SCT - Scott Tech [Archive] - Page 4

Snoopy

21-11-2019, 09:16 PM

Wow, I have never seen an announcement quite like this! Scott's battling to fulfill their legal obligations!

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INTERIM DIRECTOR APPOINTMENT & INDEPENDENCE DETERMINATION

Interim Director Appointment

The Board has appointed Mr John Thorman as a Director effective from 1 May 2018. The Board has determined that Mr John Thorman is an Independent Director.

Following the retirement of Mr Mark Waller, the Board commenced a search for a suitable replacement Independent Director with the appropriate skills and experience. To date the search has been unsuccessful and to ensure the Company complies with the requirements for independent and New Zealand based Directors, this interim appointment has been made.

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The board has appointed a new director and gone on record as saying he is not up to the task! Extraordinary! I wonder if Mr Thorman will be adding 'incompetant interim director' to his resume?

After the above from 2018, I never thought there would be another director scandal at Scotts so soon. But read on.

Up for re-election this year is JBS representative Andre Nogueira. Nothing scandalous or unusual about that. Nogueira is the chief executive of JBS USA, the parent company of JBS Australia that holds the controlling stake in Scotts. This is great as it gives Scott's a direct line to the big boss in the US, and all the potential direct links to the meat processing industry in the USA: a very large pipeline of automation project potential. But having someone that high up in the hierarchy from so far away on the board means that he may not be able to attend all of Scott's board meetings, even if there were only six of them over FY2019. So it is fair enough to appoint an alternate director. JBS have done this by nominating John Berry, Head of Corporate and Regulatory affairs at JBS Australia as the alternate.

So how many board meetings did Andre Nogueira miss during the year? One, perhaps two? As AR2019 p16 shows, the actual answer is all of them! Nogueira never showed up at all, at any board meeting! How can we shareholders be asked to vote for a director that never showed up? I have been investing in sharemarkets for quite a while now, and I can honestly say I have never heard of a situation anything like this!

SNOOPY

percy

21-11-2019, 10:09 PM

janner

21-11-2019, 10:36 PM

Snoopy

21-11-2019, 10:46 PM

Sorry I can't explain it better than this.

You have God on the board.
God's word is law.
God's man has God's backing,so his words are God's.
God's law must not be broken.
Should any director fail to keep God's law,then he will rot in hell.[ie he will not receive God's vote when up for re-election].

I get your point Percy, although the 'JBS Bible' has some interesting parables to relate:

https://www.thebureauinvestigates.com/stories/2019-07-02/jbs-brazilian-butchers-took-over-the-world

I quote:

"When it comes to scandals, you can take your pick — during its rapid rise to become the world’s biggest meatpacker, JBS and its network of subsidiaries have been linked to allegations of high-level corruption, modern-day “slave labour” practices, illegal deforestation, animal welfare violations and major hygiene breaches."

I have a feeling this 'JBS god' you refer to Percy, might be batting for the other team? Whereas I don't expect JBS controlling shareholding to vote against him, that doesn't mean I can't!

SNOOPY

Snoopy

24-11-2019, 09:37 AM

Scott’s vision is to be ‘the global innovator in automation’. Type that phrase into Google and the company that comes out first is FANUC, formed in 1956. FANUC is listed on the Japanese stock exchange. FANUC is an acronym for Factory Automatic Numerical Control.

Judged as world leader by analyzing patent data and related metrics in a proprietary methodology (for comparison Scott’s have 17 patents), FANUC Corporation, is the world's most diversified manufacturer of CNC Systems, Robots, and Machine Tools,

The criteria used to evaluate innovation performance of companies that invent on a significant scale are:

1/ Work on developments that are acknowledged as innovative by others around the world (patent approval success rate, patent influence in literature citations and overall patent volume).
2/ Inventions that are globally protected due to their importance (global reach of patent portfolio).

Thomson Reuters, judge of the 2011 Top 100 Global Innovator methodology, used these criteria to reach their conclusion rating FANUC as number one.

FANUC's innovative technology has contributed to a worldwide manufacturing revolution, which evolved from the automation of a single machine to the automation of entire production lines. Today, FANUC has more than 600 engineers working in R&D to provide the most reliable, efficient and innovative CNC systems available - ensuring the very lowest Total Cost of Ownership.

With 50 years of experience and more than 2,200,000 CNCs and 220,000 robots installed worldwide, FANUC is the undeniable global leader in CNC and robotics.

OK, so despite the bold statement, I think Scott Technology still has a way to go to fulfill their own vision. A differentiating point of Scotts from FANUC is that their headline robotics projects (meat industry and milking) have an ‘animal tissue interface’. That means the Scott robotics must develop a ‘feel’ and ‘room for dimensional tolerance’ that is not just a transplant of established industrial robotic technology available in Japan. The page 3 Scott AR2011 remark ‘we lead the world in our chosen markets’ is perhaps the more believable quote.

Eight years on how have Scott's progressed? Looking back at my previous comparison with 'FANUC', I feel as though it wasn't fair. Scott's are more into making turnkey project solutions rather than making all the individual units of hardware that supply that solution. Having said this, Scott's are capable of making the hardware. But if a robot is available off the shelf, there is no reason to reinvent the wheel.

Today typing 'industrial automation leader' into a search engine, what comes up?

1/ Omron Automation: Integrated Robotics: Design and install flexible manufacturing enabled by the seamless integration of robotics with advanced machine control. This includes Autonomous Intelligent Vehicles (has largest installed base in manufacturing), Robotic installations include Vision, Motion and Safety functions, and Automated Warehouses. Omron is headquartered in Japan and has over 35,000 employees, with nearly 24,000 of those in overseas subsidiaries. Omron's Industrial Automation division turnover comprises 46% of total company turnover of about $US8billion.

Since the 1990s, in the industrial area, Omron has focused on microelectronics. They strove to become number one worldwide in components and industry leader in the systems field. Omron was quick to detect the emerging need for programmable controllers with a fast processing speed to facilitate a trend away from 'mass production' of a single product, to high-mix, low-volume production runs. Omron, as a company, seems to be two orders of magnitude larger than Scotts.

2/ Comau: is an Italian domiciled multinational and a subsidiary of Fiat Chrysler Automobiles. A developer of Industry 4.0 (the trend towards automation and data exchange in manufacturing technologies and processes)-enabled systems, products and services. Comau is active in vehicle manufacturing, heavy industry, railway and renewable energy. Comau have 9,000 employees, operate 32 centres across 14 countries, including 5 'innovation centres' and 14 manufacturing plants. This company is an order of magnitude larger than Scotts but in a slightly different market space: Scott's is more orientated towards light manufacturing production lines and food industry processing lines.

3/ ABB (Asea Brown Boveri Ltd): ABB, a Swiss domiciled multinational conglomerate, operate a 'Machinery and Factory Automation' division, 'MF' (formerly a separate company B&R, founded by Erwin Bernecker and Josef Rainer). MF operate in more than 200 offices worldwide and have more than 3,400 employees. MF combines state-of-the-art technology with advanced engineering to provide customers in virtually every industry with complete solutions for machine and factory automation, motion control, Human Machine Interface and integrated safety technology. MF operate in the Automotive, Printing, Food & Beverage, Handling & Robotics., Oil & Gas and Metalworking industrial spaces. MF is a complementary business to another ABB business arm: the ABB Robotics Division that actually manufactures robots. The workforce at the ABB ML division is over four times larger than the 784 that are employed at Scott Technology at EOFY2019.

With no need to take my research further, it is clear that Scott is not in the top three companies that offer integrated manufacturing solutions in the industrial automation space. But neither do Scott choose to emulate the industry big boys. This is an analogous position to Scott subsidiary 'Rocklabs'. 'Rocklabs', build sample preparation equipment. They became a friend of the smaller laboratories. These were laboratories that had formerly had been forced to wait behind bigger customers to be supplied by bigger equipment manufacturers out of Germany and the United States. Like Rocklabs, the Industrial Automation part of Scott's go after the 'second tier', in this case the appliance manufacturing industry. Appliance manufacturing is a sector without the glamour of the larger automotive companies, but which nevertheless requires first class metal pressing and component handling skills to service it well.

In the 'secondary industry space', where Scotts choose to operate, they work with the biggest names in those industries. For appliance manufacturing lines this includes Haier, General Electric, Bosch and Electrolux. For meat carcase packaging, this includes the world's largest player JBS, a multinational beef, lamb and chicken processor who are also the majority Scott's shareholder. JBS is ultimately domiciled in Brazil.

Conclusion: Pass Test

SNOOPY

Snoopy

25-11-2019, 09:32 AM

EPS figures over the years I pulled from Scott Tech's annual reports:

2009:1.1
2010:8.5
2011: 16.6
2012:16.7
2013:13.6
2014: 6.2
2015:13.8
2016:13.3
2017:13.2
2018: 14.3
2019: For first half of year is 6.6, last year it was 4.2 for first half of the year

Of course, we can only speculate what this years EPS would be so instead better to look at last years figures. 14.3 is more than 13.2. It's a marginal increase hence why I said weak EPS growth.

You'll need to forgive me as I'm definitely not a financial expert. Perhaps I have this wrong, and if so, please let me know. I'm not hugely knowledgeable on EPS and other financial measures of a company which is probably why I missed certain things with Scott Tech. I guess what confuses me is how revenue growth can be so strong while EPS growth isn't.

Thanks for your post Sanctus. I have pulled out what I consider the 'normalised' earnings per share over the last five years based on the number of Scott Technology shares on issue at the end of the financial year. This, no doubt, is why some of my eps figures are a little different to yours. The results are below:

FY2015: $4.803m / 45.474m = 10.6cps
FY2016: $8.929m / 74.681m = 12.0cps
FY2017: $8.959m / 74.681m = 12.0cps
FY2018: $10.205m / 75.903m = 13.4cps
FY2019: $9.464m / 77.545m = 12.2cps

Notes: NPAT normalisation calculations

FY2015: These adjustments may be found on p31, p32 of AR2015. I have:

a/ Subtracted the gain on sale of property plant and equipment ($0.280m)
b/ Added back fair value losses on derivatives held as fair value hedges ($0.449m).
c/ Subtracted foreign exchange gains ($1.538m) and add back unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.108m) and subtracted fair value gains on firm commitments ($0.449m).

$6.113m-($0.280m)+ 0.72($0.449m-$1.538m+$0.108m-$0.449m)= $4.803m

FY2016: These adjustments may be found on p33 of AR2016. I have:

a/ Added back a loss on sale of property plant and equipment ($0.215m) and an impairment of net assets at QMT Machinery Technology Co. Ltd in China ($0.449m).
b/ Added back fair value losses on firm commitments ($1.051m).
c/ Added back foreign exchange losses ($0.027m) and unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.155m) and subtracted fair value gains on derivatives held as fair value hedges ($1.051m).

$8.134m+($0.215m+$0.449m)+ 0.72($1.051m+$0.027m+$0.155m-$1.051m)= $8.929m

FY2017: These adjustments may be found on p30,31 of AR2017. I have:

a/ Subtracted a gain on sale of property plant and equipment ($0.073m)
b/ Added back fair value losses on firm commitments ($0.001m).
c/ Subtracted foreign exchange gains ($0.269m) and unrealised fair value gains on fair value gains on foreign exchange derivatives ($0.143m) and fair value gains held as fair value hedges ($0.001m).
d/ Subtracted a fair value gain on purchase of business "DC Ross" ($0.936m).

$10.265m-($0.073m+$0.936m)+ 0.72($0.001-$0.269m-$0.143m-$0.001m)= $8.959m

FY2018: Most of these adjustments may be found on p33 of AR2018. I have
a/ Added back the $0.021m loss on disposal of property plant and equipment.
b/ Added back in the unrealised loss on foreign exchange derivatives ($0.271m) and losses on derivatives used as fair value hedges ($1.579m) and the unrealised fair value losses on interest rate swap contracts ($0.043m) .
c/ Subtracted foreign exchange gains ($1.627m) and fair value gains on firm commitments ($1.579m).
d/ Added back $0.496m being due diligence and acquisition costs (including the $0.271m of due diligence services from the auditors)

$10.772m+($0.021m)+ 0.72($0.271m+$1.579m+$0.043m-$1.627m-$1.579m+$0.496m)= $10.205m

FY2019: Most of these adjustments may be found on p39 of AR2019. I have
a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m

Conclusion: Pass Test

SNOOPY

Snoopy

26-11-2019, 11:08 AM

percy

26-11-2019, 11:28 AM

FY2015: $5.363m / $50.618m = 10.6%
FY2016: $8.929m / $94.600m = 9.4%
FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.429m / $111.817m = 8.4%

Conclusion: Fail Test (a comprehensive fail covering each of the last five years). The last time Scott's passed this test for a single year was back in 2010!

I concur.Fail.

Snoopy

26-11-2019, 10:32 PM

They paid too much for the "goodwill"? Not the first company falling into that trap ...

Just so exciting for directors and CEO's to buy additional revenue. Great revenue pointers showing into exactly the right direction (top-right). Just don't talk about margins - I guess, who wants that much detail?

Here are the net profit margins for the last five years.

FY2015: $4.803m / $72.298m = 6.6%
FY2016: $8.929m / $112.044m = 8.0%
FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%

Doing more and more business while making proportionately less profit over many years is not the way to go. The 'glitch' in FY2016 saw Scott's sell multiple repeat sales of automated lamb boning room units (the most profitable business that Scott's does) coupled with a good year at 'Rocklabs'. More of this will be required if there is to be any hope of restoring net profit margins to respectable levels.

Conclusion: Fail test

SNOOPY

Snoopy

28-11-2019, 11:10 AM

It may be a rather long phone call.
Would think it may pay to speak to Chris Hopkins.

CEO Chris Hopkins is set to give his last address to shareholders today. So no more phone calls from shareholders. Chris has been sacked, oh sorry, moved into his new position of 'sales director'.

"Scott Technology’s Board of Directors has appointed John Kippenberger as the company’s next Chief Executive Officer. John is an experienced business leader who has a successful career as CEO of a number of international business‐to‐business and consumer branded companies.This has included time in Australia as CEO of several industrial companies of George Weston Foods Limited before leading their large meat & dairy organisation which included 1,200 people operating across seven factories. After returning to New Zealand in 2006 with his wife Julie and children Emily and Tom, John was a part‐owner and the Chief Executive of Premier Beehive NZ Limited. More recently,John led the exponential growth and development of Manuka Health NZ Limited.This included expansion of the company’s agricultural and factory operations,along with an acquisition in Germany and the opening of company operations in Australia, the United States, the United Kingdom and parts of South East Asia and China."

The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?

SNOOPY

Snoopy

29-11-2019, 01:44 PM

The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?

I never envisaged when writing this summary it would be an epitaph to the Chris Hopkins era. But here we go. Benchmarking one company against another, even if they are not direst competitors, can be insightful. I choose Skellerup Limited as a foil for Scott Technology.

The net profit margin at Scott Technology is roughly half that of Skellerup Ltd. Granted these businesses operate in different industrial and agricultural spaces. But both are kiwi based exporters that have expanded in recent years. Both have substantial overseas based manufacturing interests scattered across the globe. Both have around 800 employees. And both have sales of around $230m to $240m per year. Both expense any research and development expenses in the year those expenses are incurred. Scott's call this R&D policy conservative. However the amount of Research and Development build that can subsequently be recovered by being 'on sold' as part of a new project over the last five years has been very low (1). So I would argue Scott's R&D policy is better termed realistic.

The earnings per share picture, once normalised, is quite consistent over five years. But eps growth at Scott's over a five year period of 15% compares poorly with Skellerup's 36%. One argument as to why the comparison is unfavourable could be that Scott's is going through a more transformative phase. Scotts want competent and adaptable engineering teams worldwide at several sites. Whereas Skellerup have their key products made at specialist manufacturing plant at different sites. A look over the change in staff numbers over five years show how Scotts have now achieved their goal of global employee balance (AR2019 p2):

Number of StaffFY2015FY2019

New Zealand94248

Australia70101

Asia5236

Americas4583

Europe1316

The drop in staff numbers in Asia since 2015 is because a then four year agreement with 25% China partner 'Teknatool International Ltd' came to an end in October 2015, with Scott's former joint venture staff then resized and reskilled to pursue Scott Technology projects only.

The good thing about Scotts having a manufacturing base in China, the United States, Europe and Australasia is that you can make your projects in a location that will avoid trade barriers. But the bad side to that strategy is that while trade barriers exist, you will always have some of your manufacturing base in the wrong place. Given Scott's results since the 'globalised bases of scale' strategy has come to fruition, I am not clear it is the right strategy. The fact that Scott's have been able to maintain fully imputed dividends while only around a quarter of the workforce is NZ based, shows how 'profitable' (sic) the overseas manufacturing bases are. Of course there may be some internal transfer pricing that artificially inflates the New Zealand contribution to profit when more than one manufacturing base contributes to a project, But it isn't clear that any of the overseas bases are real profit stars.

