend attached). These shares get to vote against the scheme, whereas shares from the rights do not.

[Snoopy]

Certainly not a done deal, and I think highly unlikely to not become a done deal as it stands.


You may think the deal is highly unlikely to pass in its present form. But that doesn't mean you shouldn't plan for the possibility that it does pass.



You get to vote full deal or no deal (i.e. can't vote for or against the rights component on its own).


Quite right US. SCT can't have half this deal. It is all or nothing. Perhaps I should have been clearer in what I said. I will -probably- vote against the deal, although I feel I should hear the pre AGM Christchurch presentation at Deloitte's before finally deciding. If the deal is rejected, then I will not get the shares I asked for in the rights issue. However, if the deal goes through then I will be very happy to receive those rights issue shares bought at $1.39, accompanied by the certainty that the company will be well capitalised going forwards.

Also by subscribing the rights issue, if the deal goes through, then I am forcing JBS to stump up more capital on top of the stage one placement, to build their controlling share of 50.1%.



If you send in your cheque and the full deal gets shot down you'll get your 139 cents back some time in December, no interest paid. If the deal as at present gets approved you might get the shares allocated by Christmas.

I've put my bob on the nose and bought more this morning at 140 (5.5 cent dividend attached). These shares get to vote against the scheme, whereas shares from the rights do not.

I think a few weeks low interest on not that much amounts to not that much. So I won't lose any sleep over my lost interest. However I like your idea US of topping up cum dividend on market, and getting some more 'no' votes in the process. I might just do that too :-)

SNOOPY

[Snoopy]

Scott Technology have more many years had a policy of expensing all research and development costs. This is a conservative accounting policy and appropriate when you are unsure that the R&D expenditure you are making will be recovered in a clearly defined future project. I have no argument with the way SCT has implemented this policy.

<snip>
Total government grants or income tax credits relating to R&D add to $9.311m since FY2008.


Did a web search on these Callaghan Innovation R&D grants.

https://www.callaghaninnovation.govt.nz/grants

How does it work?

------

Your business will receive:

20% of your eligible R&D expenditure, capped at $5m per annum
A two year extension after 3 years, subject to having met annual review requirements

-------

The government only reimburse 20% of R&D costs! So actual R&D is much higher than the government grant. Or is it? I would imagine pigeonholing just what is 'R&D' and what are 'normal business development expenses' is an area that has wriggle room. Any accountants (or others!) out there able to share some insights as to how this works in practice?

SNOOPY

[Snoopy]

There are a couple of major weaknesses in the Northington Partner's analysis that I am unhappy with. These are important because Northington's are using an EBITDA metric for valuation purposes. I believe both the 'I' and the 'DA' have not been adequately assessed by Northingtons. The result of these undervaluations is that true underlying EBITDA has been significantly undervalued by Northingtons and that in turn means their fair share valuation for SCT is too low.


Time to revisit the four full years of results considered by Northington partners. The table below is derived from Table 6 on page 22 of the Northington report.



FY2011FY2012FY2013FY2014FY2015


EBITDA (Northingtons) (A)$5.043m$8.941m$8.223m$6.021m$10.904m


SCT term borrowing rateN/AN/AN/A5.21%4.78%


Net hidden associate debt$7.241m$7.089m$5.368m$5.540m$5.972m


Net hidden interest (@5%)(B)$0.362m$0.354m$0.268m$0.277m$0.299m


Govt R&D Grant$1.877m$2.558m$2.509m$1.498m$0.673m


2 x Govt R&D Grant (C)$3.754m$5.166m$5.018m$2.996m$1.346m


EBITDA (Snoopy) (A+B+C)$9.159m$14.411m$13.509m$9.294m$12.549m



So the adjusted EBITDA average over the last 5 years has been $11.784m.

Note: Assuming the R&D expenditure was capitalised rather than expensed has produced the biggest change from the 'two' Northington Partner's approach. How much the capitalisation should be is a matter of judgement. I am assuming that the Callagahan R&D cover half of the 'real' R&D spend (so real spend was $18.28m over 5 years). I think that assumption is generally conservative.

SNOOPY NORTHINGTON (the third 'partner' from the Northington kennel)

[Snoopy]

So the adjusted EBITDA average over the last 5 years has been $11.784m.

Note: Assuming the R&D expenditure was capitalised rather than expensed has prodiuced the biggest change from the 'two' Northington Partner's approach. How much the capitalisation should be is a matter of judgement. I am assuming that the Callagahan R&D cover half of the 'real' R&D spend (so real spend was $18.28m over 5 years). I think that assumption is generally conservative.