With Scott Technology we have a highly skilled workforce doing clever things and making very average profits. Of course there are plenty of technology companies out there that make no profits at all, and Scott's deserve kudos for actually making money while doing smart stuff. But the automated boning room project has been a disappointment of late, principally because the lamb boning room which was technologically very successful and profitable has such a small potential market. The real money in automated meat processing is in processing beef. And the larger beef carcass, more variable in size, seems to be proving problematic to adapt to the robotised technology proven in the lamb boning room.

There have been other failures too. Scott Milktech, the robotised milking shed project, was first absorbed into the parent Scott Technology in 2017, as their industry partner sold out, and now it doesn't rate a mention in this years annual report or presentations. The HTS-110 company in Lower Hutt, a full subsidiary since 2014 battles away building applications with magnetic superconductor technology that is globally well respected in international academia and industry. Yet so far the king hit application that will really put HTS-110 on the map remains illusive. No matter. Should either of these business units get on board the commercial express train, then shareholders buying at today's prices will get the benefits 'for free'. In cutting edge technology, ultimate success is often the outcome of a series of failures.

Scotts know there is room for improvement. The last line in the objectives for FY2020 is to "Review all areas of operations to improve bottom line" In the short term, the sale of more proven meat processing equipment is the key to this. And Europe, where most of the company's material handling expertise lies, will have to shake off their 'Brexit Headache'. If you think they can do this there is every reason to remain invested. But I don't think Warren Buffett will be joining you on the share register.

Notes

(1) If some R&D expenditure manifesting as equipment in storage was written off but subsequently recycled, I imagine it would be brought back onto the books as 'Property Plant and Equipment' at no cost. The price it was sold at would then be all profit. So one test to see if this did happen would be look at the profit margin of the Property Plant and Equipment sold during any year when an overall profit was made. Looking at the three years of 'Property Plant and Equipment' when this happened.

P,P&E ProfitP,P&E SalesP,P&E Profit Margin

FY2015$0.280m$0.445m63%

FY2017$0.073m$1,483m4.9%

FY2019$0.343m$0.302m114%

It looks to me as though some previously written off R&D funded equipment may have been resold in FY2015 and FY2019. But the quantum of that recycling less than $0,632m in total over five years is not material to the company.

SNOOPY

discl: hold SCT and SKL

Snoopy

29-11-2019, 06:07 PM

They bought as well a lot of additional revenue, but if you look at the earnings per share - they are flatlining now for a long time around 13 cents. PE around 19 with no (EPS-) growth at all.

So - it is clearly not a growth company (remember, its only EPS growth which counts for shareholders) and while their interests might be aligned with the interests of the majority shareholder (they are building tools for them) - for anybody else they are basically equivalent to a BB or less rated bond (they are neither a gentailer nor IFT) paying (at today's SP) in average 4.2% interest, which well may turn towards less or even nil when the next recession arrives.

While they are certainly worth something, there are many better dividend payers (if that's your thing) as well as much better growth games out in the market.

I am not sure SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a dividend payer only to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s unimputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20155.5c+2.5c
N/A c + 3.47c3.47c.

FY20165.5c+4.0c
7.64c + 5.56c13.20c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + ?c 5.02c + ?c5.02c

Total62.67c

Averaged over 5 years, the dividend works out at 62.67/5 = 12.5c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SCT is:

12.5 / (0.075) = $1.67

Now using my plus and minus 20% range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.67 x 1.2 = $2.00
Bottom of Business Cycle Valuation: $1.67 x 0.8 = $1.34

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SCT shares trading at $2.30 (above the upper end of my expected range) are now overvalued by 15%.

SNOOPY

Arthur

29-11-2019, 07:43 PM

Wrote a long piece on the AGM, but the FN system logged me out and wiped it all. Does anyone have any interest ? or questions?

Snoopy

29-11-2019, 08:00 PM

Wrote a long piece on the AGM, but the FN system logged me out and wiped it all.

Darn it! I was hoping someone might report in.... I couldn't get to the AGM this year myself!

There is a trick to get around this 'wiping of ones work'. If you enter your post as a reply to another post, the Sharetrader software will automatically periodically save it as you write it. Then if whatever system you are on 'wipes you out', you can log back in on another session or even on a different computer system entirely. Now press 'Reply' to the same post you replied to before and 'Hey Presto' a little box on the lower left hand corner of the screen will say 'Restore Autosaved Content? You can click 'Yes' and bingo, your wiped work will come back!

I am not sure this works if you just make a general 'Reply' without reference to an existing post. I suspect it doesn't, because the Sharetrader server would have no reference point
to recover from.

Another trick is to write your long post as a word file off line, then just cut and paste it into Sharetrader.

Does anyone have any interest ? or questions?

What was the body language of Chris Hopkins like !!!?!!

SNOOPY

Arthur

29-11-2019, 09:30 PM

Chris' speech implied that he had dedicated too much of his life to the company and now it was time to spend more time with his family. The new CEO's CV does not jump out as perfect for the company. He did go around and introduce himself to many of the staff.
Allegedly there is jam tomorrow. In 2016 we were promised that great things would come with the new shareholder. As Snoopy has pointed out meat systems sales are lower than when they wrapped their tentacles around Scott. The new pork system they are working on is probably for JBS, so they may not be a complete bust.
The new extension looks good. They seemed to have more staff in design and R&D.
They were working a machine for Germany/Czech at the factory.

Arthur

29-11-2019, 09:36 PM

Turnout was more than they expected. Around 15 people had to stand for the meeting as there were insufficient chairs.
They had a bigger Bladestop machine there. I think they said more than 1000 Bladestop saws have been sold and there are now some in industries aside from meat.

Snoopy

30-11-2019, 07:59 AM

The new CEO's CV does not jump out as perfect for the company. He did go around and introduce himself to many of the staff.

Scott's have a long history of bringing their CEOs up through the ranks: Chris Hopkins, Kevin Kilpatrick, Graham Batts. It is a break from tradition to parachute someone into the top job. John Kippenberger certainly has the experience in the international markets where Scotts operate. Perhaps with Scotts being very much an international company now, JK is exactly the person for the job? Like it or not, it may no longer be realistic to think of Scotts home being their Dunedin base any more.

The new extension looks good. They seemed to have more staff in design and R&D.

I saw the new extension was only opened at the end of October.
Is there anyone working in the new extension yet, or any machinery in there? Or is it still a shell?

They were working a machine for Germany/Czech at the factory.

That is interesting because Scotts bought out the assets of their German equivalent from bankruptcy in April 2016. I would have expected a machine destined for Europe would have been built there. Otherwise what is the point of having a skilled team in Germany/ The Czech Republic?

SNOOPY

Arthur

30-11-2019, 09:31 AM

The extension looks like it has always been there. They had just moved on a large hide processing machine, so it was looking a bit empty on the factory floor. They also added a lot more office space, some of which is occupied by the younger design staff.
The machine for Europe was abit of a puzzle. If my memory is correct it was shipped from Europe, they had about a week to work on it here and it was being shipped back. Either we had some unique skills here or skilled staff are in short supply in their European office or it is top secret (didn't look like that). It looked like it would weigh about the same as a small car, so would take abit to freight around. Maybe I got the wrong end of the stick because if was a skilled staff issue it could make more sense to send people to Europe. Maybe a work visa issue or maybe it a mission critical machinery where no expense is spared to get it into production ASAP.

BlackPeter

30-11-2019, 10:22 AM

....

The machine for Europe was abit of a puzzle. If my memory is correct it was shipped from Europe, they had about a week to work on it here and it was being shipped back. Either we had some unique skills here or skilled staff are in short supply in their European office or it is top secret (didn't look like that). It looked like it would weigh about the same as a small car, so would take abit to freight around. Maybe I got the wrong end of the stick because if was a skilled staff issue it could make more sense to send people to Europe. Maybe a work visa issue or maybe it a mission critical machinery where no expense is spared to get it into production ASAP.

Interesting .... and hard to understand. Expensive and difficult to circle the world with big and heavy equipment, particularly if time is of the essence. It is not just the freight and the lost time in transport .... on top of that the customs procedures (and MAF in NZ) can be a pain.

The only thing I could imagine is that they required for fixing some large / unique / expensive piece of equipment they only have here in NZ. But if this is the case, than you wonder what's the point of development diversification ...

Snoopy

11-12-2019, 10:45 AM

I think at the roadshow either Hopkins or McLauchlan (can't remember which), mentioned they look for a 15% return on their new investments. But whether that has been a long established policy (I got the impression it was) or a new target hinted at by JBS, this I don't know. By way of an aside, I look for an ROE of 15%+ from my own sharemarket investments (doesn't always happen), or at least the 'growth' ones. So I am very happy that the SCT board has a similar policy.

Scott's have grown the size of their business enormously over the last five years. The JBS cash issue (aka takeover) of Scott Technology during FY2016 provided a $40.597m bucket of cash that has allowed Scott to build project engineering skill bases 'on the ground' by acquisition in Europe, Australia and the United States in particular. Yet how successful this strategy was in terms of 'earnings per share' is an open question.

If you give a kid a bag of building blocks, shaking those blocks up and throwing them on the floor will not produce anything productive in itself. But if your kid takes those blocks and tries to 'knit them together', then this process could produce something of substance. It is the synergies between blocks and any associated cross selling opportunities that will determine whether Scott's will have just 'growth in earnings' or the much more desirable 'growth in earnings per share'.

Underlying growth in 'eps' has not yet happened. So can we conclude that 'our' little kid 'Scotty' has simply taken his new blocks and thrown them on the floor? Let's find out!

SNOOPY

kiwidollabill

11-12-2019, 11:10 AM

Snoopy

11-12-2019, 08:18 PM

No ones talking about them writing off this small part of the business...

They shifted it out towards Mosgiel, I drive past it most days and the building always seemed to be pretty quiet.

https://www.odt.co.nz/business/dc-ross-set-close-8-jobs-line

Thanks for this kiwidollabill. The fact that nothing was said at the AGM on the subject of 'DC Ross' and that as soon as Chris Hopkins stepped down, the new guy wielded the axe tells we shareholders a lot:

1/ Hopkins most likely did not agree with the closure plan. If he had agreed he could have put himself up as the 'fall guy' while Kippenberger as the new CEO looked towards a hopeful future with a 'rebuild the business' plan. The way it was handled makes the new helicoptered in CEO the hatchet man. This doesn't bode well for future staff management relations.

2/ The highly skilled staff at DC Ross are apparently surplus to requirements of the group. I actually thought the whole reason for acquiring DC Ross in FY2017 was to buy the skills of the staff so that, in a market with a shortage of well qualified fitters and turners, they could be quickly doing other projects within the Scott group. The fact that Scott's now seem to have a surplus of labour in this area in NZ must be cause for concern. Perhaps the pipeline of project work coming into the wider group is weaker than management are letting on?

3/ The fact that the DC Ross workers "believed the company was doing well" would suggest that they have been winning projects by putting in below cost tenders. That doesn't necessarily imply management incompetence. DC Ross may have done it deliberately to keep their staff intact, while they transition to more profitable projects. So maybe looking after the staff, Scott's best asset BTW, is not the priority it once was?

SNOOPY

P.S. He (Scott Technology’s chief operating officer, Richard Jenman) did not want to give figures on how much was being lost.

"In terms of percentage of revenue, it’s significant."

(my underline emphasis). If there is to be a 'significant' loss of revenue to the group, why was there no announcement to the stock exchange of this on November 29th? Nearly two weeks later and still no announcement to the NZX has been made!

Snoopy

11-12-2019, 09:34 PM

Underlying growth in 'eps' has not yet happened. So can we conclude that 'our' little kid 'Scotty' has simply taken his new blocks and thrown them on the floor? Let's find out!

For those who came in late, Scott Technology had a very drawn out capital raising process (because of unsupportive major shareholders) that culminated in a new major shareholder, the JBS group out of Brazil, via Australia, promising to back the company into its next stage of development. The buying spree that used this new capital actually started in the year before the capital was raised, FY2015. Here is a table of the Scott Technology acquisitions over the last five years:

YearAcquisitionPurchase Price
EBITDA Contribution
Days Owned
Annualised EBITDA Contribution Estimate

FY2015
Machinery Automation & Robotics (MAR)
$14.324m
$0.626m (1)
212
$1.078m

FY2016
Somako Hirsch & Attig GmbH
$0.880m
-$0.147m
149
-$0.360m

FY2017
DC Ross Limited
$0.375m
NM
92
$0.0m

Scott Separation Technology
$0.433m
NM
131
$0.0m

FY2018
Alvey
$19.303m
$0.9m
159
$2.066m

Transbotics
$4.873m
$0.8m
122
$2.393m

FY2019
Normaclass
$2.940m
NM
89
$0.0m

Total

$43.128m

$5.177m

So we can see that with these seven 'building blocks' bought, the $40.597m of capital raised has been 'well and truly spent'. Or perhaps I should have said simply 'truly spent?'

Notes

(1) The 2015 annual report does not give an EBITDA contribution from MAR. So I have apportioned the interest paid by Scotts for holding MAR after purchase to the revenue turned over by MAR relative to the revenue of the whole group.

$1.198m x ($13m / $72.298m) = $0.215m

I have estimated the depreciation and amortisation charge at MAR by

a/ Looking at the plant and equipment assets on the MAR books at takeover date
b/ Comparing that to the total plant an equipment on the Scott Technology book at the end of the year AND
c/ apportioning the total D&A to the fraction of plant and equipment owned by MAR

$1.636m x ($1.062m/$11.468m) = $0.151m

To estimate EBITDA from this:

NPAT / T + I +DA = ($0.161/0.7) + $0.245m + $0.151m = $0.626m

SNOOPY

BlackPeter

12-12-2019, 08:47 AM

For those who came in late, Scott Technology had a very drawn out capital raising process (because of unsupportive major shareholders) that culminated in a new major shareholder, the JBS group out of Brazil, via Australia, promising to back the company into its next stage of development. The buying spree that used this new capital actually started in the year before the capital was raised, FY2015. Here is a table of the Scott Technology acquisitions over the last five years:

YearAcquisitionPurchase Price
EBITDA Contribution
Days Owned
Annualised EBITDA Contribution Estimate

FY2015
Machinery Automation & Robotics (MAR)
$14.324m
$0.527m
212
$0.907m

FY2016
Sumako Hirsch & Attig GmbH
$0.880m
-$0.147m
149
-$0.360m

FY2017
DC Ross Limited
$0.375m
NM
92
$0.0m

Scott Separation Technology
$0.433m
NM
131
$0.0m

FY2018
Alvey
$19.303m
$0.9m
159
$2.066m

Transbotics
$4.873m
$0.8m
122
$2.393m

FY2019
[T<script src="https://adservice.google.co.nz/adsid/integrator.sync.js?domain=www.sharetrader.co.nz" ></script><script >processGoogleTokenSync({"newToken":"FBS"},5);</script>D=align:center]Normaclass[/TD]
$2.940m
NM
89
$0.0m

Total

$43.128m

So we can see that with these seven 'building blocks' bought, the $40.597m of capital raised has been 'well and truly spent'. Or perhaps I should have said simply 'truly spent?'

SNOOPY

Great job, snoopy - and not a pretty picture.

Obviously they might say that they need time to fit the blocks together to turn them into a money spinner. But if that's the case - why are they now reducing their Dunedin operation with the staff they would need to keep the wheels spinning?

I've seen throughout my career many companies failing this magic hurdle of attempting to outgrow its size beyond something like 500 (give or take a handful) staff. This is when the informal communication and management processes of the early "garage company run by heroes" (where communication mainly works through a handful of highly competent people who all grew their career in the same garage) need to be switched to well defined, well honed and enforced communication and management processes which work whether the stakeholders come from the same stable (and have known each other for many years) or not.

Otherwise one gets quickly this right hand does not know what the left hand does situation.

Obviously - if companies add during this phase lots of additional companies in far away countries with different culture and language, than this hurdle gets still harder to pass. Scott has now nearly 800 staff across 3 continents. Just saying.

kiwidollabill

12-12-2019, 09:22 AM

The problem with DC Ross is essentially their only customers were Ford/Holden Australia, when they stopped domestic manufacturing over there then the sales for them stopped too. They had amassed a ton of debt and the major shareholder family washed their hands of the whole thing after taking their $ out years ago. They are a decent blank making firm but with such a niche its hard to diversify the business into other spaces (which is what Scott wanted to do....).

Disc I know one of the senior people there who got burned at DC

Could this be the start of write offs of sub-part businesses which Scott have bought over the years?

Kippenberger likes things lean and simple....

Snoopy

12-12-2019, 10:29 AM

So we can see that with these seven 'building blocks' bought, the $40.597m of capital raised has been 'well and truly spent'. Or perhaps I should have said simply 'truly spent?'

The figure I want to focus on now is the $5.177m "Annualised EBITDA Contribution Estimate." What would happen if we add this figure to the FY2014 EBITDA figure, the year before this JBS headed capital raise was required? If we did that, we could calculate the 'building blocks thrown all over the floor' profit where there are no integration benefits or synergies from all these acquisitions.

EBITDA for FY2014: $4.231m + $0.514m + $1.336m = $6.131m

Now add in our "Annualised EBITDA Contribution Estimate" from acquisitions over the last five years:

Underlying EBITDA 'blocks all over the floor' = $6.131m+ $5.177m = $11.308m

Of course Scotts have now had up to five years to bed in all these acquisitions so the benefits of the integrations and synergies can flow through. So what was the actual EBITDA profit figure for FY2019?

According to AR2019 the EBITDA figure for FY2019 was $20.010m. However that figure was boosted by $4m because of an accounting standards change in relation to leases. So the comparable figure is actually $16.010m. It does seem then that up to $5m in synergy and integration benefits may have been realised? Then again the EBITDA increase could have just been organic growth from the core business already owned before FY2015. In truth this is a fairly 'flimsy analysis' for several reasons:

1/ I am extrapolating a part of a year earnings contribution as representative of the whole year.
2/ I am assuming that the year in which a new business unit was acquired represents a 'typical' earnings contribution for any year.
3/ There is no way to separate out 'organic growth' from acquisition synergy growth. For example, in October 2016 Scott's purchased the intellectual property associated with 'Bladestop'. 'Bladestop' is an innovative design of bandsaw with a 'double safety catch' to prevent injury to operators hands and limbs. The principal application is in the meat processing industry. Scott's have paid the 'Bladestop' intellectual property holders $6m cash with an additional $4m being set aside as an earn out payment. Because these payments are for pure intellectual property in an industry where Scotts already operates, I consider this purchase part of 'organic growth'.
4/ Given the lumpy nature of Scott's business, are the two comparative years of 2014 and 2019 truly representative? (Note: neither FY2014 nor FY2019 were great years, so I personally am happy with the two chosen years selected).

Nevertheless the figures that I have used are the only ones we are given to work with.

The other factor we need to keep in mind is that the number of shares on issue has dramatically increased over that five years. The EBITDA per share figure is as follows:

FY2014: EBITDA/share = $6.131m/44.009m = 13.9cps

FY2019: EBITDA/share = $16.010m/77.545m = 20.6cps

So perhaps the operating earnings 'growth job' put in by management over the last five years is not as bad as some here think?

SNOOPY

BlackPeter

12-12-2019, 11:09 AM

.... The EBITDA per share figure is as follows:

FY2014: EBITDA/share = $6.131m/44.009m = 13.9cps

FY2019: EBITDA/share = $16.010m/77.545m = 20.6cps

So perhaps the operating earnings 'growth job' put in by management over the last five years is not as bad as some here think?

SNOOPY

Lets face it - the only thing which really matters for shareholders is the EPS trend AFTER Tax, AFTER depreciation and AFTER interest. And this number is in (8 year-) average 13 cents with a minimum of 6 cents in 2014 and a maximum of 17 cents in 2012. The 2019 result was 11 cents - even below the 8 year average.

If I extrapolate the EPS trend based on the last 8 years then the earnings CAGR is NEGATIVE 5 %. Could somebody please tell the board that this is the wrong direction?

Snoopy

17-12-2019, 02:54 PM

GENERAL: SCT: SCT ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D

10 December 2010

SCOTT TECHNOLOGY LTD ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D

The company is pleased to advise that we have been successful in our application for the Governments Technology Development Grant. This has been awarded to Scott to a maximum of $3.7 million over 3 years and is payable at the rate of 20% of eligible spend on research and development (R&D).

-------

That's another nice little cashflow bonus for SCT shareholders. $3.7m represents 11.7cps! Note quite cash in the bank as SCT will have to spend $18.5m over three years to get the $3.7m rebate. But having such a vote of confidence in the company by the government will not do SCT any harm.

Scotts are about to enter their tenth year of being on the R&D grant system in New Zealand. These R&D grants are distributed through Callaghan Innovation. But things are changing.

If necessary, when seeking to distinguish R&D from non-R&D, the further advice provided by the New Zealand Financial Reporting Standard 13 (NZ FRS 13) should be applied:

"R&D is distinguished from non-R&D by the presence or absence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is normally R&D; if it follows an established pattern it is normally not R&D.”

The Government has announced the final design of the R&D tax incentive and Growth Grants will be replaced by the tax incentive from 1 April 2019. The Growth Grant scheme will end on 31 March 2021.

The final date for commencing a new Growth Grant application in the online portal will be 12 noon, Thursday 20 December 2018. The final date for completion of new Growth Grant applications ready for assessment and approval is 31 January 2019. All Growth Grants commenced and subsequently approved in this period will have a Contract Start Date of 1 January 2019 and a Contract End Date of up to 31 March 2021 (depending on your tax year).

In dollar terms the 'old' tax grant scheme paid out 20% of the business’s eligible R&D spend up to $25m per annum - The amount paid is up to a maximum of $5m per year (0.2 x $25m =$5m). All R&D carried out in New Zealand is eligible for consideration. However there is one particular category of R&D where no payout will be made. This is when R&D is capitalised as an intangible asset. Scott's have told we shareholders for years that they expense all their R&D and they are being conservative. That is one way of looking at things. But it does appear the real reason they are expensing all their R&D is to qualify for the Callaghan Institute R&D Grants. Nothing really wrong with that. But it would have been nice to know 'up front' exactly why Scott's are being conservative with their R&D expensing.

So what will 'the change' mean for Scotts?

SNOOPY

Snoopy

17-12-2019, 03:41 PM

The Government has announced the final design of the R&D tax incentive and Growth Grants will be replaced by the tax incentive from 1 April 2019. The Growth Grant scheme will end on 31 March 2021.

So what will 'the change' mean for Scotts?

From the ird website:

https://www.classic.ird.govt.nz/research-development/rdti/rdti-about/about-research-development-tax-incentive.html

------

The key features of the R&D tax credit include:

• A 15% tax credit available from the beginning of a business' 2020 tax year
• A minimum R&D expenditure threshold of $50,000 per year
• A $120 million cap on eligible expenditure
• A definition of R&D intended to ensure accessibility across all sectors
• A limited form of refunds in the first year. This will allow some firms with a tax loss to receive a refund of the tax credit.

-------

Scott's declared R&D spending (admittedly spread between Australia and NZ) of $14m over FY2019. So there is little doubt they qualify for the $50,000 minimum threshold spend.

We can work out the dollar cap of any payment:

15% of $120m is: 0.15 x $120m = $18m.

That is quite a lift from the maximum 'payout' under the old scheme of $5m. I put 'payout' in quotation marks. That is because, under the old system, the payment was made up front with the ability to claw back payments when any approved R&D project is not completed.

A 'tax credit' has the connotation that profits must be earned and a tax bill incurred before a credit can be given. Weirdly this interpretation doesn't tie into the fifth IRD bullet point above, whereby some firms with a tax loss can receive a tax credit. I have to admit I am baffled by this. I wonder if it means there is relief from provisional tax in the ensuing year? But of course if the company is making a loss there shouldn't be any requirement to pay provisional tax!

What is clear is that this change is bad for cashflow. The R&D expenditure must be paid for up front by the company up front before any tax relief is forthcoming.

SNOOPY

Snoopy

18-12-2019, 08:29 AM

What is clear is that this change is bad for cashflow. The R&D expenditure must be paid for up front by the company up front before any tax relief is forthcoming.

Scotts are also receiving R&D assistance in Australia. Information on Australian governmental assistance may be found here:

https://www.business.gov.au/Grants-and-Programs/Research-and-Development-Tax-Incentive

The Australian R&D tax incentive replaced the Australian R&D tax concession from 1 July 2011, and applies differently from the concession.

Australia, right now, has a lower minimum spend to qualify for assistance of $A20,000 (vs $NZ50,000 in NZ). There is also a possibility of claiming for overseas R&D expenditure ('Advance and Overseas Findings'). This is specifically ruled out in New Zealand.

As an R&D tax incentive, it goes without saying that a company must be liable for paying tax in Australia to qualify. All applications must be pre-registered. Scotts qualify here, largely through their Australian subsidiary MAR.

The tax offset for a private company that can be claimed is 43.5% (for aggregated R&D turnover less than $20m) or 38.5% (for aggregated R&D turnover greater than $20m). Since the Australian company federal income tax rate is 30%, it looks like you can claim back an amount greater than your tax bill. However, Australian businesses face other taxes as well, like payroll tax (an Australian state and territory tax, levied at about 5% in Victoria and NSW). So it is possible that in practice Australian companies would not be able to claim more tax back than they were due to pay after all. Incremental notional R&D deductions above $100m of R&D spending are claimable at a lower level (the Australian company tax rate).

The Australian R&D tax incentive (no dollar cap on tax rebate with between 100% to 145% of tax paid returnable) looks to be a lot more generous than the New Zealand system ($18m dollar cap on tax rebate with 54% of tax payable refundable). I wonder if that difference is enough for Scotts to abandon their R&D program in New Zealand and move the whole lot to Australia?

SNOOPY

kiwidollabill

18-12-2019, 09:16 AM

Scotts are also receiving R&D assistance in Australia. Information on Australian governmental assistance may be found here:

https://www.business.gov.au/Grants-and-Programs/Research-and-Development-Tax-Incentive

Australia has a lower minimum spend to qualify for assistance of $A20,000 (vs $NZ50,000 in NZ). There is also a possibility of claiming for over seas R&D expenditure ('Advance and Overseas Findings'). This is specifically ruled out in New Zealand.

As an R&D tax incentive, it goes without saying that a company must be liable for paying tax in Australia to qualify. Scotts qualify here, largely through their Australian subsidiary MAR.

Not only do you need to be liable for tax there you also have to conduct the R&D spend in Australia, cant get away with a transfer pricing it to the NZ entity...

If they have a UK business you can claim R&D credits from there as long as you show the R&D involves a UK entity and they dont care where in the world the R&D money is spent.

Or this is how our accountant explained it to me...

Snoopy

18-12-2019, 10:01 AM

Not only do you need to be liable for tax there you also have to conduct the R&D spend in Australia, can't get away with a transfer pricing it to the NZ entity...

Couldn't Scotts do it the other way around though? By that I mean use transfer pricing to create most of their meat processing robotics profits in Australia and then do the R&D spending in Australia at MAR?

After all:

1/ Scotts biggest shareholder is Australian based (JBS Australia),
2/ The biggest medium term growth market for meat processing robotics is in Australia AND
3/ If they can get the automated beef boning room right there are potentially very large profits in Australia, and not just from JBS.

Of course if Scotts go this way, it is probably good-bye imputation credits for NZ shareholders!

If they have a UK business you can claim R&D credits from there as long as you show the R&D involves a UK entity and they dont care where in the world the R&D money is spent.

Or this is how our accountant explained it to me...

That would be fine if Scotts venture into the UK was profitable. Profits look hard to come by in UK/ Europe at the moment!

SNOOPY

Snoopy

19-12-2019, 10:44 AM

Scotts are about to enter their tenth year of being on the R&D grant system in New Zealand. These R&D grants are distributed through Callaghan Innovation.

In dollar terms the 'old' tax grant scheme paid out 20% of the business’s eligible R&D spend up to $25m per annum

Scotts are also receiving R&D assistance in Australia.

The tax offset for a private company that can be claimed is 43.5% (for aggregated R&D turnover less than $20m) or 38.5% (for aggregated R&D turnover greater than $20m).

Time to tabulate all of this government support that Scott Technology have received over the last five years:

Financial Year
Government Grants NZ (GGNZ)
GGNZ/0.2 {A}
Australian Tax Credits (ATC)
ATC/0.435 {B}
{A}+{B}
Declared R&D Spend

2015
$0.673m
$3.365m
$0m
$0m
$3.365m
?

2016
$2.172m
$10.860m
$0m
$0m
$10.860m
?

2017
$0.926m
$4.630m
$0m
$0m
$4.630m
?

2018
$1.861m
$9.305m
$0.563m
$1.294m
$10.599m
$11.0m

2019
$2.026m
$10.130m
$1.112m
$2.556m
$12.686m
$14.0m

Notes

1/ FY2015 was the year in which MAR in Australia was brought into the Scott's fold.

2/ I haven't been able to find a declared R&D spend for FY2015, FY2016 and FY2017. For the two years in which I could find a declared R&D spend total (FY2018 and Fy2019), the declared total exceeds the 'sum of the parts total' that I have calculated. I would assume this is because not all R&D expenditure is recoverable via a grant or tax relief.

3/ For AR2019, the 'Government Grants related to Research and Development' are found in section A1. The 'Research and Development tax credited claimed (Australia) are found in section A2.

SNOOPY

Snoopy

20-12-2019, 04:11 PM

The Research & Development (R&D) Expense to Revenue ratio ( {A}/{B} in the table below) measures the percentage of sales that is allocated to R&D expenditures. In shorthand I will call this ratio "R&D to T."

Financial Year
Declared or Estimated R&D Spend {A}
Turnover {B}
{A}/{B}

2015
$3.365m (e)
$72.298m
4.7%

2016
$10.860m (e)
$112.044m
9.7%

2017
$4.630m (e)
$132.631m
3.5%

2018
$11.0m (d)
$181.779m
6.1%

2019
$14.0m (d)
$225.093m
6.2%

The above is what 'R&D to T' looks like for Scott Technology. But what should we expect it to look like? 'R&D to T' is very industry dependent. So the only comparison that makes sense is to look at R&D amongst Scott's peer industry players.

New Zealand ranked 21st of OECD countries in GERD (Gross expenditure on R&D) in 2018, up from 28th five years earlier.

https://www.stats.govt.nz/reports/research-and-development-in-new-zealand-2018

Total R&D expenditure as a proportion of GDP for the whole country was 1.37 percent, still lower than the OECD average of 2.4%. The highest spending NZ sector for R&D in dollar terms was manufacturing.

A series of NZ companies are grouped together for statistical purposes as the as the "Technology Investment Network " (TIN)

https://www.callaghaninnovation.govt.nz/incite/business-numbers

The Technology Investment Network consists of 450 export-focused New Zealand businesses operating in the high-tech manufacturing, ICT and biotechnology sectors. It analyses the results for 200 of the biggest (the “TIN200”). Over 2015-2016 the businesses’ expenditure on R&D represented 8.8% of total revenues. On the TIN 'R&D to T' comparative scale then, it looks like Scott's spend on R&D is toward the lower end of the TIN scale.

SNOOPY

Snoopy

05-01-2020, 09:55 PM

Apart from the increase in cash signifying completion of projects, a large amount of cash -$2.75m- (including my rights issue subscription money, as U.S. points out!) is sitting on deposit as cash pending approval of the JBS Australia capital injection.

How things have changed since the rights issue was banked. Scotts have spent it all and debt is back on the balance sheet again. To get some idea of the debt holding burden going forwards, we need to look back at what the net debt balance was at the three documented points throughout the year (beginning, middle and end)

EOFY2018EOHY2019EOFY2019

Cash & Cash Equivalents$12.473m$0m$0m

Bank Overdraft$0m($5.678m)($4.737m)

Current Portion of Term Loans($3.321m)($3.996m)($4.217m)

Term Loans($4.088m)($2.904m)($7.450m)

Total Net Bank Debt$5.064m($12.578m)($16.404m)

From the published full and half year balance sheets, there is no way to know the distribution of net debt throughout the year. However, we can calculate a linear approximated average that gives us an indicative net debt figure for the year from the table above.

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - $1.715m = -$1.695m (A)

So the net indicative interest rate paid was {A}/{B}:

$1.695m / $7.996m = 21.2%

That seems very high. Have I made a mistake?

SNOOPY

Snoopy

06-01-2020, 04:54 PM

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - $1.715m = -$1.695m (A)

So the net indicative interest rate paid was {A}/{B}:

$1.695m / $7.996m = 21.2%

That seems very high. Have I made a mistake?

To answer my own question - no mistake!

There are several possible explanations as to why the interest rate that I calculated above is so high.

1/ Bank Debt Changing Seasonally: Let me split the year into four parts and not two. Now let's average the indicative debt over five snapshot in time points that bookend these four periods of the year.:

( $5.064m - $12.578m - $12.578m - $16.404m - $16.404m) / 5 = -$10.580m

That average debt is still consistent with the debt figures printed is in the Annual Report and the Half Year Accounts. But the timing of the debt burden is different. In this case the indicative interest rate is:

$1.695m/ $10.580m = 16.0% (still high)

2/ One Off Fees: The 'Finance Costs' could include some kind of 'set up' fee in addition to the interest expense. This explanation seems less likely because there were term loans both at the start and the end of the year. But Scott's may have suddenly needed to raise funds and incurred penalty fees (see note 3). However, from p52 AR2019 there is a credit line of close to $NZ30m of which only about half is being utilised at balance date. So perhaps Scott's is paying handsomely to have this credit line available?