I now move onto table 9 in the Northington report



LowHigh


Maintainable EBITDA$11.800m$12.300m


Valuation Multiple7.5x8.0x


Enterprise Value (000s)$88.500m$98.400m


less Net Debt (000s)$18.200m$18.200m


Aggregate Equity Value (000s)$70.300m$80.200m


No. shares on issue48.474m48.474m


Value Per Share$1.45$1.65



Note that the above figures do not include a premium for control. This is in contrast to the statement on page 7 of the 'original' Northington report which states:

"Our valuation is based on 100% of equity in Scott and therefore includes a premium for control"

(my emphasis on the italics). The statement 'that analyzing 100% of a company automatically includes a premium for control' is not true, and represents a serious error of judgement in the original Northington report IMO!

A modest premium for control of 10% would see a fair value takeover price between $1.60 and $1.82.

Thus my conclusion: A $1.39 bid for control is well outside the fair value range of SCT as determined by the 'three' Northington partners. Shareholders should reject the JBS bid

SNOOPY

[Under Surveillance]

A modest premium for control of 10% would see a fair value takeover price between $1.60 and $1.82.

Thus my conclusion: A $1.39 bid for control is well outside the fair value range of SCT as determined by the 'three' Northington partners. Shareholders should reject the JBS bid
Good work, Snoopy.
You've arrived at much the conclusion I came to a month back, post #456, when I reckoned JBS if serious would need to bump the offer price up 30%. 1.39 x 1.3 = 1.81.

[Under Surveillance]

1) SCT directors have raised no disagreement with the Northington Partners valuation of SCT shares at $1.08 to $1.26.

SCT directors unanimously recommend SCT shareholders support a deal with JBS whereby the shareholders may buy new SCT shares for $1.39, i.e. 110% to 129% of the Northington valuations. SCT directors have not attempted to justify the premium shareholders would pay.

Question arising: What does that say about the directors' exercising of their fiduciary responsibility to shareholders?

2) SCT directors have not challenged the Northington valuations, and have unanimously recommended a deal whereby JBS will pay SCT shareholders $1.39 for their shares, and SCT will issue new shares to JBS for $1.39.

Questions arising: Does it follow that the SCT directors are morally obligated to sell shares they hold personally to JBS at $1.39? Or is it do as we say but not as we do?

[Snoopy]

If you send in your cheque and the full deal gets shot down you'll get your 139 cents back some time in December, no interest paid. If the deal as at present gets approved you might get the shares allocated by Christmas.

I've put my bob on the nose and bought more this morning at 140 (5.5 cent dividend attached). These shares get to vote against the scheme, whereas shares from the rights do not.


Thanks for the heads up with your idea U.S. Bought a few more shares on market over the last few days to increase my (probable) 'no' vote to the scheme of arrangement. Meanwhile Scotts have wasted no time hungrily banking my rights cheque!

SNOOPY

[Snoopy]

1) SCT directors have raised no disagreement with the Northington Partners valuation of SCT shares at $1.08 to $1.26.

SCT directors unanimously recommend SCT shareholders support a deal with JBS whereby the shareholders may buy new SCT shares for $1.39, i.e. 110% to 129% of the Northington valuations. SCT directors have not attempted to justify the premium shareholders would pay.


Not quite true. Included in Statement 39a of the directors recommendation is the following text.

"The directors believe that the Company has developed and will continue to develop intellectual property which may create future value that is not fully incorporated into the Independent Adviser's valuation range. If the scheme of arrangement is approved, the directors suggest that shareholders need to be mindful of the Company's intellectual property and its possible value when considering their personal decision in relation to their shareholdings in the Compoany (for example in deciding whether to sell to JBS , hold or invest more by taking up the rights offer"

Translation: "You shareholders that prefer to 'sit back' really are getting a good deal by selling your shares to JBS." BUT "You shareholders that want to stay really are getting a good deal by buying new shares in the company at $1.39." "You see, we really can please everybody."



Question arising: What does that say about the directors' exercising of their fiduciary responsibility to shareholders?


Wash your mouth out with soap U.S. You really shouldn't be asking such a question of such nice people. Just start singing "everybody wins" and you will be fine.



2) SCT directors have not challenged the Northington valuations, and have unanimously recommended a deal whereby JBS will pay SCT shareholders $1.39 for their shares, and SCT will issue new shares to JBS for $1.39.

Questions arising: Does it follow that the SCT directors are morally obligated to sell shares they hold personally to JBS at $1.39? Or is it do as we say but not as we do?


The latter obviously. Now line up behind the nice man with the shepherd's crook and stop bleating.

SNOOPY

[GTM 3442]

I am a small shareholder in SCT. I think this sucks.

Speaking (as always) from a position of ignorance, it sucks because:


1) I don't like it from an "NZ Inc" perspective. The country loses more than it gains.

2) I don't believe that selling a diverse company such as SCT to a customer will lead to anything other than the atrophy and eventual divestment of the non-meat technology. I don't believe the stuff in the presentation about "business as usual". Come back in 5 years and see what's left.

3) From a personal financial perspective, the money offered isn't enough.

Not a happy holder.

[Snoopy]

2) I don't believe that selling a diverse company such as SCT to a customer will lead to anything other than the atrophy and eventual divestment of the non-meat technology. I don't believe the stuff in the presentation about "business as usual". Come back in 5 years and see what's left.


Interesting to read the JBS mission statement from the upcoming presentation (my emboldening):

"To be the best in what we set out to do, completely focused on our business, ensuring the best products and services for our customers, consistency for our suppliers, profitability for our shareholders and the opportunity of a better future for all our team members."

Then further on in the presentation look at what Scott hope to do if the scheme of arrangement is implemented (my emboldening).

Governance
• Scott will continue to pursue ambitions in all market sectors (not just meat);
• Scott will continue to service existing and new customers regardless of their competitive relationship with JBS;
•There are no plans by JBS to move or otherwise change any part of the business

To me this looks like a pretty serious clash of culture. It is almost as if Scott's and JBS's parts of the presentation were prepared completely separately, without any thought of the conflicting message sent.

SNOOPY

[Snoopy]

I see from Appendix 1 of the Northington report that JBS Australia has 11 processing facilities in Australia. From the presentation:

-----

Over the past two, JBS Australia and Scott have worked together installing an automated meat processing system for its lamb plant in Bordertown and elsewhere in Australia.

1/ The production line at Bordertown is running daily, at commercial line speeds (approx. 10 head of sheep per minute or approx. 8,000 per day). [Snoopy note: looks like two eight hour shifts per day]
2/ Rather than leading to redundancies, staff have been relocated to other parts of the plant, with consequent expansion in throughput.
3/Scott’s automation equipment is also operating at JBS’s Brooklyn plant (lamb) and beef plants at Dinmore and Beef City.

This reads as though Bordertown has 'full automation' and Brooklyn (lamb) and for Beef Dinmore and 'Beef City' (Toowoomba) are partially automated.

The JBS Australia Website lists the following processing sites:

Queensland: Dinmore, Beef City (near Toowoomba), Rockhampton, Townsville
NSW: Rivernia (rural NSW)
Victoria: Brooklyn, Cobram
Tasmania: Devonport, Longford
South Australia: Bordertown

Late in 2014, JBS acquired the 'Primo' group, specialising in smallgoods and bacon. Primo has two abbatoirs. One in Port Wakefield (South Australia) , and the other at Scone in the Hunter valley (NSW)

Nine of the above facilities process beef, and one pork. However JBS also processes lamb (Brooklyn) and goats.

SNOOPY

[Under Surveillance]

I am a small shareholder in SCT. I think this sucks.
Hey, GTM 3442, your angst is shared.

Like you, I would like to see SCT thrive for the benefit of employees, shareholders and NZ Inc.

I liked it that SCT had a large portion of their manufacturing in Dunedin and Christchurch, and are headquartered in Dunedin. Unfortunately with that comes a board of long-ensconced southern men - 4 from Otago and one from Canterbury. I hazard that only the latter could be considered in a national context to have outstanding corporate accomplishments. [I can’t help, as a shareholder in both SCT and SKL which have similarities, see huge disparities in the heft and governance skills of the boards, even allowing for SKL being 3x in size by revenue and NPAT.]

The SCT board was well-intentioned in helping SCT employees buy shares in 2012, the employees paying 10% less than market price, and getting interest free loans to buy if they wanted. Employees paid $1.53 for shares which Northington Partners now values at $1.06 to $1.28, which the board say are fairly priced at $1.39, and which traded at $1.55 immediately before the JBS scheme pack was mailed.

No doubt the board genuinely regrets the way the employee shareholders who still hold have fared with the value of their shares. When it comes to large shareholders, however, regret becomes obsession. The board is beside itself that large shareholders can’t sell down their holdings without knocking down the market price for SCT shares (meantime the existence of these overhangs itself places downwards pressure).

This obsession is, I think, at the core of the board’s motivation to cosy up with JBS in the proposed scheme, after large shareholders turned their backs on a regular rights issue and institutions didn’t want to deal, and the board had promised for months to be about to announce something. The JBS arrangement is set up for substantial holders, possibly including Oakwood Securities (Marsh) with 5.4 million shares and Urquhart estate with 3.4 million shares, to sell down or out at a guaranteed $1.39. No matter that Oakwood Securities rode their shares up to the mid $2.80s in early 2013, at which point large parcels might have been quit at a discount in a strong market. No matter that no-one forced the large shareholders to become so. No matter that no renounceable rights issue has been tried and failed.

The road show material released yesterday says if the JBS deal is not approved “Plan B” is for SCT to return to planning for a discounted rights issue for $15 - $20m, and there will be no liquidity event to sell shares. The stunning turnaround in NPAT in H2 2015 could see brighter prospects for a rights issue now than earlier (except from the constipated large holders). The board would have to come up with a convincing and optimistic outlook, and employ a valuation method selected to produce a result at the other extreme to the Northington product. It would help if the SCT board could quickly self-renew and bring aboard a David Mair (SKL) or two and fresh (to SCT) ideas.