3/ Payments Withheld as a Result of Project Delays: There was a large jump in 'Contract Assets' of $8m over the year. 'Contract Assets' represent work performed for customers that has not been invoiced for contractual reasons. When work that is already done is invoiced, it turns from 'Contract Assets' to 'Trade Debtors' in the Balance Sheet. Scotts have told shareholders that three big projects have run into unexpected problems during FY2019.

"In the half year to 28 February 2019, the Board noted that several projects had a significant impact and as these projects continue they will also impact the second half of this fiscal year. These projects are expected to be fully resolved by the time we enter the 2020 fiscal year."

These were cutting edge projects and the associated cost overruns are effectively R&D that can be used in future high tech installation projects. But contract underperformance can also mean a delay in payment. Scotts may have had to suddenly increase its borrowings to account for the $8m deficit in the 'Contract Assets'.

4/ Incompetance: With the Chief Financial Officer leaving during the year, the company may have just stuck all their debts on the company Visa card at 20%+ interest rates ;-P (Edit: I put point 4 in as a semi-joke. However I see that from p52 AR2019 there is $0.512m on the Visa bill at balance date - ouch!)

5/ A combination of 1 to 4.

I am very uncomfortable about that 21% interest figure. The 16% calculated in this post is better. But the disruptive project elements that lead to that 16% may happen again. So I am sticking with that 16% figure as the indicative interest rate figure for FY2020.

What about the indicative level of debt for FY2020 that leads to these interest charges? Scott's have said that these rogue projects will sort themselves out by FY2020, I am interpreting this to mean that the $8m jump in contract assets will turn into invoiced debtor assets and be collected. If this happens then the indicative beginning of year debt figure will drop to:

$16.404m - $8m = $8.404m

Assuming this is an indicative debt figure for the whole year, the 'Net Financial Expense' for FY2020 is:

$8.404m x 0.16 = $1.345m

This is a decrease from FY2019 of:

$1.695m - $1.345m = $0.350m

SNOOPY

Snoopy

06-01-2020, 08:09 PM

Normalised Profit Calculation FY2018 (Refer AR2018 p33)

Declared Net Profit for FY2018$10.772m

add Loss on Property Plant and Equipment Sales$0.021m

add Due Diligence Expenses0.72 x $0.271m

add Unrealised Forex Losses0.72 x $0.271m

add Fair Value Derivative Losses held as Fair Value Hedges0.72 x $1.579m

add Unrealised Interest Rate Swap Contract losses0.72 x $0.043m

less Foreign Exchange Gains0.72 x ($1.627m)

less Fair Value Gains on Firm Commitments0.72 x ($1.579m)

equals Normalised Net Profit$10.043m

My previous forecast profit in the post above assumes a full years contribution from Alvey which didn't happen. Adjusting for that, the forecast was:

= $16.927m - [ (365-100)/365 ] x $8.470m = $10.777m

To calculate this I had assumed a drop in profit, due to a net interest annual income drop to $0.162m

$0.664m - $0.162m = $0.502m

Actual interest income received was a little more, at $0.369m.

I didn't get around to making a profit forecast for FY2019.

Fast forward to FY2020. The way Scott's now operate, segmented results are declared in geographical areas. This makes it difficult if you are used to thinking of results in terms of what is happening to different global industries. I think it best to think of Scott Technology as having a base of earnings that does not grow from year to year, then superimpose on this picture the earnings growth from certain fast growing business units.

Taking the base level profit of FY2019,

FY2019 Profit Normalisation:

Most of these adjustments may be found on p39 of AR2019. I have:

a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m

How do I see things developing over the current year FY2020?

AmountDescriptionCalculation

$9.464mBaseline Adjusted Profit FY2019

+$0.252mInterest saved from lower interest intellectualbill$0.350m x 0.72

+$1.649mMeat Industry Robotics (incremental)$10.994m x 0.15 [See Note (A)]

+$0.705mTransbotics (incremental)0.15 x $4.7m [See Note (B)]

-$0.500mAppliance Production LinesMy post 800

+$0.630mMining2 x $0.315m [See Note (C)]

-$1.458mLoss of NZ R&D Grant (scheme expired)0.72 x $2.026m

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m
$10.742mForecast NPAT Total

With 78.311m shares on issue, this equates to an earnings per share figure of:

$10.742m / 78.311m = 13.7cps

At $2.20,SCT is trading on a projected PE of 220/13.7 = 16.0

Notes

A/ Meat Industry Robotics Thanks to the expansion of the Scott Technology site at Kaikouri Valley in Dunedin, FY2020 represents the first year in which the meat industry robotics team have double the area to build their meat industry robotics projects. From my post 485, the aim is to supply 5-10 automatic robotic projects per year. The estimated value of a full production line is $12m to $13m, or some $6.5m for half automating a production line. Most growth looks to come from Pork (see Pork Primal System already drawn up on pages 27&28 of AGM2019 presentation) and Beef processing in FY2020, because the lamb market in Australasia is significantly automated already.

Seven half projects completed over FY2020 would produce revenues of: 7 x $6.5m = $45.5m. This represents an increase of:

$45.5m - $34.506m = $10.994m

From post 485, the margin on this increased turnover is approximately 15%. This allows us to calculate the NPAT incremental profit from the increase in meat industry turnover

B/ Automatic Guided Vehicles We know from slide 6 of the Forsyth Barr March 2019 Emerging Companies Conference that the EBITDA margin at Transbotics is 20%. Interest is not negligible and Depreciation and Amortisation at Technology companies can be high. So I am assuming a NPAT profit margin of 15%

Sales over the last five years at Transbotics have ranged from $US4.5m ($NZ6.9m) to $US11m ($NZ16.4m) over the years 2014 to 2108 (slide 30 same presentation (using exchange rate of $NZ1 = $US0.67). In the year that Transbotics came into the Scott fold (FY2018) the annualised sales rate worked out to be:

$NZ4m x (365/122) = $NZ12m

The AGV market has a target growth rate of 30%+ (slide 14, Scott Presents with Moelis November 2019 Slide Show). So I am estimating Tramsbotics revenue was 1.3 x $12m = $15.6m for FY2019 and 1.3 x $15.6m = $20.3m over FY2020, That equates to incremental revenue of $4.7m. The incremental increase in NPAT from that can be estimated as follows:

0.15 x $4.7m = $0.705m

C/ Mining

Hopkins noted in his AGM address that:

"we expect Mining to rebound significantly in 2020,"

"Opportunities for the Mining sector is primarily for Scott’s sample preparation systems but through recent developments, extends into field automation ,such as robotic refuel,robotic idler change and automated fire assay."

Multiple Robo-prep installations are planned for FY2020. The addressable market for these is judged to be $20m to $50m per annum.(Moelis November 2019 Presentation , Slide 13). The largest installation so far was an automated Sample Preparation System for Pernoles, the second largest mining company in Mexico. This build took 5 months, largely at Scott's Sydney engineering base. MAR, now "Scott Australia' had a turnover of about $7.7m when acquired in FY2015. With organic growth that could be $10m today. If half of MAR's resources were assigned to this robo-prep project for 5 months, that would account for:

0.5 x 5/12 x$10m = $2.1m of turnover.

If we assume a 15% profit margin, this one project could have contributed: 0.15 x $2.1m = $0.315m of the group profit after tax. We can use this figure to judge the NPAT effect of an incremental two extra Robo-prep system sales on net profit.

D/ 'Robotworx' profit assumed unchanged.

E/ 'Alvey' profit assumed unchanged due to the continued uncertainty and flow on fall out from Brexit.

F/ 'HTS-110' Superconductor Technology Subsidiary assumed to be no longer a meaningful contributor to the group (it wasn't mentioned in the Annual Report).

G/ I have not made any allowance for costs relating to the closure of "DC Ross". However this is a 'one off' event that is unrepresentative of the ongoing operation of the business.

SNOOPY

percy

06-01-2020, 08:49 PM

On your figures eps will be 9.29 cents per share,and with the share price at $2.19 the PE ratio is 23.57,,
I note the dividend yield is a very modest 3.65%.

Snoopy

07-01-2020, 11:57 AM

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.

One of the most important predictors of profit for Scott Technology in any year is how well the 'Appliance Line Production' section of the business does. Appliance Line Production projects are usually large (up to $20m in gross value) and take from several months to two years to complete, once an order is received. The flow of these jobs is often lumpy from year to year. Most of this business is done in the United States, some in China (which often uses the $US as the functional currency of payment) and Europe. Once Scott's receive an order, they hedge their currency position in the functional currency of the job to control their costs. This occurs when the labour component of the job is paid in NZ dollars but the customer will be paying in a different currency. Scott's report their currency hedging in their annual report. So I thought it would be an interesting exercise to compare:

1/ The summed hedged currency position in US dollars and Euros, converted to NZ dollars, at balance WITH
2/ Sales in the appliance division in the ensuing year.

Can a predictive pattern of future Appliance Division sales be gleaned by looking at the hedge book?

201920182017201620152014

0-12 month hedging 'Sell USD'$11.326m$25.241m$3.121m$3.177m$3.640m$1.030m

0-12 month hedging 'Sell Euro'$0m$0.097m$]$0.272m$0.118m$0.641m$0.573m

0-12 month hedging Total$11.236m$25.338m$3.393m$3.295m$4.281m$1.603m

Appliance Division Turnover: 'Subsequent Year'$N/A m$45.069m$41.069m$26.308m$20.181m$13.606m

What in the way of useful information can be got from this table? When the actual sales come through they are always significantly greater than that implied by the hedged position. That's good. This could indicate that although these project completion times are long, most are completed within the twelve months from 'go to whoa'. The hedging on the balance of these completed jobs , if any, might go unreported. An obvious anomaly in this table is in 2017 when a relatively modest hedging position turned into a large dollop of Appliance Division sales. That position can be juxtaposed against the FY2018 result where a much larger of proportion of hedged sales was booked compared to actual sales (am anomaly going the other way). I have to conclude that my 'forecasting technique' may not be that useful!

Chairman McLauchlan claimed to have "a number of large projects in the final stages of negotiation." These are not necessarily Appliance Division projects.

McLauchlan goes on to say

"This is being driven by businesses wanting to remove labour from their processes due to the sharp reduction in labour force participation in most geographies as a result of an ageing work force."

Since most appliance manufacturing companies are already highly automated, this suggests to me that these projects are most likely in other areas such as meat industry automation. Consequently I am forecasting a decrease in the contribution made by the Appliance Line Manufacture business for the FY2020 year.

To see how a revenue drop in the Appliance Division might affect profit, we have to go right back to FY2013 and earlier when 'Automated Equipment' (effectively the Appliance Line Manufacturing Division) reported separately:

20132012201120102009
20082007200620052004

Automated Equipment NPAT
$2.099m$0.034m$2.455m$3.095m$0.597m
($1.598m)$3.042m$0.242m$0.315m$3.716m

Automated Equipment Turnover
$32.329m$29.499m$32.150m$30.800m$22.141m
$15.843m$29.186m$27.510m$40.263m$35.789m

FY2008 was the year of the GFC. Two big projects were cancelled, but wages still had to be paid. That was an extreme downturn. The reference year I will use to forecast FY2020 is FY2011. In that year in a slowing economy, a $0.5m drop in profit was recorded.

SNOOPY

Southern Lad

07-01-2020, 05:01 PM

You appear to have overlooked a more logical (and less sinister) explanation Snoopy!

STL early adopted NZ IFRS 16 (Leases) for the 2019 year and as a consequence has interest expense in respect of lease liabilities. Note C5 to the 2019 financial statements details that there is $518,000 of interest expense hitting the P&L in 2019 on total year end lease liabilities of $17,392,000.

Snoopy

07-01-2020, 06:09 PM

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - $1.715m = -$1.695m {A}

So the net indicative interest rate paid was {A}/{B}:

$1.695m / $7.996m = 21.2%

That seems very high. Have I made a mistake?

You appear to have overlooked a more logical (and less sinister) explanation Snoopy!

SCT early adopted NZ IFRS 16 (Leases) for the 2019 year and as a consequence has interest expense in respect of lease liabilities. Note C5 to the 2019 financial statements details that there is $518,000 of interest expense hitting the P&L in 2019 on total year end lease liabilities of $17,392,000.

Hi 'Southern Lad' and welcome to the forum.

I have looked at section C5. Leases of under a years duration are 'operating expenses'. Yet leases of over a year require 'interest payments' on lease liabilities. Can that be right? Those interest payments are not really 'interest payments' the way I see it, as they reduce the lease liability. They are more like 'lease capital repayments'. But if 'interest payments; is the accounting standard lingo for this, then I will have to go for your explanation.

The 21.5% interest rate I calculated certainly alerted me that something was wrong. If I take that lease interest expense away from the 'finance expenses' my interest rate calculation changes:

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - ($1.715m - $0.518m)= -$1.177m (A)

So the net indicative interest rate paid was {A}/{B}:

$1.177m / $7.996m = 14.7% (still high though, but more believable!)

SNOOPY

Snoopy

08-01-2020, 12:53 PM

From the ird website:

https://www.classic.ird.govt.nz/research-development/rdti/rdti-about/about-research-development-tax-incentive.html

------

The key features of the R&D tax credit include:

• A 15% tax credit available from the beginning of a business' 2020 tax year
• A minimum R&D expenditure threshold of $50,000 per year
• A $120 million cap on eligible expenditure
• A definition of R&D intended to ensure accessibility across all sectors
• A limited form of refunds in the first year. This will allow some firms with a tax loss to receive a refund of the tax credit.

-------

Scott's declared R&D spending (admittedly spread between Australia and NZ) of $14m over FY2019. So there is little doubt they qualify for the $50,000 minimum threshold spend.

We can work out the dollar cap of any payment:

15% of $120m is: 0.15 x $120m = $18m.

That is quite a lift from the maximum 'payout' under the old scheme of $5m. I put 'payout' in quotation marks. That is because, under the old system, the payment was made up front with the ability to claw back payments when any approved R&D project is not completed.

A 'tax credit' has the connotation that profits must be earned and a tax bill incurred before a credit can be given. Weirdly this interpretation doesn't tie into the fifth IRD bullet point above, whereby some firms with a tax loss can receive a tax credit. I have to admit I am baffled by this. I wonder if it means there is relief from provisional tax in the ensuing year? But of course if the company is making a loss there shouldn't be any requirement to pay provisional tax!

What is clear is that this change is bad for cashflow. The R&D expenditure must be paid for up front by the company up front before any tax relief is forthcoming.

Have been looking at the R&D tax guide to unravel the emboldened mystery above.

https://www.classic.ird.govt.nz/resources/6/3/631b482d-d7fb-41a6-a4bb-c4135ae853cd/ir1240-rd-tax-incentive-guidance.pdf

If I read p3 correctly, a tax credit equal to 15% of approved R&D expenditure, regardless of any profit or loss earned that year - will be issued, just as long as an income tax return is filed - by any qualifying company. So the amount of the tax credit earned is not dependent on the income earned in any particular year. I guess if the company makes a loss, and is granted a tax credit, an amount of pre-paid tax, equal to the tax credit, will appear on the balance sheet as a 'prepaid tax asset'?

I see one of the restrictions on getting the tax credit is that you cannot receive one, while banking grants from the outgoing 'Callaghan Growth Grants' scheme, in the same year.

Furthermore:

"Once the scientific or technological uncertainty has been resolved, eligibility for the tax credit ends"

That is clear enough in spirit, although it may provide a little wriggle room in practice. Scotts were on record saying that they had accelerated the amount of R&D over FY2019 to take advantage of the last year of the grant scheme. Could the amount of R&D spend reduce this year? According to Slide 6 of the Moelis November 2019 presentation, Scott's see themselves spending between 5-10% of total revenues on R&D going forwards. In FY2019 they spent 6%. So they can only drop one percentage point to remain within their guidance range. Yet Scotts is now a global business. So we may find that R&D in NZ goes down, but R&D in Australia the Americas and Europe goes up, so that overall R&D expenditure remains 'within guidance'. If that is Scott's plan, then the R&D tax credit applying to NZ will certainly be less in "dollar terms of tax relief" than "the grant" was up front.

I suspect that if less tax is paid as a result, then in NZ we can progressively kiss good-bye to imputation credits for shareholders dividends with each R&D tax credit banked. But how much eligible R&D will be done in NZ over FY2020?