There might be a case for SCT to go into the mode of funding expansion from NPAT for several years, paying no or token dividends. "Plan C" perhaps.

I don’t fault JBS for pursuing the deal which the SCT board proposed to them. If the SCT board believe that $1.39 is fair, and will get 75% voting support, why should JBS offer more? If the SCT board believe that the deal will be get 75% without JBS limiting its flexibility when in control, why should JBS tie itself in knots?

This is not an instance where a big multinational has used stealth or force to ravish a NZ company, rather one where a mediocre board has solicited action, consented to it, and bent the company over.

[Snoopy]

No doubt the board genuinely regrets the way the employee shareholders who still hold have fared with the value of their shares. When it comes to large shareholders, however, regret becomes obsession. The board is beside itself that large shareholders can’t sell down their holdings without knocking down the market price for SCT shares (meantime the existence of these overhangs itself places downwards pressure).

This obsession is, I think, at the core of the board’s motivation to cosy up with JBS in the proposed scheme, after large shareholders turned their backs on a regular rights issue and institutions didn’t want to deal, and the board had promised for months to be about to announce something. The JBS arrangement is set up for substantial holders, possibly including Oakwood Securities (Marsh) with 5.4 million shares and Urquhart estate with 3.4 million shares, to sell down or out at a guaranteed $1.39. No matter that Oakwood Securities rode their shares up to the mid $2.80s in early 2013, at which point large parcels might have been quit at a discount in a strong market. No matter that no-one forced the large shareholders to become so. No matter that no renounceable rights issue has been tried and failed.

U.S. at the investor roadshow, it was announced that Oakwood Securities are in. The Urquart Estate wants out - that is well known. The other crowd that wants out are Fisher Funds (probably). Fisher Funds inherited their holding as a result of buying out Tower Asset management. However Fisher's have not made up their mind - finally (I guess the voting paper isn't in). Reading between the lines I would guess Fisher don't really understand what they have got with Scott Technology, which is why they are ambivalent at best.

SNOOPY

[Snoopy]

I don’t fault JBS for pursuing the deal which the SCT board proposed to them. If the SCT board believe that $1.39 is fair, and will get 75% voting support, why should JBS offer more? If the SCT board believe that the deal will be get 75% without JBS limiting its flexibility when in control, why should JBS tie itself in knots?

This is not an instance where a big multinational has used stealth or force to ravish a NZ company, rather one where a mediocre board has solicited action, consented to it, and bent the company over.

Hot from the roadshow U.S. Stuart McLauchlan said the board were very disappointed with the $1.08 to $1.26 valuation. They went back to Northington's and said:

"Hey all of this R&D is for the new stream of growth businesses coming on stream."

Northington's rejected this argument. All the R&D was just a normal part of staying in business they said. So the valuation stuck. Remember that the board cannot force Northington's to change their opinion because then the valuation ceases to be independent. So this is why the board stuck the following 'qualifying' comments under note 39 of the directors recommendation.

"The directors believe that the Company has developed and will continue to develop intellectual property which may create future value that is not fully incorporated into the independent adviser's valuation range. If the Scheme of Arrangement is approved, the directors suggest shareholders need to be mindful of the Company's intellectual property and its possible value when considering their personal decision in relation to their shareholding in the company (for example in deciding whether to sell to JBS, hold or invest more by taking up the rights offer.)"

IOW the directors are saying the Northington valuation is a crock. It is just they can't come out and say it as bluntly as I can, for fear of upsetting the 'independent valuers' (Northingtons) that they engaged.

SNOOPY

[Under Surveillance]

U.S. at the investor roadshow, it was announced that Oakwood Securities are in. The Urquart Estate wants out - that is well known. The other crowd that wants out are Fisher Funds (probably). Fisher Funds inherited their holding as a result of buying out Tower Asset management. However Fisher's have not made up their mind - finally (I guess the voting paper isn't in). Reading between the lines I would guess Fisher don't really understand what they have got with Scott Technology, which is why they are ambivalent at best.

SNOOPY
Thanks Snoopy.
Clearly if Urquhart estate wants out it will vote for the JBS deal.
What does Oakwood being in suggest as to the way they will vote? Are they in to buy more at $1.39 (so, consistently, will vote for the deal), in to maintain their current holding (could vote either way), or in to put it up JBS (and vote against)?
Big volumes sold on market today, last day shares are cum div.

[Snoopy]

I see from Appendix 1 of the Northington report that JBS Australia has 11 processing facilities in Australia. From the presentation:

-----

Over the past two, JBS Australia and Scott have worked together installing an automated meat processing system for its lamb plant in Bordertown and elsewhere in Australia.