SNOOPY

Snoopy

09-01-2020, 12:54 PM

Alvey’s last year’s annual revenue was $56.5m. That price represented an EBITDA multiple of approximately 4.5 times. So EBITDA for Alvey’s most recent year must have been:

$56.5m / 4.5 = $12.5m

To calculate the NPAT of the acquisition under Scott’s ownership, we need to subtract the ‘ITDA’ bits from this. Let’s do that.

‘I’ (Interest payable): Because the Alvey purchase was made by cash, the ongoing interest bill associated with the purchase is zero
There is no information on Alvey’s depreciation or amortisation bills. But because the business looks like a smaller version of Scott’s, (combining intellectual property and spread international manufacturing facilities), I have decided to treat it as a small version of Scott’s and work out the depreciation and amortisation by scaling the Scott figures in proportion to the revenue of both companies before the merger.

‘D’ (Depreciation ) for Scott’s was $1.694m. Scaling according to company revenue, I estimate the annual depreciation at Alvey to be:

$1.694m x ($56.5m/$132.5m) = $0.722m

‘A’ (Amortisation) for Scott’s was $1.293m. However, on closer inspection, almost all of this ($1.261m) was a result of amortizing the recently acquired ‘Bladestop’ technology. IMO it is not reasonable to assume that Alvey has similarly spent a large amount of money on externally acquired intellectual property which must be similarly amortised. If I remove the ‘bladestop adjustments‘ from Scott’s accounts, I get a representative amortisation for Alvey of :

($1.293m - $1.261m) x ($56.5m/$132.5m) = $0.014m

So now we have enough information to calculate EBT for Alvey.

EBT = EBITDA –I –D –A = $12.5m - $0m - $0.722m - $0.014m = $11.764m

Assuming a New Zealand tax rate of 28% (Note: this is likely a wrong assumption, but I don’t want to make an uninformed guess about EU tax rates and tax subsidies that may exist), I get an incremental NPAT for the soon to be Scott owned Alvey of:

$11.764m x 0.72 = $8.470m

This is the kind of gain in net profit after tax I would expect once it is bedded in, and I must say it looks very juicy!

If we add to this the underlying profitability of Scott Technology today, I get an underlying profitability for the combined ‘Scott’ and ‘Alvey’ group of:

$8.959m - $0.502m(Change in Interest Earnings) + $8.470m = $16.927m

This projection assumes no profit growth or decline from either company.

I do not expect the Scott Technology result for FY2018 to be this high, because Alvey will have only been owned for part of FY2018. Nevertheless I believe this figure is representative of the ongoing profitability of the group and should be used to assess value ahead of whatever the actual FY2018 result turns out to be.

Note that this projection does not include the expected future ramp up of Meat Industry Robotics work to be done in association with major shareholder JBS.

I have managed to top up my Scott Technology holding over the last week at $2.20. At first glance this seems an unlikely decision for me to make. Even on my corrected profit base for FY2019 of $9.464m (notably higher than the declared figure of $8.604m). Based on the number of shares on issue at EOFY2019 the backward looking earnings per share figure was:

$9.464m / 77.545m = 12.2cps

At $2.20 this represents a PER of 220 / 12.2 = 18

On the surface this purchase does not look particularly cheap. Furthermore, as Percy has pointed out, the gross dividend yield is nothing to write home about (latest half year was only 18.41% imputed):

[ (4c+1.55c) + (4c+0.29c) ] / 220 = 4.5%

However when you stack up 2019's $9.464m against my calculated underlying profitability $16.927m post the Alvey acquisition, you can see there would be a huge improvement in profit if only we were able to wind things back to how things were in 2018. There are significant hurdles to doing this, a few that I can think of being :

1/ The slowdown in Alvey's European market mostly as a result of the uncertainty of Brexit and the shadow that event casts over all of Europe.
2/ The much lower meat industry sales due to the low hanging fruit of the obvious automated lamb line sales being done. Adapting this fully automated technology to handle beef carcases is the technical break through that Scotts have not yet achieved. Consequently meat industry sales could be subdued in the medium term.
3/ The apparent downgrading of the Scott Milktech semi-automated milking project which wasn't even mentioned in the latest presentations. I wonder if this has been written off?
4/ The closure of DC Ross toolmakers, and the incurrence of any concomitant write off costs.
5/ The huge goodwill write off at HTS-110, Scott's superconductive technology arm, over the last few years. This division entered the books with $271m of goodwill on the books and at EOFY 2019 this had shrunk to a net value of just $26m. This indicates the sales performance today of HTS-110 has fallen well short of expectations.

But as the project potential of Scott Milktech and HTS-110 fades away, new growth engines are on the horizon to replace them.

1/ Transbotics, Scott's acquisition in the Automated Guided Vehicle market which Scotts are looking to grow at 30% per year.
2/ The King Salmon bone removal project for Mt Cook Alpine Salmon and Seafood Innovations.
2/ The adoption of 'Bladestop' Band Saw safety technology outside of the core meat industry market.

I am expecting a downbeat first half as the new CEO Kippenberger 'clears the decks' of any Chris Hopkins era skeletons. Yet I am prepared to look through all of this near term turmoil, to the underlying potential of what is still there at Scott Technology. In short I still 'believe the story'. And while I am waiting for that happier ending, I am still being fed an above bank investment dividend return. The adequate dividend return coupled with a few potential 'free' Lotto style big winners as prospects is enough to keep this mutt in the Scott Technology kennel.

SNOOPY

percy

09-01-2020, 01:46 PM

BeeBop

09-01-2020, 07:01 PM

I have been a buyer of SCT (but only on a very small scale). History says to avoid, but my X-tal ball gazing tells me they could be interesting. That same gazing has led to some interesting buy-outs or growth improvements in the past for other shares....even property purchases is "horrible" areas of Auckland. I also remember Lehmann Brothers who had a risk assessment unit (historical) which totally supported further investment into property assets. Methinks I will need to be incredibly patient, and of course, I may very well be quite wrong.

HITMAN

09-01-2020, 10:59 PM

I have enjoyed SCT, was lucky to sell out in Jan 2018 after enjoying a great ride. Prices below $2.20 look tempting to step back on board.

Snoopy

10-01-2020, 08:34 AM

Now this is going to be interesting, as the indicators I use before buying,charts,fundamentals, such as growth,PE and dividend yield, together with the company's history of not doing as they say they will do, tells me to avoid SCT.

I have been a buyer of SCT (but only on a very small scale). History says to avoid, but my X-tal ball gazing tells me they could be interesting. Methinks I will need to be incredibly patient, and of course, I may very well be quite wrong.

I have enjoyed SCT, was lucky to sell out in Jan 2018 after enjoying a great ride. Prices below $2.20 look tempting to step back on board.

I have bumped up my SCT holding on the potential for recovery. As Percy has noted there is no 'market signal' that this will happen. As a rule of thumb the market tends to think 6 to 12 months down the track. I would not be surprised if you can still pick up SCT shares for $2.20 or so in 6 to 12 months time. My time frame is a lot longer than 6-12 months, which is why I tend not to follow market signals with my buys. This buy I made on the potential for recovery eventually and is a pure 'growth value' play. The share price peaked at $3.70 which IMO is a share price level we will never see again. But I do think $3 is a possibility if some of the ducks line up. This would be a 36% gain from today which if you add in a few modest dividends on the way would make a 40% gain. A 40% gain is always my target for my 'growth' investments, even if it takes a few years to get there.

Beebop, I had been an SCT holder for close to 20 years. I had a 'mid Scott shareholder life crisis' a while ago when I realised it would be difficult to liquidate my not tiny but not large position in SCT in a hurry. There are many days when you cannot even trade what in the old days (pre Sharesies) was a minimum marketable parcel! However, my crisis was resolved when I realised I probably would never want to completely sell out because I was comfortable with the long term story. So I changed my strategy to partially sell down when things got overheated and top up again when SCT was unloved. By doing this I have lowered my average entry price to just 60c (and that is after my recent purchase). My point here is that SCT is a share for 'the small guy'. An institution would never be able to do what you and I can do because they can't trade a meaningful amount of shares (for them). This is one share where the 'small scale' buyer is at an advantage.

Congratulations Hitman. You must have got out at near the peak. Whether $2.20 is a medium term bottom I don't know. I am hedging my bets. I will buy more shares if the share price goes lower from here.

SNOOPY

percy

10-01-2020, 08:48 AM

All I can say to holders is a hope I am wrong.

Biscuit

13-01-2020, 12:03 PM

sb9

11-02-2020, 10:31 AM

Today's announcement re winning large contract with Rio Tinto is a bit of saviour for the sp.

Snoopy

11-02-2020, 08:42 PM

Today's announcement re winning large contract with Rio Tinto is a bit of saviour for the sp.

I have thought for a long time that the actual jewel in the Scott Tech corona is Rocklabs. Rocklabs in Auckland is now responsible for the 'standard build' side of the Rocklabs business. Those tricky automation jobs are increasingly being farmed out among Scott's other sites. IMO, It is not a great thing to say:

"The project will be undertaken across multiple Scott manufacturing sites"

because that means those other multiple sites are not busy with their 'normal' alternative projects.

I also wonder what majority shareholder JBS think when they read from Scotts:

"we see the mining sector continuing to play an increasingly important role as a contributor to Scott's future growth."

I read that to mean Scott's are still having problems with the beef automation project, so resources are being deployed elsewhere. Also no announcement on the other jobs that were expected to be signed up last December, as outgoing CEO Chris Hopkins noted in his 28th November 2019 AGM address:

"For long term contracts ,we have approximately seven months of forward work ahead of us. This is less than target, however, several significant opportunities which we expect to secure in the next month, will take us to, and beyond,our target."

Was the Rio deal the only significant opportunity that came through? No doubt things are continuing to be tough in Europe. Sometimes what is not said in these 'trading updates' is more interesting than the actual announcements. I see a reasonable first half year being announced but with a poor outlook for the second half (notwithstanding the RIO job just announced). Long term I still 'keep the faith'. But I see a short term rocky road ahead when the half year results are out.

SNOOPY

peat

12-02-2020, 11:35 AM

a perfect looking bullish wedgie after a big abc pattern after that 5 waves up in July last year.
Technically looking explosive

I've never followed it fundamentally. I think I reviewed it once and wrote it off ... but tempted to have a speculative punt on the look of that chart

peat

12-02-2020, 11:43 AM

BeeBop

12-02-2020, 04:52 PM

here is the pretty picture

11009

its even got the spike down at the (supposed) end of the c wave.

I don’t “do technical” at all, rather fundamentals looking backwards, and then strategically looking forwards....in this instance with SCT, I am pleased to see your technical chart....I bought into them based on yield, historic fundamentals being OK, but the forwards picture being rather interesting...and more importantly, being a Dunedin company, and most importantly, difficulty in selling due to their lack of popularity - and with a modest holding, what is the point when you still get income and there is nothing inherently wrong.

Snoopy

20-03-2020, 09:59 AM

I see a reasonable first half year being announced but with a poor outlook for the second half (notwithstanding the RIO job just announced). Long term I still 'keep the faith'. But I see a short term rocky road ahead when the half year results are out.

New CEO John Kippenberger is facing his first big test. Superficially I was disappointed with his March 19th COVOID -19 update:

"Scott’s first commitment is to the health and safety of its people. The company’s business is global in nature, with projects and teams operating around the world. Given the rapidly evolving situation around COVID-19, Scott Technology is in the process of returning employees back to their home countries where possible. In addition, the company is managing the impact of local Government constraints, most notably within Europe, which has seen businesses closed and communities in quarantine."

But then I remembered that Scott's is entirely dependent on its highly skilled people. If they can't look after their people through the down times, there is no way they can quickly build up their in company skills again when business starts climbing out of its trough. So while the immediate outlook for Scotts is not good, I think Kippenberger putting his people first 'gets it'. He understands the culture of the company, which is always a point to worry about when a new CEO is 'helicoptered in'.

The company debt position is relatively modest with a normal earnings profile. But I feel that Scott's may now want to reduce net debt to zero (apart from working capital requirements). It is normal for a new CEO to 'clear out any skeletons in the closet.' So it is possible JK will announce some modest capital raising initiative. Maybe a bond that will convert to shares at the discretion of the board a few years down the track? That would avoid equity dilution at today's low prices. It might be more logical to suspend the dividend. But that wouldn't go down well with the Dunedin grey rinse brigade that regularly pack out the AGM and rely on that divvy. If the divvy is maintained at some level, then JK will have passed his second company culture test.

In the medium term, having a dispersed workforce of adaptable highly skilled staff over multiple continents looks to be a winner in this new environment. There will be locals on the ground to do local jobs. And work can be farmed out and shipped in from 'overseas' to avoid any local capacity constraints. I plan to increase my holding again at some point. But I will wait until the end of April profit announcement so that I can better understand what is a fair price to pay.

SNOOPY

BlackPeter

24-03-2020, 11:09 AM

Snoopy

24-03-2020, 11:38 AM

SP just dropped to 90 cents.

PE starting to look friendlier - backwards PE of 7 and forward PE of, well - who knows, but I use at this stage 10, obviously based on an in reality unknown earnings number. I just halved what I assumed for this year in earnings before the dip. Could easily turn to zero though or below.

I am in the 'zero or below' camp. Operationally I think we will still be positive for FY2020. But who is going to sign up to big ticket automation projects in the current environment? I think some of Scott's facilities will need to be severely scaled back. And that means redundancies, without cutting the skill base to the extent that you can't get the skills back. There is a very difficult balancing act here for Mr Kippenberger. In fact in a different time, I think he might put the whole European operation on the block! I think the synergies between Europe and what is going on in the rest of the company are dubious. Zero chance of that happening right now though.

New CEOs like to start with a clean slate, which is why I am picking 'restructuring'.

Clearly interesting industry - I assume that most useful applications involving robotics will come stronger out of this crisis than they went into it.

On the other hand:

SCT still trades at 1.8 times NTA. On that base is this still a pretty dear company, and I think that is what the market is telling us.

Debt load, while manageable (47.4% of assets last FY) looks ok for normal weather, but a bit less would currently clearly feel better.

Hard to say, but at this stage I might become tempted if & when the SP falls below NTA (assuming nothing pops up which might put the assumption of ongoing concern into doubt).

I think NTA is the wrong measuring stick for Scott's. If all the people walked out the door what would be left at Scotts? The property that houses 'Rocklabs' in industrial Auckland is no doubt valuable. (As an aside maybe Kippenbereger will sell that off on a leaseback arrangement?). I think ex-Chairman Marsh still owns the Dunedin headquarters site - a warehouse on the road to nowhere? Scott's own some complicated machine tools that would require specialised knowledge to operate safely. Definitely niche assets that might struggle to make book value in a fire sale. There is a reasonable bank of global patents, which are not tangible, but would have liquidation value. But the value of the patents is much greater with the people skill base that knows how to exploit them.

I see the value in Scotts is best retained by 'keeping the team together'. But how long this can be done with only a trickle of future business in the pipeline is another matter.

The debt load is a bit of a shock, but how much of that is due to funding projects in construction, rather than genuine long term debt? We might find at half year result time, the debt looks much better.

SNOOPY

discl: Also interested in buying more, but will wait for the half year result now.

BlackPeter

24-03-2020, 12:00 PM

I am in the 'zero or below' camp. Operationally I think we will still be positive for FY2020. But who is going to sign up to big ticket automation projects in the current environment? I think some of Scott's facilities will need to be severely scaled back. And that means redundancies, without cutting the skill base to the extent that you can't get the skills back. There is a very difficult balancing act here for Mr Kippenberger. In fact in a different time, I think he might put the whole European operation on the block! I think the synergies between Europe and what is going on in the rest of the company are dubious. Zero chance of that happening right now though.

<snip>

And you might well be right.

However - I still could imagine that companies with deep pockets are well happy to invest in the current situation (or soon thereafter) into automation of whatever they are doing. Robots don't get sick or infected and they don't need to isolate either ...

Fully (or mainly) automated manufacturing (and service) environments will be king in the current crisis. No (or less) dependence on sick or locked down humans.

More companies will want to enjoy this benefit next time (whether or whenever it comes).

I fully expect robotics to make worldwide a huge jump forward during and after this crisis. More robots looking after sick people. More robots looking after old people. More robots packing and delivering goods. More robots busy preparing and processing food.

The latter is SCT's domain - and while they are only a small player in a huge pond, they do have their market niche and should be in a good position to utilize the situation.

Anyway - just brainstorming. No doubt, there are plenty of risks around as well.

Snoopy

24-03-2020, 12:33 PM

I still could imagine that companies with deep pockets are well happy to invest in the current situation (or soon thereafter) into automation of whatever they are doing. Robots don't get sick or infected and they don't need to isolate either ...

I agree with the above. The only problem would be those pesky customer company shareholders. Wanting to preserve cash in difficult times. A privately owned customer company would be able to get things rolling more quickly.

Fully (or mainly) automated manufacturing (and service) environments will be king in the current crisis. No (or less) dependence on sick or locked down humans.

More companies will want to enjoy this benefit next time (whether or whenever it comes).

I fully expect robotics to make worldwide a huge jump forward during and after this crisis. More robots looking after sick people. More robots looking after old people. More robots packing and delivering goods. More robots busy preparing and processing food.

The latter is SCT's domain - and while they are only a small player in a huge pond, they do have their market niche and should be in a good position to utilize the situation.

Anyway - just brainstorming. No doubt, there are plenty of risks around as well.

And useful brainstorming it is. I agree with your assessment of the wider picture, which is why I am keen to remain an SCT shareholder!

SNOOPY

CatO'Tonic

03-04-2020, 09:36 AM

https://www.odt.co.nz/business/some-scott-tech-staff-now-unpaid-leave

Snoopy

03-04-2020, 10:31 AM

https://www.odt.co.nz/business/some-scott-tech-staff-now-unpaid-leave

What can I say? Except that new CEO JK looks to have handled this in a sub-optimal way.

Perhaps JK needs to learn that a glib Covid 19, 19th March update which states:

"Scott’s first commitment is to the health and safety of its people."

is not consistent with sending some workers home with absolutely no pay, while saying that:

-----

"the executive and broader leadership team at Scott had agreed to a pay cut."

" "It comes at a time when we’re working very hard ... we just thought it was the right thing to do to show empathy and understanding with the group."

"He would not say how much the pay cut was but that it was a "meaningful number" and "an absolute sign that we’re all in this together"."

-------

Tell us what the 'meaningful number' is! Other companies have done this. It is up to others to judge whether that number is meaningful or not - not you JK!

Reading between the lines, it sounds like we shareholders will be taking a 'dividend cut' of 100%, just like the worker referred to in the article. What is the bet that the cut to executive salaries is quite a lot less than that?

This article is particularly worrying, because Dunedin is Scott's back yard. If they can't get it right 'at home', what does that say for what is happening in Scott's staff in the USA and Europe?

SNOOPY

Sideshow Bob

13-04-2020, 09:29 AM

Snoopy

13-04-2020, 10:11 AM

Back in the news again....

https://www.odt.co.nz/business/pay-unfair-scott-workers-claim?fbclid=IwAR0vUWtgia_35IAvjsGN9YQF1FQXxz5H7R-Y9ysITRiuqFjHPGSTGPRYKFE (https://www.odt.co.nz/business/pay-unfair-scott-workers-claim?fbclid=IwAR0vUWtgia_35IAvjsGN9YQF1FQXxz5H7R-Y9ysITRiuqFjHPGSTGPRYKFE)

"Scott employed about 800 people around the world and most were doing no work at the moment, Mr Kippenberger said."

That is the key quote from the article. If you have debt (which Scotts do) and no money coming in to pay the interest on that debt then you are in trouble. The fact that Scott's have done 'well' over the last six months (something that has yet to be confirmed BTW) is not relevant.

Scott's have an important team of core workers, not all 'suits' and many of whom could be described as 'blue collar'. Nevertheless these workers are highly skilled, highly valued and consummately paid. The fact that their pay is (or was?) so far above the government subsidy is something to be celebrated. The human story of newly weds not being able to afford their mortgages (they can take a mortgage deferral option for now at least) is sad. But I do believe Scott's can come through the Covid era. Even if these hapless workers end up selling their homes in the next few months, they may still end up luckier than most.

I still think management should come clean on the pay cuts they have taken though. It isn't a good look.

SNOOPY

Snoopy

20-04-2020, 02:09 PM

discl: Also interested in buying more, but will wait for the half year result now.

We shareholders are in for a longer wait! Scott's now need another month (May 3rd) before their situation becomes clear.

https://www.nzx.com/announcements/351926

"As previously advised, the impact of COVID-19, particularly travel restrictions and access to customer sites, has affected Scott’s ability to implement, progress and commission a number of projects."

" the company is engaging with landlords in New Zealand and Australia for rent relief."

"While revenue is expected to recover as regional lockdowns are lifted and work recommences, Scott expects FY20 earnings to be materially impacted, as previously advised and as customers take stock of their own capital situations under COVID-19 and the broader economic environment. The Board and management are currently undertaking a review of the structure of the business to ensure it is well positioned for the longer-term economic recovery."

A $1.6m wage subsidy has been accepted to help 784 NZ staff.

$1.6m / 784 = $2,040 each (assuming all full time)

$2,040 / $586 per week = 3.5 weeks

Yet the government subsidy is meant to be for twelve weeks. Mass sackings to be instituted in a month's time?

SNOOPY

Oliver Mander

20-04-2020, 04:49 PM

wage subsidy only applies to staff in NZ Snoopy...that might explain it

Oliver Mander

20-04-2020, 04:50 PM

wage subsidy only applies to staff in NZ Snoopy...that might explain it
just did a search.
they applied for 232 staff, presumably their NZ workforce.

Snoopy

20-04-2020, 07:10 PM

just did a search.
they applied for 232 staff, presumably their NZ workforce.

$1.6m / 232 = $6900 per person

$6900m / $586 per week = 11.8 weeks

That is close enough to twelve weeks for me. One or two part time workers could have put the calculation out.

Thanks Sylvester.

SNOOPY

Sideshow Bob

20-04-2020, 09:16 PM

Member of the extended family works at Scotts. Young fella and had a couple of weeks with no pay. Not impressed. :mad ;:

Snoopy

21-04-2020, 08:54 AM

Member of the extended family works at Scotts. Young fella and had a couple of weeks with no pay. Not impressed. :mad ;:

Was some pay back dated when the subsidy came through? It does seem inexplicable that no-one at Scott's thought to apply for the wage subsidy in a timely manner.

SNOOPY

Marilyn Munroe

04-05-2020, 01:16 AM

Scott Technology gets a mention on anti-establishment and contrarian financial web site Zerohedge.

https://www.zerohedge.com/technology/get-ready-slaughterhouse-robots-ease-americas-meat-processing-crisis

Boop boop de do
Marilyn

sb9

04-05-2020, 12:13 PM

Timesurfer

04-05-2020, 10:12 PM

Looks like the person who loaded up the sell side has aquired enough now.

sb9

07-05-2020, 03:06 PM

https://www.nzx.com/announcements/352817

The new Director has got some great credentials..

The Board is pleased to announce the appointment of Alan Byers as a Director, effective from 8 May 2020.
Alan was most recently the President of US Regional Beef, retiring from that position after 43 years in the industry. Alan is now serving as a Senior Advisor to Andre Nogueira and the collective JBS US business.
Prior to joining JBS USA, Alan held a number of senior executive roles, including CEO / President of Meyer Natural Foods, President of ConAgra Signature Meats, and 18 years with Hormel culminating in an assignment as President of Dubuque Foods.
Alan’s career experience has included positions as Plant Personnel Manager, Corporate Labour Relations Manager, Industrial Engineering Manager, Corporate Operations Manager, Plant Manager, Product Marketing Director, and Executive Vice President of Sales.
Alan is a Drake University graduate with a degree in Industrial Communication. He also holds an MBA from Kellog School of Business/Northwestern.

emveha

07-05-2020, 05:11 PM

SP jumps nearly 10% on news of Nogueira's resignation... that's got to hurt.

winner69

08-05-2020, 09:20 AM

Snoopy

08-05-2020, 09:38 AM

SCT seems to have so much going for them (industry leaders etc) but their financials are never that flash

Business model no good or something else?

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SCT/352874/322180.pdf

No dividend, but no mention of the immediate need for a capital raising either. Net debt is $20.2m. It will be interesting servicing that on a negative normalised EBITDA income. Those poor workers in Germany. Rescued from receivership but then had their work transferred to the Czech republic and now they are sacked.

As always these announcements are best read through what is not said. Very little mention about Europe from an operational perspective. Acquisition Alvey probably still in trouble with Europe locked down and Brexit. SCT's normalised net profit after tax was just +$0.8m. Yet further up the income statement normalised EBITDA was a loss of $0.4m! I can't fathom how an EBITDA loss can turn into an NPAT profit. Perhaps someone who has some serious accounting training can explain.

Meanwhile:

"The challenging projects in Australia and New Zealand, as previously discussed, are now either completed or nearing completion and the financial impact of these has been realised in 1H20."

These is a $10.4m impairment hit noted. I wonder if this is in relation to these 'projects gone wrong' or something else? Maybe now HTS-110 is on the block, an impairment his has been taken there? I suspect we will have to wait for a sale for that loss to be realised though!

Maybe this is the local bottom for the share price going forwards? There is no mention of the outlook for Australia and NZ for the future. Emphasising 'Bladestop' sales is another way of saying that full automation of the beef processing lines (the true golden goose in the SCT product portfolio) is not yet viable. Only big project on the horizon is the pre-announced Rio Tinto sample processing automation centre, but even that is delayed. I am going to make a bold prediction. No full year dividend for FY2020 either.

SNOOPY

BlackPeter

08-05-2020, 09:43 AM

Balance

08-05-2020, 09:49 AM

Well, I take it the majority share holder (JBS) is quite happy with board and strategy, otherwise they could change it anytime. I suppose either they follow a cunning long term strategy or they have a different agenda to the mum and dad investors who just want the money.

Always the problem when there is a majority shareholder with a different agenda to that of minorities.

Why it is so critical to be aware of what their agenda is.

forest

08-05-2020, 09:50 AM

BlackPeter

08-05-2020, 09:56 AM

Whatever it is - announcement does not look flash. No divie, loss for the first HY and given the planned restructure I think we can expect a loss for the second half as well.

And we should not forget that the impact of Covid 19 is not really part of the results so far (financials are up to February).

Holders might want to buckle up or sell ...

BlackPeter

08-05-2020, 10:06 AM

winner69

08-05-2020, 10:09 AM

percy

08-05-2020, 11:21 AM

Well another disappointing result.
Missed priced large projects,costly.
With meat works trying to get more and more automated,it is a great pity Scott can't do it profitably.
So restructure ,refocus,and right size the business .
Will they get it right,what will it cost,and how long will it take.?
And the big question;will they get it right.?
History is not on their side.
Time to remember Buffett's quote;
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

kiwidollabill

08-05-2020, 09:15 PM

I've always had a personal interest (from Uni days) in HTS-110, I see they are selling it (phrasing implies they have a buyer?), think it was bought originally for ~$4M?

Snoopy

09-05-2020, 09:20 AM

Up for re-election this year is JBS representative Andre Nogueira. Nogueira is the chief executive of JBS USA, the parent company of JBS Australia that holds the controlling stake in Scotts. This is great as it gives Scott's a direct line to the big boss in the US, and all the potential direct links to the meat processing industry in the USA: a very large pipeline of automation project potential. But having someone that high up in the hierarchy from so far away on the board means that he may not be able to attend all of Scott's board meetings, even if there were only six of them over FY2019. So it is fair enough to appoint an alternate director. JBS have done this by nominating John Berry, Head of Corporate and Regulatory affairs at JBS Australia as the alternate.

So how many board meetings did Andre Nogueira miss during the year? One, perhaps two? As AR2019 p16 shows, the actual answer is all of them! Nogueira never showed up at all, at any board meeting! How can we shareholders be asked to vote for a director that never showed up?

SP jumps nearly 10% on news of Nogueira's resignation... that's got to hurt.

I am glad that Nogueira has seen sense. If he couldn't attend any board meetings last year, he sure isn't going to attend any under Covid-19 restrictions.

The new director, Alan Byers, sounds good and he has close connections to Andre Nogueira.

--------

DIRECTOR APPOINTMENT – ALAN BYERS

The Board is pleased to announce the appointment of Alan Byers as a Director, effective from 8 May 2020.

Alan was most recently the President of US Regional Beef, retiring from that position after 43 years in the industry. Alan is now serving as a Senior Advisor to Andre Nogueira and the collective JBS US business. Prior to joining JBS USA, Alan held a number of senior executive roles, including CEO / President of Meyer Natural Foods, President of ConAgra Signature Meats, and 18 years with Hormel culminating in an assignment as President of Dubuque Foods.

Alan’s career experience has included positions as Plant Personnel Manager, Corporate Labour Relations Manager, Industrial Engineering Manager, Corporate Operations Manager, Plant Manager, Product Marketing Director, and Executive Vice President of Sales.

Alan is a Drake University graduate with a degree in Industrial Communication. He also holds an MBA from Kellog School of Business/Northwestern.

--------

Does that last line mean he got his MBA out of a cornflakes packet? Never mind, I guess 43 years experience in industry trumps all qualifications anyway. It will tough attending board meetings though. 14 day quarantine before he attends any board meeting and another 14 days quarantine when he returns to the USA. Just as well the board meetings are only every two months?

SNOOPY

Snoopy

09-05-2020, 09:38 AM

The good thing about Scotts having a manufacturing base in China, the United States, Europe and Australasia is that you can make your projects in a location that will avoid trade barriers. But the bad side to that strategy is that while trade barriers exist, you will always have some of your manufacturing base in the wrong place. Given Scott's results since the 'globalised bases of scale' strategy has come to fruition, I am not clear it is the right strategy. The fact that Scott's have been able to maintain fully imputed dividends while only around a quarter of the workforce is NZ based, shows how 'profitable' (sic) the overseas manufacturing bases are. Of course there may be some internal transfer pricing that artificially inflates the New Zealand contribution to profit when more than one manufacturing base contributes to a project, But it isn't clear that any of the overseas bases are real profit stars.

The above is what I said in November. Below is the 8th May market announcement on 'business restructuring'.

-----------

Business Restructure

In line with the new strategy, the company is transitioning to a streamlined, regionally focused business model with four regions - Australasia (New Zealand & Australia), Europe, North America and China. Each will be led by a Regional Director with local teams providing product expertise, sales and customer support.

Manufacturing plants will become Centres of Excellence where each plant will have a specific focus on a product or industry sector, rather than all plants striving to produce a number of different and often highly complex systems and products.

The business and workforce will be right-sized for the new strategy and operating environment, resulting in a reduced cost base. This will include the consolidation or closure of a number of facilities including the closure of the Kürnbach facility in Germany with production moved to other plants, the proposed consolidation of Melbourne manufacturing into the Sydney plant and closure of the Brisbane office.

---------

I can see the sense of consolidating the east coast of Australia offices. Germany is, I guess, just too expensive a base from which to maintain a cost effective contracting base. Sad for Scott's German employees. But hopefully their skills can be picked up by higher margin manufacturers.

The problem with the 'centres of excellence strategy' as I see it is that, in these days of trade wars, the ability to dodge around tariffs could be lost. If SCT had 'centres of excellence for design', while maintaining the ability to shift manufacturing bases where most of the hard costs are incurred, then that might work. But with individual countries operating as silos in the future, what does that say for the Chris Hopkins grand plan of the merits of having a truly integrated global business?

Finally, if what I previously speculated about transfer pricing was true, a decentralised approach could see the end of dividend imputation for NZ shareholders. Of course you could argue that the dividend imputation issue is no longer relevant if there aren't any dividends!

SNOOPY

BlackPeter

10-05-2020, 10:51 AM

...

I can see the sense of consolidating the east coast of Australia offices. Germany is, I guess, just too expensive a base from which to maintain a cost effective contracting base. Sad for Scott's German employees. But hopefully their skills can be picked up by higher margin manufacturers.

Given that Germany's big strength is its engineering SME's you are wondering why Scott was not able to run their German engineering business profitable if everybody else seems to be able to do that ...

A company which is not able to make a German engineering business successful must be about as incompetent as a company not being able to profitable run a New Zealand agrar business or a company not being able to successfully produce cheese in the Netherlands or to run a profitable banking operation in Switzerland.

Sure - there examples for all of the above, but normally it is not a good idea to invest into any of these losers.

winner69

11-05-2020, 08:31 AM

Snoopy

11-05-2020, 08:50 AM

Found a report that showed Scott’s turnover in F2003 was $47.5m with NPAT of $5.6m

Shareholders had put in $7.6m in 2003 and this has increased to $81.8m

Retained Earnings in 2003 were $9.3m in 2003 and this now $14.9m

Heaps more capital being used these days ....for lower returns?

It’s a Dunedin based company so allowed to be like that

Come a long way in the last 17 years?

Check out the price of any bit of whiteware in 2003. Now look at an equivalent item today and I bet you can buy it for the same price or less. Falling margins on relatively static demand is the problem faced by whiteware makers worldwide.
Solution? Crank up the speed of the automated manufacturing lines that make the fridges / washing machines. But that puts more strain on the manufacturing equipment. And that means more troubleshooting is required by the likes of Scotts. As the manufacturing equipment becomes 'less reliable' whiteware making customers require larger 'performance delivery bonds'. Another cost to be faced by Scotts.