1/ The production line at Bordertown is running daily, at commercial line speeds (approx. 10 head of sheep per minute or approx. 8,000 per day). [Snoopy note: looks like two eight hour shifts per day]
2/ Rather than leading to redundancies, staff have been relocated to other parts of the plant, with consequent expansion in throughput.
3/Scott’s automation equipment is also operating at JBS’s Brooklyn plant (lamb) and beef plants at Dinmore and Beef City.

This reads as though Bordertown has 'full automation' and Brooklyn (lamb) and for Beef Dinmore and 'Beef City' (Toowoomba) are partially automated.

The JBS Australia Website lists the following processing sites:

Queensland: Dinmore, Beef City (near Toowoomba), Rockhampton, Townsville
NSW: Rivernia (rural NSW)
Victoria: Brooklyn, Cobram
Tasmania: Devonport, Longford
South Australia: Bordertown

Late in 2014, JBS acquired the 'Primo' group, specialising in smallgoods and bacon. Primo has two abbatoirs. One in Port Wakefield (South Australia) , and the other at Scone in the Hunter valley (NSW)

Nine of the above facilities process beef, and one pork. However JBS also processes lamb (Brooklyn) and goats.


A good lively presentation at the roadshow from Brent Eastwood, CEO of JBS Australia. It wasn't on the CV but he hails from Invercargill! So a true 'Southern Man' ,and a likeable guy.

I am still a little confused over how many meat processing plants (in the old freezing works sense) that JBS own in Australia. Go to http://www.jbssa.com.au and ten are listed. Yet under note 25 in the Scott's Scheme booklet there are eleven. But go to the map of Australasia in the JBS part of the presentation and there are fifteen, although that fifteen includes the recently acquired smallgoods plant in Carterton New Zealand. As Brent Eastwood was going through his slides he seemed to be updating numbers 'on the fly' as JBS's rapid growth in Australia oustripped the now historical graphic.

So: ten, eleven, fourteen - take your pick! For now I will stick with eleven as that is the number specifically stated in the Scheme booklet.

For future benefit purposes, I am going to say that one and one half of these 11 plants are now robotised, leaving 9.5 to go. A full robotised installation today (X-ray Primal & Grading, Middle, Forequarter and Hindquarter) will cost the customer (like JBS) $12m to $13m. Scott gives a 'payback guarantee' of 18 months. This payback is achieved via improved yield, because robotized cutting is more precise, and results in less waste that a 'human knife wielder'. Gains in productivity (because robots don't get tired) and fewer accidents (robots don't sue) are a bonus. JBS hasn't done enough trialling yet to know if the 18 month (1.5 year) payback will be achieved. But based on past experiece from other installations, I am guessing it will be.

So: 9.5 (no. installations in Oz to do) x $12.5m (average cost) = $120m that JBS will ultimately spend.

Annnual payback with everything up and running will be:

$120m /1.5 = $80m

JBS have indicated they will not be paying 'mates rates' for their installations, even if they become controlling shareholders of SCT (Do I believe that? I'll take the claim at face value for now).

So: Outlay $120m (a one off).
Savings over ten years $80m x 10= $800m

Net gain: $800m-$120m = $680m

Amount laid out to 'get to the top of the customer list' : $15.4m to $50.4m (depending whether 80% or 20% of share holders accept Scheme of Arrangement).

Worst realistic case return for JBS over 10 years (calculation slightly quick and dirty, because not all installations will be installed at year one, but then again neither will all the outlay be paid in year one- but still indicative) :

$50.4m(1+r)^10= $680m

r=29.7% compounding!

This is simply a staggering return on investment. No wonder JBS Australia are keen to seek a controlling position in SCT at what, in investment terms, is an incredible bargain basement price.

SNOOPY

[Snoopy]

A good lively presentation at the roadshow from Brent Eastwood, CEO of JBS Australia. It wasn't on the CV but he hails from Invercargill! So a true 'Southern Man' ,and a likeable guy.


A report on the Dunedin roadshow can be found here.

http://www.odt.co.nz/news/business/363600/we-just-want-scott-grow-jbs-says

One thing that puzzled me was point 15 in the literature, the first point under the sub header:

Q"Why is the Scheme of Arrangement being proposed?"

A "...it could open up additional opportunities for the company for growth internationally."

Given Scott's success internationally already with the Australian Lamb Company (ALC) and JBS itself (in Australia and Brazil) and the Northern Co-operative Beef Company (Australia), Scott's didn't seem to have any problem getting meat industry work overseas right now. CEO Brent Eastwood,of JBS Australia, provided the answer:

"With JBS being the second largest food company in the world, everyone follows what we do." "When a corporate level food deal is done worldwide, the name JBS is brought up even when the promotors of the deal know that JBS is not part of it, because just the mention of the JBS name garners world attention, and therefore interest from industry rivals."