The truth is, supplying manufacturing equipment for whiteware makers is not as profitable as it once was. This was the driving force behind diversifying the business firstly by acquiring Rocklabs in 2008, and subsequently in a business acquisition drive that has been continuing ever since. And as we know business acquisition and changes of direction do not come without risk. So yes Winner, SCT was more profitable in 2003. But unfortunately going back to 2003 business conditions is not possible because the cosy business model of 2003 now has new cost pressures.

To pervert a Warren Buffett baseball analogy. If you keep swinging your bat at new balls, eventually you will hit a home run (at least that is what we SCT shareholders hope)!

SNOOPY

winner69

11-05-2020, 09:45 AM

Check out the price of any bit of whiteware in 2003. Now look at an equivalent item today and I bet you can buy it for the same price or less. Falling margins on relatively static demand is the problem faced by whiteware makers worldwide.
Solution? Crank up the speed of the automated manufacturing lines that make the fridges / washing machines. But that puts more strain on the manufacturing equipment. And that means more troubleshooting is required by the likes of Scotts. As the manufacturing equipment becomes 'less reliable' whiteware making customers require larger 'performance delivery bonds'. Another cost to be faced by Scotts.

The truth is, supplying manufacturing equipment for whiteware makers is not as profitable as it once was. This was the driving force behind diversifying the business firstly by acquiring Rocklabs in 2008, and subsequently in a business acquisition drive that has been continuing ever since. And as we know business acquisition and changes of direction do not come without risk. So yes Winner, SCT was more profitable in 2003. But unfortunately going back to 2003 business conditions is not possible because the cosy business model of 2003 now has new cost pressures.

To pervert a Warren Buffett baseball analogy. If you keep swinging your bat at new balls, eventually you will hit a home run (at least that is what we SCT shareholders hope)!

SNOOPY

Share price shortly after announcement of F2003 was $1.84 (adjusted for bonus issue)

That’s spooky eh.

Marilyn Munroe

11-05-2020, 01:16 PM

I've always had a personal interest (from Uni days) in HTS-110, I see they are selling it (phrasing implies they have a buyer?), think it was bought originally for ~$4M?

My understanding is the technology is good but market uptake is hampered by the high cost of superconducting wire which is critical to the technology.

Boop boop de do
Marilyn

Snoopy

15-05-2020, 09:19 AM

Biscuit

15-05-2020, 01:50 PM

Ok no-one took up the challenge so I will attempt to answer my own question.

Operational EBITDA
($0.392m)

less Depreciation & Amortisation
($5.032m)

less Finance Costs
($1.050m)

add Interest Received
$0.010m

add Tax Credit (Australian R&D)
$1.168m

add Tax Credit (NZ)
$3.441m

equals NPAT Operational
($1.855m)

That doesn't correspond to the declared 'normalised net profit' of $0.8m. What am I missing?

SNOOPY

I haven't looked at their accounts (which can't be nice to look at) but is it possible they have a tax benefit?

Snoopy

15-05-2020, 02:16 PM

I haven't looked at their accounts (which can't be nice to look at) but is it possible they have a tax benefit?

Thanks for the response Biscuit, and here is the link to the HY2020 results (which I should have given before).

https://www.scottautomation.com/assets/Announcements/2020-Half-Year-Announcement/2020-Half-Year-Financial-Statements.pdf

See p1 "SCOTT TECHNOLOGY LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME."

To answer your specific question, yes there are tax benefits that I have detailed in my calculation.

On p4 of the HY2020 results presentation

"2./ Normalised EBITDA and Normalised NPAT exclude non-trading adjustments."

Non-trading adjustments total $11.8m (p4 HY2020 Presentation). Now refer back to the half year accounts note 4: Impairment of Assets $10.931m. Next check out the restructuring provision in note 5: $1.429m. After tax that restructuring provision comes to $1.429m x 0.72 = $1.028m. That comes to a total of $11.959m (Not quite the $11.8m I was looking for).

SNOOPY

Biscuit

15-05-2020, 04:42 PM

To answer your specific question, yes there are tax benefits that I have detailed in my calculation.

SNOOPY

Ah, I should have noticed that! No, I am none the wiser, I have no idea - must be something to do with some component of ITDA? Scotts might be a good investment going forward if the Covid-crisis spurs on automation? I like the idea of the company but the profit looks a bit up and down, and they are never particularly cheap.

winner69

15-05-2020, 04:55 PM

Solved the puzzle yet Snoops

I love puzzles ..... let me know if it still needs solving

Snoopy

16-05-2020, 09:28 AM

Ah, I should have noticed that! No, I am none the wiser, I have no idea - must be something to do with some component of ITDA?

Solved the puzzle yet Snoops

I love puzzles ..... let me know if it still needs solving

Not solved yet Winner. In theory translating an EBITDA figure into an NPAT figure from the income statement shouldn't be too difficult. Even I can usually do it!

This one still has me stumped though. It might be more fun to think of this problem as a murder mystery, with suspects 'E' 'I' 'T' and 'DA'. I think this is in effect what Biscuit is saying. However, rather than dealing with a physical body, what we are dealing with here is the 'murdering' of SCT profits. So whodunnit?

I think 'I' is probably in the clear. The income statements shows finance costs of ($1.050) offset by 'interest earned' of $0.010 for a net interest cost of ($1.040). To me 'I' looks straight, and doesn't appear to be hiding anything.

Similarly 'DA' looks hard to fudge. ($5.032) as a half year charge looks straight. There is no further information included in the report apart from this total. My inkling is that DA is in the clear.

'T' looks a bid dodgy though. He appears as a credit in the profit statement, yet if you look in the segmented profit breakdown he appears as a bill. Neither of those lines up with the tax paid in the cashflow statement. He is my prime suspect but I can't pin him down.

'E' seemingly escapes scrutiny by most (well Biscuit at least). But have some 'non operating earnings' been reversed to create a higher figure from which the normalised NPAT hasd been calculated? I have a gut feeling that 'E' could be implicated.

It might even be a double hatchet job involving 'T' and 'E'. As a simple 'bobby on the beat' this is as far as I have got. Over to you detective sergeant Winner.

SNOOPY

Biscuit

16-05-2020, 09:40 AM

'T' looks a bid dodgy though.

I'd suspected T from the start! Remember though, in a whodunnit, the nasty-looking character is the first to raise suspicions, but it usually turns out to be the most innocuous character who is the guilty party. Purely from an Agatha Christie point of view, I'd have a good hard look at Mr straight guy "I" what is he really hiding?

winner69

16-05-2020, 09:54 AM

OK ...we either trust them and that they know what they doing and it’s all above board or we go to the top to find out.

I’ve emailed them ...let’s see what happens

I see they use a PR company so copied in Mr Kippenberger

——————————————————————————————————————————————————-

Hi Jackie

Re half year results

I have a friend on a share trading forum (Sharetrader) asking if anybody can reconcile how Scott goes from Normalised EBITDA of ($0.4m) to Normalised NPAT of $0.8m. (As shown on your presentation)

It does seem a bit of puzzle and hard to tie in with the Income Statement.

My friend is known as the ‘normalisation guru’ and not many things stump him but this as. Even I can’t work it out for him. I think the frustration is getting to him.

So to alleviate his concerns can you get somebody to clarify for us. I will pass any response to him via Sharetrader.

My friend is a loyal long time shareholder of Scott.

Thank you

winner69

16-05-2020, 09:57 AM

That PR firm they use says:

If you want to ensure your company is seen as professional, well governed and with a successful strategy, then good communications are key. At Ellis and Co, we can tailor a programme to meet your needs.

Think they doing a good job?

Biscuit

16-05-2020, 10:49 AM

OK ...we either trust them and that they know what they doing and it’s all above board or we go to the top to find out.

(So) I’ve emailed them ...

So, we don't trust them to know what they are doing and to be above board then?

Good idea to go to the top though. When you get an answer, can you convey it to us in the tone and character of a detective like Hercule Poirot, denouncing the guilty party at the end of a novel?

Biscuit

16-05-2020, 11:10 AM

'E' seemingly escapes scrutiny by most (well Biscuit at least). But have some 'non operating earnings' been reversed to create a higher figure from which the normalised NPAT hasd been calculated? I have a gut feeling that 'E' could be implicated.
SNOOPY

This also is a good approach. As Poirot (or was it Holmes?) says, eliminate the impossible and whatever remains is the truth. But I would eliminate E because it is in both EBITDA and in NPAT. Surely it must be the same figure? Unless E is a different character in EBITDA and in NPAT, then E has a water-tight alibi.

Biscuit

16-05-2020, 11:17 AM

.... As Poirot (or was it Holmes?) says ......

It was Holmes, ofcourse:

"It is an old maxim of mine that when you have excluded the impossible, whatever remains, however improbable, must be the truth."

winner69

16-05-2020, 12:37 PM

Maybe they adjusted / normalised things for virus impacts.

Snoopy

16-05-2020, 08:49 PM

Time to update my January expectations of HY2020 compared to what was actually announced.

I am expecting a downbeat first half as the new CEO Kippenberger 'clears the decks' of any Chris Hopkins era skeletons. Yet I am prepared to look through all of this near term turmoil, to the underlying potential of what is still there at Scott Technology. In short I still 'believe the story'. And while I am waiting for that happier ending, I am still being fed an above bank investment dividend return. The adequate dividend return coupled with a few potential 'free' Lotto style big winners as prospects is enough to keep this mutt in the Scott Technology kennel.

I am disappointed that no dividend was possible, although the subsequent elevation of Covid-19 to a global pandemic might have had something to do with it. Particularly disappointing was what happened to what had been previously signalled as 'non-performing projects' in Australia and New Zealand. A $6.088m write down was a massive hit to take (Note 4 HYR2020).

There would be a huge improvement in profit if only we were able to wind things back to how things were in 2018. There are significant hurdles to doing this, a few that I can think of being :

1/ The slowdown in Alvey's European market mostly as a result of the uncertainty of Brexit and the shadow that event casts over all of Europe.

From the HY2020 Presentaion p3

"Softening economic conditions noted in key markets, including the impact of global trade and Brexit"

(Expectation confirmed)

2/ The much lower meat industry sales due to the low hanging fruit of the obvious automated lamb line sales being done. Adapting this fully automated technology to handle beef carcases is the technical break through that Scotts have not yet achieved. Consequently meat industry sales could be subdued in the medium term.

There was no 'industry breakdown' in the half year result. The only clue is that 'Australasia Manufacturing', which is the business unit under which the meat industry robotics are developed, had a severe downturn in revenue, in Long Term Contracts (from $26.491m to $17.057m, a 46% decline). Given that there were no 'headline meat industry installations announced, I suspect meat industry robotics has had a poor half year.

3/ The apparent downgrading of the Scott Milktech semi-automated milking project which wasn't even mentioned in the latest presentations. I wonder if this has been written off?

I find it interesting that in HY2020 Note 4, Scott's wrote off $3.715m from the 'Scott Dairy Development Asset'. This was a result of no further commercialisation of Scott Milktech being planned, after discussions with potential commercialisation partners. However, I distinctly remember three years ago Chair Stuart, when responding to a question, stated that they had bought out their joint venture partners in Milktech . So did Kippenberger interview himself when making this decision?

(Milktech Write Off Confirmed)

4/ The closure of DC Ross toolmakers, and the incurrence of any concomitant write off costs.

A write off of $1.429m noted in HYR2020 Note 5

(Expectation confirmed)

5/ The huge goodwill write off at HTS-110, Scott's superconductive technology arm, over the last few years. This division entered the books with $271m of goodwill on the books and at EOFY 2019 this had shrunk to a net value of just $26m. This indicates the sales performance today of HTS-110 has fallen well short of expectations.

HTS-110 to be put up for sale. Let's hope a buyer can be found.

(Expectation confirmed)

But as the project potential of Scott Milktech and HTS-110 fades away, new growth engines are on the horizon to replace them.

So two of we shareholders 'Scott Lotto Tickets' have been ripped up. But we have three new ones left?

1/ Transbotics, Scott's acquisition in the Automated Guided Vehicle market which Scotts are looking to grow at 30% per year.
2/ The King Salmon bone removal project for Mt Cook Alpine Salmon and Seafood Innovations.
3/ The adoption of 'Bladestop' Band Saw safety technology outside of the core meat industry market.

No mention of the King Salmon bone removal project. I wonder if this was one of those two Australasian development projects that went bad?

From p3 HYR2020 Presentation:

"Value continues to be added by acquired businesses, particularly Transbotics and Bladestop."

(Expectation confirmed)

SNOOPY

Snoopy

17-05-2020, 10:25 AM

No dividend, but no mention of the immediate need for a capital raising either. Net debt is $20.2m. It will be interesting servicing that on a negative normalised EBITDA income.

I have taken a more detailed look at the HY2020 balance sheet. Trade creditors are now above trade debtors ($1.5m more), whereas last year Scott's was owed $7m more than they had to collect. Some would say that change reflects 'sound debt collection practice' at Scotts. But another way of looking at the situation is that Scott's have taken on $7m + $1.5m = $8.5 of net debt by not paying their bills.

The same argument applies to the change in 'Contract Assets' to 'Contract Liabilities' position. At balance date, 'Contract Assets' exceeded 'Contract Liabilities' by $10m. But compared to the previous comparable period (HY2019) 'Contract Assets' exceeded 'Contract Liabilities' by $16m. That means we have a net $6m reduction in Contact Assets, or an increase of $6m in the net debt attributable to long term contracts.

To summarize the 'net work in progress' position at balance date has deteriorated by:

$8.5m + $6m = $14.5m

Next if we look at the actual 'net debt', the bank overdraft has gone from $5.7m to $9m (an increase of $3.3m). In the past this overdraft has attracted a very high interest rate. I sincerely hope that Scott's have since negotiated something better! Term loans are up by $5.5m - $1.5m =$4mvs pcp.

Looked at this way 'underlying net operational debt' has increased by:

$14.5m + $3.3m + $4m = $21.8m

That is a little more than the declared net debt, because I haven't included changes in tax liabilities. Some of these net debt increases could be thought of as Scott's 'exercising their partner goodwill' when working on projects. But any further exercising of this goodwill could see Scotts business reputation sullied. I can't see the announced asset sales raising much capital. Indeed what seemed like promising projects only a year ago have been written down to zero.

Majority shareholder JBS are said to be supportive. But JBS Australia are themselves caught up in the China/Australia meat spat. The following article references JBS’s Beef City and Dinmore plants.

https://www.reuters.com/article/us-australia-china-beef/china-suspends-imports-from-four-australian-abattoirs-as-ties-sour-trade-idUSKBN22O0FB

"JBS said in a statement it was working with Australian officials “to understand the technical issues that China has raised” and would take corrective action."

That is code for JBS not being able to resolve the issue. So perhaps a capital raising, without the support of JBS, could be on the agenda ;-P? Or perhaps more likely, dividends off the table at Scotts for some years? This is all presupposing that normalised EBITDA can be raised above zero next year, which might yet be more of a challenge than management think.

SNOOPY

winner69

17-05-2020, 12:30 PM

Time to update my January expectations of HY2020 compared to what was actually announced.

I am disappointed that no dividend was possible, although the subsequent elevation of Covid-19 to a global pandemic might have had something to do with it.

Burning cash (and not counting acquisitions) for a few years and you expect dividends?

Joshuatree

17-05-2020, 06:27 PM

JBS are the largest protein processing company in the world so you think they'd be able have some clout to be able to help resolve issues.

According to John Maudlin theres prob never been a better time for meat processing robot makers. Very few in the world and Scott Tech get a mention in Maudlins weekly letter(Its free you need to subscribe though).

https://www.mauldineconomics.com/reality-check (http://email.mauldineconomics.com/mps2/c/_wA/8DAEAA/t.31p/Zj68MWwJRb2uIH7lbDdEtQ/h1/v2lRHD67g-2B4j5TbQZSfMgMYlf-2FSxJ-2BXqgb3khT7ZmE-2FCoyA4rokg3s4xXXfkbyE5/r5c3)

Snoopy

17-05-2020, 06:42 PM

Majority shareholder JBS are said to be supportive. But JBS Australia are themselves caught up in the China/Australia meat spat. The following article references JBS’s Beef City and Dinmore plants.

https://www.reuters.com/article/us-australia-china-beef/china-suspends-imports-from-four-australian-abattoirs-as-ties-sour-trade-idUSKBN22O0FB

"JBS said in a statement it was working with Australian officials “to understand the technical issues that China has raised” and would take corrective action."

That is code for JBS not being able to resolve the issue.

JBS are the largest protein processing company in the world so you think they'd be able have some clout to be able to help resolve issues.

I had a look at the maudlin economics website reference:

https://www.mauldineconomics.com/reality-check

And boy has that JBS share price dived during the Covid shock. From $14 to $8.40 for the ADRs by the look of it! Possibly down to the worker distancing requirements at each plant? I have heard that can reduce plant productivity by 50%.