Scott's have already applied for resource consent to extend their Dunedin operation. Whether this will be granted, due to possible affects on the Kaikouri valley stream behind the existing building is uncertain. Funding permitting, the plan is to upscale meat industry robotics so that it can supply 5 to 10 systems per year rather than the one or two it does now. Apparently next to Rocklabs, the fully developed meat industry robotic technology is now the most profitable part of the business.

The Robotworx (Scott USA subsidiary) experience in palletising and distribution robots is viewed as a possible profitable meat industry add on.

Scott's have an internal rate of return management planning target of 15% return on capital per annum for all investments.

SNOOPY

[Snoopy]

The star of FY2014 was ‘Appliance Line Manufacturing’. Seven production lines were shipped, four for installation in the USA. Two of these lines were parallel production lines. That allowed higher profit margins. Shareholders were shown a video of a hot water cylinder production line designed and installed for Haier in China. During the contract brief, it became apparent there were some design issues with the hot water cylinder. Scott Technology doesn’t advertise itself as product developer. Yet they do have this capability, and Scott’s were able to partner with Haier to both design and build a better product.


Some musings from the presentation on the current state of the appliance business.

A fridge selling for $300 fifteen years ago still sells for $300 today. So Appliance makers globally are under huge cost pressures. In Europe alone, three manufacturers have disappered completely over the last few years.

After the GFC, and the accompanying housing downturn, most appliance manufacturers had their lines turning over at only 30% capacity. In tight times, the first thing to be cut is capital expenditure. The only time capital expenditure is not cut in hard times, is when government legislation demands new environmental standards, necessitating new product design and manufacture. Big Appliance players normally work on 120 to 130 day payment terms, tough for smaller contracting companies like Scotts. Nevertheless, the 30-40% deposit on order is helpful to cashflow at the front end of any project.

However, a new order has been received just recently. So that means Appliance manufacturing lines in FY2016/2017 will likely be in better shape than in FY2015 position.

SNOOPY

[Snoopy]

Thanks Snoopy.
Clearly if Urquhart estate wants out it will vote for the JBS deal.
What does Oakwood being in suggest as to the way they will vote? Are they in to buy more at $1.39 (so, consistently, will vote for the deal), in to maintain their current holding (could vote either way), or in to put it up JBS (and vote against)?
Big volumes sold on market today, last day shares are cum div.


I am guessing as to Oakwoods position, apart from the fact they at least want to maintain their current absolute number of shares. Being the largest holder (12%), it seems inconceivable that they were not consulted re the capital raising. especially as we know that both the Urquart Estate and Fisher Funds (both 7.5% holders) definitely were consulted. JBS CEO Brent Eastwood, at the Roadshow, said that not all large shareholders were leaving, which by deduction (given there are only three) means that Oakwood must be staying.

Meanwhile the SSH on the market today shows that 5.21% of shareholders have already buckled and sold to JBS, conditional on the Scheme of Arrangement being approved. That figure can't include either the Urquart Estate or Fisher Funds for their complete holdings at least. If the 5.21% are all small shareholders, we might be looking at around 25% of all shareholders wanting out completely. That means a total SCT capital raising of around $40m. This will wipe out company debt and then some. But given the somewhat patchy or at least unproven nature of recent acquisitions, is this too much money to trust the company with? Capital return anyone?

SNOOPY

[Snoopy]

Meanwhile the SSH on the market today shows that 5.21% of shareholders have already buckled and sold to JBS, conditional on the Scheme of Arrangement being approved. That figure can't include either the Urquart Estate or Fisher Funds for their complete holdings at least. If the 5.21% are all small shareholders, we might be looking at around 25% of all shareholders wanting out completely. That means a total SCT capital raising of around $40m. This will wipe out company debt and then some. But given the somewhat patchy or at least unproven nature of recent acquisitions, is this too much money to trust the company with? Capital return anyone?


A big jump in JBS acceptances today ( +3.982%) . However, it looks like this figure still does not include those two larger shareholders wanting out.

------

For this disclosure,--
(a) total number held in class: 4,180,131
(b) total in class: 45,473,890
(c) total percentage held in class: 9.192%

For last disclosure,--
(a) total number held in class: 2,369,386
(b) total in class: 45,473,890
(c) total percentage held in class: 5.210%

-----

SNOOPY

[Under Surveillance]

On the matter of a return of capital, Hopkins volunteered this as a possibility during the Q&A session at the Wellington road show; a video of the session is posted on the SCT website.

[ScripMan]

Big jump in JBS acceptances announced today. How high is this going before Thursday?
Summary for JBS Australia Pty Limited
For this disclosure,—
(a) total number held in class: 9,663,115
(b) total in class: 45,473,890
(c) total percentage held in class: 21.250%

[Under Surveillance]

Big jump in JBS acceptances announced today. How high is this going before Thursday?
Summary for JBS Australia Pty Limited
For this disclosure,—
(a) total number held in class: 9,663,115
(b) total in class: 45,473,890
(c) total percentage held in class: 21.250%


Acceptances closed at 5.00 pm yesterday with Link, as did applications for new shares under the rights issue.

Whether the 9.663 million will go much higher depends on at what point of yesterday the notified tally was taken, and possibly on the extent of late-in-the-day acceptances.

[Snoopy]

Big jump in JBS acceptances announced today. How high is this going before Thursday?
Summary for JBS Australia Pty Limited
For this disclosure,—
(a) total number held in class: 9,663,115
(b) total in class: 45,473,890
(c) total percentage held in class: 21.250%

With such a big jump in one day, I am picking one of the substantial shareholders has sold. Odds on it is the Urquart estate. Maybe Fisher having second thoughts about selling after attending the presentation in Auckland (the first time Scott's has ever presented in Auckland?) and seeing what a stunning bargain they are holding?

SNOOPY

[Snoopy]

On the matter of a return of capital, Hopkins volunteered this as a possibility during the Q&A session at the Wellington road show; a video of the session is posted on the SCT website.

The video of the Wellington presentations may be found here:

https://www.youtube.com/watch?v=4rornRtTamM

It is interesting to note that Brent Eastwood, JBS Oz CEO, had commissioned their owned independent valuation of SCT that was "not materially different" from the Northington valuation.

SNOOPY

[ScripMan]

Interestingly, JBS Oz CEO said at the Auckland briefing that their valuation range topped out below bottom of Northington range (NZ$1.08)

[ScripMan]

I checked with Scott CFO Greg Chiles today and there is unfortunately no live web-cast available for tomorrow's meeting.

[Under Surveillance]

My back of an envelope calculations indicate that JBS could be up for around $50 million to get 50.1% of SCT, if the scheme is approved at the SGM.

Assuming that 2 million shares are taken up under the rights scheme, and that the acceptances for JBS purchases don't exceed by much the 9.7 million shares as notified this morning, the arithmetic is ....

45.5 million shares issued as of 17 September 2015 plus 2.0 million new shares = 47.5 million post rights issue

47.5 million less 9.7 million JBS acceptances = 37.8 million shares held other than by JBS

So, to get to 50.1%, JBS needs to hold 37.9 million shares. Under the scheme, and given the assumptions above, the composition of the 37.9 million will be 9.7 million acceptances plus 10 million placement plus 18.2 million top up.

Given the assumptions above, all up JBS will pay $52M + change for 50.1%. Of this $13M+ goes to existing shareholders and $38M+ to SCT.

[Snoopy]

My back of an envelope calculations indicate that JBS could be up for around $50 million to get 50.1% of SCT, if the scheme is approved at the SGM.

Assuming that 2 million shares are taken up under the rights scheme, and that the acceptances for JBS purchases don't exceed by much the 9.7 million shares as notified this morning, the arithmetic is ....

45.5 million shares issued as of 17 September 2015 plus 2.0 million new shares = 47.5 million post rights issue

47.5 million less 9.7 million JBS acceptances = 37.8 million shares held other than by JBS

So, to get to 50.1%, JBS needs to hold 37.9 million shares. Under the scheme, and given the assumptions above, the composition of the 37.9 million will be 9.7 million acceptances plus 10 million placement plus 18.2 million top up.

Given the assumptions above, all up JBS will pay $52M + change for 50.1%. Of this $13M+ goes to existing shareholders and $38M+ to SCT.

As usual when the AGM is held in Dunedin, the Otago daily Times covers it well.

http://www.odt.co.nz/news/business/364855/jbs-australia-gains-control-scott-tech

"With the JBS capital injection, expansion in Dunedin is now high on the management's agenda, and with a second share tranche taking JBS to 50.1%, Scott could, in theory, get up to $45million in new capital."

From Scott's own press release tilted:
SHAREHOLDER APPROVAL OF JBS AUSTRALIA PTY LIMITED SCHEME OF ARRANGEMENT

"Subscriptions received pursuant to entitlements: 1,975,618 ordinary shares totalling $2.75 million, representing a take -up of entitlements of 34.76 %."

That sounds poor, until you remember that those shareholders accepting the JBS offer were not allowed to apply for the rights offer as well.

The last SSH figure from JBS was that they held 10,129,971 out of 45,473,890. Other shareholders have added 1,975,618 to the grand total since that notice. We must add in the 10,000,000 shares issued to JBS to the total figure (pre top up) as well.

So total percentage JBS holding prior to top up is:

(10,000,000 + 10.129,971) / (45,473,890+10,000,000+1,975,618) = 35.0%

To make 50.1% JBS need an additional number of shares 'S' calculated as follows:

(10,000,000+10,129,971 + S)/( 45,473,890 +10,000,000 + 1,975,618 + S) = 0.501

Solving this implicit equation for 'S' I get: S = 17,339,229 shares



Hence total cash injection into SCT from JBS and all other shareholders will be:

(17,339,239+1,975,618) x $1.39 = $26.874m

That wipes out the $17.4m worth of debt, leaving:

$26.9m -$17.4m = $9.5m

on the table as 'surplus capital'.

SNOOPY

PS Double Check on New Share Numbers



Share OriginShare Numbers


Pre Arrangement Capital45,473,890(wouldn't the RBNZ like that)


Initial JBS Placement10,000,000


Other Shareholder Exercised Rights1,975,618


JBS Top Up17,339,239


Total Shares (Post Arrangement)74,788,747



Final JBS Holding Percentage:

(17,339,239+ 10,000,000+ 10,129,971)/ 74,788,747 = 0.501 (50.1%) - Correct

[Under Surveillance]

As usual when the AGM is held in Dunedin, the Otago daily Times covers it well.

http://www.odt.co.nz/news/business/364855/jbs-australia-gains-control-scott-tech

"With the JBS capital injection, expansion in Dunedin is now high on the management's agenda, and with a second share tranchetaking JBS to 50.1%, Scott could, in theory, get up to $45million in new capital."

From Scott's own press release tilted: SHAREHOLDER APPROVAL OF JBS AUSTRALIA PTY LIMITED SCHEME OF ARRANGEMENT

"Subscriptions received pursuant to entitlements: 1,975,618 ordinary shares totalling $2.75 million, representing a take -up of entitlements of 34.76 %."

That sounds poor, until you remember that those shareholders accepting the JBS offer were not allowed to apply for the rights offer as well.

The last SSH figure from JBS was that they held 10,129,971 out of 45,473,890. Other shareholders have added 1,975,618 to the grand total since that notice. So total percentage JBS holding prior to top up is:

10.921,971 / (45,473,890+1,975,618) = 23.0%

To make 50.1% JBS need: 50.1/23.0 x 10,921,971 = 23,790,902 shares

So top up shares total: 23,790,902 - 10,921,971 = 12,868,931

Hence total cash injection into SCT from JBS and all other shareholders will be:

(12,868,931+1,975,618) x $1.39 = $20.624m

That neatly wipes out the $17.4m worth of debt without leaving too much on the table as 'surplus capital'.

SNOOPY
Try again, Snoopy.

Shares on issue before scheme of arrangement 45,473,890
Plus increased shares from rights issue 1,975,618
Total non-JBS shares 47,449,508
Less purchases by JBS from non-JBS holders 10,129,971
Non JBS holdings 37,319,537

After the scheme is completed, 37,319,537 shares will be 49.9% of all the shares issued.
To get to their 50.1% JBS need to hold another 37,319,537 shares for 49.9%, plus a further 149,673 for the 0.2% to make 50.1%. So, 37, 469,200 altogether.


Shares on issue after JBS deal - JBS 37,469,200 50.1%

Others 37,319,537 49.9%
Total shares on issue 74,788,737 100%


Sources of shares, and costs, of JBS' holding of 50.1%:


Acceptances 10,129,971 $14,080,971

Placement 10,000,000 $13,900,000

Further placement 17,339,229 $24,101,528

37,469,200 $52,082,499



Cash raised by SCT from rights and from placements to JBS:


Rights $ 2,746,109

Placement $13,900,000

Further placement $24,101,528

$40,747,637

[Snoopy]

Try again, Snoopy.


Quite right U.S. . Glad to see there is someone out there awake, to correct me when I post a load of bs. I have now corrected my calculation as you can see.

The problem for shareholders now is that with the number of shares on issue increased so massively -from 45m to 75m ( +66%) , that means the profit must go up by 66% for earnings per share just to stand still. Can SCT do this?

SNOOPY

[Under Surveillance]

Quite right U.S. . Glad to see there is someone out there awake, to correct me when I post a load of bs. I have now corrected my calculation as you can see.

The problem for shareholders now is that with the number of shares on issue increased so massively -from 45m to 75m ( +66%) , that means the profit must go up by 66% for earnings per share just to stand still. Can SCT do this?

SNOOPY
A pleasure to help you out, Snoopy.

A cynical response as to whether SCT can increase NPAT by 66% is that of course they can, as they demonstrated by increasing NPAT by 102% in FY 2015 (the task was made easier by NPAT in FY 2014 having dropped 41% from NPAT in FY2013).

Were you to ask whether SCT can increase NPAT by 66% in FY2016, after a relatively good year in FY2015, I would say it is unlikely, but conceivable if many stars align. Hopkins told the AGM on 26 November that: Our order book is at historically high levels. In addition, we are in the advanced stage of discussions in respect of multiple projects that if we win them it will take us to the next level of activity. For this reason we believe 2016 is going to be extremely busy and bring new challenges. This is susceptible of optimism, but extra activity and extreme busyness does not necessarily presage booming NPAT right away, and new challenges might bring new expenditures.