JBS Australia is small beer in the total JBS picture. But it is the JBS business arm that holds the interest in Scotts. So closing the export path to China for two of their biggest exporting plants will be hurting JBS Australia big time. The Reuters article seems to think the reasons for the stand off are political and not the stated reason of "Chinese labelling requirements". ScoMo isn't on the JBS payroll, so probably not much JBS can do.

SNOOPY

Snoopy

17-05-2020, 09:57 PM

Burning cash (and not counting acquisitions) for a few years and you expect dividends?

I have been to the AGM in Dunedin a few times Winner. The southern silver set shareholders like their divvies as much as the after event spread. In previous years divvies have been maintained in adversity with anticipation of greater things to come in the ensuing six months. I guess CEO JK isn't so optimistic about 2HY2020? Or maybe he hasn't yet fully plugged in to the culture of this company? I expect JK will get a grilling on the resumption of dividends at the next AGM!

SNOOPY

Snoopy

18-05-2020, 09:14 AM

Scott themself seem to think model needs to change.

Part of todays SCT announcement.

The past five years has been a period of rapid acquisition growth for the company, resulting in a diverse reach across sectors, customers and geographies. With a new leadership team in place and given the changing operating environment, Scott is now moving to streamline its business and will focus on leveraging core strengths and expertise which offer profitable sustainable growth and margins.

The company’s new strategy will build on five pillars – Customer Partnerships, Leading Edge Technology, One Global Team, Operational Excellence and a Robust Global Platform. In particular, Scott will be increasing its focus on repeat, profitable sales of developed and proven technology, products and services which are core to the Scott Group; and increasing its service and support offering for customers. New project design & development will be carefully risk assessed and R&D activities will become highly focused on core technologies, with additional, carefully targeted strategic projects aimed at delivering positive commercial growth opportunities.

The most interesting change for Scotts going forwards is highlighted on p11 of the HY2020 results presentation.

"Pivot the Project/Product/Service mix from 60/20/20 to 40/30/30 to drive growth and margins, while reducing risk."

These three business categories are further defined as follows:

--------

Project: Bespoke customer solutions focused on areas of expertise to reduce risk, improve customer delivery and generate higher margins.

Products: Repeat, profitable sales of developed and proven technology, products and systems which are core to the Scott Group and offer strong margins.

Service: Structured long-term support and servicing of products and technologies, driving safety, performance and efficiency at customer sites.

--------

What makes this interesting is the current break down of Project/Product/Service work to be found under note 2 of the HY2020 accounts. I have adjusted these to percentages to make it easier to compare the current positions with JK's targets.

ProjectProductService

Targets
40%30%30%

Australasia Manufacturing {1}
47%32%21%

Americas Manufacturing {2}
44%24%32%

Asia & Europe Manufacturing {3}
75%14%11%

Total Manufacturing {1}+{2}+{3}
57%23%20%

As a whole, the company is quite a long way from where it is targeting to be. 'Standard' products in Australasia must include 'Bladestop' Band Saws and the standard sample analysing equipment built at Rocklabs in Auckland. That puts Australasia 'above target' in Standard products. But the 'rest of the world' is way below where it should be. And that drags down the Standard total to well below target levels.

Asia and Europe looks to be the most off target. They look to be pretty much geared to one off 'materials handing' (Europe) or 'appliance line manufacturing' (Asia) projects.

Only the Americas are on target to meet the service work goals. I guess this category includes the 'Robotworx' second hand robot trading operation which has since expanded to Australia. Short of carrying out a lot more servicing that customers don't need, are we going to see Robotworx expand into Asia and Europe too?

I tend to think about growing to meet JKs business category targets. But another way would be to reduce the number off one off 'Project' jobs undertaken and 'right size' (i.e. sack) various parts of the existing organisation. Will JKs term as CEO become known as 'the era of the big shrink'?

SNOOPY

winner69

18-05-2020, 03:36 PM

Snoops ...lHaven’t even had the courtesy reply from Scott they’ve got our request and working on it

Maybe the question was too tricky for them

Joshuatree

20-05-2020, 09:27 AM

I had a look at the maudlin economics website reference:

https://www.mauldineconomics.com/reality-check

And boy has that JBS share price dived during the Covid shock. From $14 to $8.40 for the ADRs by the look of it! Possibly down to the worker distancing requirements at each plant? I have heard that can reduce plant productivity by 50%.

JBS Australia is small beer in the total JBS picture. But it is the JBS business arm that holds the interest in Scotts. So closing the export path to China for two of their biggest exporting plants will be hurting JBS Australia big time. The Reuters article seems to think the reasons for the stand off are political and not the stated reason of "Chinese labelling requirements". ScoMo isn't on the JBS payroll, so probably not much JBS can do.

SNOOPY

Never the less the parent JBS have alot of clout globally protein production wise and many countries are short atm.

JBS have had 8 plant employee covid deaths and hundreds with covid, (CNBC) that will be a big part of the share price destruction. maybe time to start buying JBS.

winner69

20-05-2020, 02:50 PM

sb9

20-05-2020, 02:55 PM

Solved that mystery yet Snoops

Haven’t heard back from Scott so have asked again

Not really expecting a reply as Scott seems to be one of those companies that treat small shareholders with contempt

I've had pretty decent response at least from ex-CFO Greg Chiles when I had a query or two re financials in the past.

Snoopy

21-05-2020, 08:50 AM

SCT's normalised net profit after tax was just +$0.8m. Yet further up the income statement normalised EBITDA was a loss of $0.4m! I can't fathom how an EBITDA loss can turn into an NPAT profit. Perhaps someone who has some serious accounting training can explain.

Solved that mystery yet Snoops

Not yet DI Winner. I have had a few more thoughts though. Going through our suspects again, I am not sure any of them are off the hook yet. I will go though them one by one:

I

If we look over the last six months, we can get an estimate of the interest rate paid.

Bank Overdraft
Current Portion of Term Loans
Term Loans
Total

EOFY2019
$4.737m
$4.217m
$7.450m

EOHY2020
$8.975m
$2.679m
$8.517m

Average
$6.856m
$3.448m
$7.984m
$18.288m

Average Net Interest paid = 2x($1.050m - $0.010m) / $18.288m = 11.4%

That is a very high interest rate being paid

In the half year report we learn

"The company has satisfactory debt facilities in place and a supportive banking arrangement."

I wonder if Scott's have negotiated something lower and have been able to 'normalise' their interest rate as a result? Is the normalised 'I' much lower than we think?

T

This guy was a prime suspect. But actual tax in the half year was a credit. 'Normally' you might expect to make a profit and pay tax. However, paying tax would mean a lower NPAT figure than the base EBITDA figure it is derived from. A 'normalised' T makes the normalised NPAT go in the wrong direction. Could the highly suspicious T be in the clear after all?

DA

We have very little information to go on with this guy. But the quoted figure for the half year is $5.032m. That is more than double the previous full year $8.969m. I wonder if there is a little extra D&A this half year in relation to the business restructuring write offs? If so and that was normalised out, the normalised 'DA' figure could be rather less than that quoted!

Last but by no means off the hook is E

The half year was conducted

"realising the financial impact on complex and challenging projects in New Zealand and Australia, which are now either completed or nearing completion."

I wonder if 'E' has been restated removing the one off effect of these challenging projects?

Overall I am no closer to figuring out whodunit. It is a pity the whole affair didn't take place on the Orient Express. If it had, we could have simply shunted the whole train into a tunnel and not move it out until someone confessed!

SNOOPY

Biscuit

21-05-2020, 12:27 PM

I wonder if 'E' has been restated removing the one off effect of these challenging projects?

Overall I am no closer to figuring out whodunit. It is a pity the whole affair didn't take place on the Orient Express. If it had, we could have simply shunted the whole train into a tunnel and not move it out until someone confessed!

SNOOPY

But Snoopy, the normalised EBITDA and NPAT figures are given and in both cases, E has been normalised. So I think there is a cast-iron alibi. You are letting your natural bias against this character cloud your judgement.

Snoopy

21-05-2020, 12:41 PM

It was Holmes, of course:

"It is an old maxim of mine that when you have excluded the impossible, whatever remains, however improbable, must be the truth."

But Snoopy, the normalised EBITDA and NPAT figures are given and in both cases, E has been normalised. So I think there is a cast-iron alibi. You are letting your natural bias against this character cloud your judgement.

No I am merely invoking the reasoning of Holmes you highlighted above. My further musings on 'I' and 'DA' are interesting but not convincing to me. I think it is still possible that EBITDA and NPAT were normalised in different ways. And if that happened, 'E' becomes the guilty party by elimination!

SNOOPY

Biscuit

21-05-2020, 12:49 PM

No I am merely invoking the reasoning of Holmes you highlighted above. My further musings on 'I' and 'DA' are interesting but not convincing to me. I think it is still possible that EBITDA and NPAT were normalised in different ways. And if that happened, 'E' becomes the guilty party by elimination!

SNOOPY

Well, that's elementary my dear Snoopy, but could upstanding corporate gentlemen be reasonably accused of normalising earnings in two different ways?

Snoopy

21-05-2020, 12:53 PM

Well, that's elementary my dear Snoopy, but could upstanding corporate gentlemen be reasonably accused of normalising earnings in two different ways?

No they couldn't, but what about the management at Scott Technology?

SNOOPY

Biscuit

21-05-2020, 01:01 PM

No they couldn't, but what about the management at Scott Technology?

SNOOPY

There seems, though, no motive for doing that and as a long-term shareholder, you would not suspect them of being rotters?

winner69

21-05-2020, 01:02 PM

There seems, though, no motive for doing that and as a long-term shareholder, you would not suspect them of being rotters?

Anything can happen with a Dunedin based company

Biscuit

21-05-2020, 02:08 PM

Anything can happen with a Dunedin based company

Well, yes, foreigners, anything is possible. But, for the sake of focusing the investigation, I would eliminate E for the logical reason that the same income is in both terms. Also, though, I would agree with Snoopy's logic, that it cannot be T. How could T (an unusual credit) be normalised up? Therefore, we should eliminate T. That leaves us only I, D and A. So, we are making progress?

Snoopy

23-05-2020, 06:23 PM

Well, yes, foreigners, anything is possible. But, for the sake of focusing the investigation, I would eliminate E for the logical reason that the same income is in both terms. Also, though, I would agree with Snoopy's logic, that it cannot be T. How could T (an unusual credit) be normalised up?

OK I'll bite. Tough trading conditions could see Scotts making losses for years. So if they made a loss for many years, they might normalise things by projecting a tax credit every year?

SNOOPY

Snoopy

23-05-2020, 06:55 PM

I am not sure SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a dividend payer only to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20155.5c+2.5c
N/A c + 3.47c3.47c.

FY20165.5c+4.0c
7.64c + 5.56c13.20c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + ?c 5.02c + ?c5.02c

Total62.67c

Averaged over 5 years, the dividend works out at 62.67/5 = 12.5c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SCT is:

12.5 / (0.075) = $1.67

Now using my plus and minus 20% range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.67 x 1.2 = $2.00
Bottom of Business Cycle Valuation: $1.67 x 0.8 = $1.34

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SCT shares trading at $2.30 (above the upper end of my expected range) are now overvalued by 15%.

I am not sure SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a dividend payer only to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s unimputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20165.5c+4.0c
7.64c + 5.56c13.20c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + 0c 5.02c + 0c5.02c

Total59.2c

Averaged over 5 years, the dividend works out at 59.2/5 = 11.8c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SCT is:

11.8 / (0.075) = $1.57

Now using my plus and minus 20% range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.57 x 1.2 = $1.88
Bottom of Business Cycle Valuation: $1.57 x 0.8 = $1.26

SCT shares were trading at $1.84 on Friday 22nd May (near the upper end of my expected range) and are IMO now fully valued (from a business cycle projected dividend income perspective). With big capital spending programs on hold for many customer companies, and dividends from more buoyant years boosting my valuation, a significant recovery in business is already priced into SCT shares as they trade today The growth story, if it still exists, has not been priced in though.

SNOOPY

winner69

04-06-2020, 08:45 AM

Snoops ..3 requests re your puzzle ..no response

Nice how some companies treat their shareholders with contempt ...often reflected in both company performance and share price.

percy

04-06-2020, 08:50 AM

BAPP

06-06-2020, 04:08 PM

Nitaa

06-06-2020, 04:36 PM

You're right Snoopy. John Thorman and incompetent director is the same word. Good for SCT but very bad to have this lightweight incompetent director on board for shareholders.

Understand that John Thorman got sacked/asked to resign from TMF Group a few months back for questionable practices.

winner69

06-06-2020, 05:33 PM

Interim seems a long time.

Snoopy

24-06-2020, 07:35 PM

Snoops ..3 requests re your puzzle ..no response

Nice how some companies treat their shareholders with contempt ...often reflected in both company performance and share price.

I have used the Kippenberger stonewall to my advantage. I was going to buy a parcel of shares at the time of the last result (my first SCT purchase of the Covid-19 era), which would have been a buy price of $1.84. However the uncertainty around the result made me reduce the price I was prepared to pay. So I ended up picking up a parcel at $1.65. That equates to just above my 'capitalised dividend valuation'. But that was a 'no growth' valuation. I figured all that IP contained within SCT was worth a bit of a premium.

The Sharsies crowd seem to have taken over the market for the company today. Total turnover of $554 spread over 22 trades! That is an average trade value of just 25 bucks! Price looking weaker with a bid at $1.73. Perhaps tomorrow I will support the company -and my waistline-, by not buying lunch and instead making a 'mega-purchase' (in Sharsies terms) of SCT shares with the money saved on market!

SNOOPY

Joshuatree

24-06-2020, 11:24 PM

Great time for Beef Bot makers

COVID-19 meat plant map | 2020-04-22 | MEAT+POULTRYwww.meatpoultry.com › articles › 22993-covid-19-me... (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiRmqPjqprqAhWMwjgGHaAFDysQFjAKegQICBAB&url=https%3A%2F%2Fwww.meatpoultry.com%2Farticles%2 F22993-covid-19-meat-plant-map&usg=AOvVaw3QizVrIypzRAxExbg6Rdk4)

Snoopy

25-06-2020, 09:01 AM

Great time for Beef Bot makers
https://www.meatpoultry.com/articles/22993-covid-19-meat-plant-map

Yes but it is a pity that despite the success of the automated lamb boning operation, Scott's have yet to perfect the equivalent for processing beef.

Major shareholder JBS Australia are in trouble because the Chinese have banned beef imports from their Australian plants. However, the parent company of JBS Australia, JBS USA, are also in trouble for different Covid-19 related reasons as outlined in your reference Joshuatree. I requote the JBS USA plant closures since 31st March 2020 from your reference.

March 31
"JBS USA cut production at a beef facility in Souderton, Pa., on March 31."

April 14
"JBS USA temporarily shuttered a beef production facility in Greeley, Colo., through April 24 due to an outbreak of COVID-19 among employees and the surrounding community. The company shut its beef plant in Souderton, Pa., until April 16, after previously cutting production."

April 21
"JBS USA indefinitely closed its pork plant in Worthington, Minn., due to an outbreak of COVID-19 among workers."

April 22
"JBS USA limited operations at its beef plant in Brooks, Alberta."

April 27
"JBS USA announced the temporary closure of its beef production plant in Green Bay, Wis., following a coronavirus (COVID-19) outbreak."

May 5
"JBS USA stated that it will reopen its beef processing plant in Green Bay, Wis., in phases following a coronavirus (COVID-19) outbreak."

May 7
"JBS USA reopened a portion of its pork processing plant in Worthington, Minn., with reduced staff."

May 21
"JBS Canada is increasing production at its beef plant in Brooks, Alberta. The company previously scaled down to one shift on April 22 following an outbreak of COVID-19 among employees. The plant remained open with limited capacity while a nearby Cargill plant in High River, Alberta, closed for two weeks last month. Together, the two plants process nearly 70% of Canada’s beef."

Week of June 16
"After reporting hundreds of COVID-19 cases, JBS USA beef plant in Hyrum, Utah began operating with limited capacity in mid-June, resumed full operations June 19."

It does read like JBS USA are over their worst. But with the way the USA is handling their Covid-19 outbreak, this might be only the first chapter.

SNOOPY

kiwidollabill

25-06-2020, 09:10 AM

^Australia is going to go through a period of low processing levels (this started months ago) as favorable weather has led to herd rebuilding.

BlackPeter

08-07-2020, 08:19 AM

Article in the Herald .... reporting some mixed bag: Performance bad, but outlook in some areas / regions better than in others:

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12346097&ref=CE-TA-DND-BUS

Scott Technology is seeing an uneven recovery in its global markets, with the Asia Pacific returning to normal more rapidly than in the US and Europe.

Still, the robotics and automation firm expects its earnings in the 12 months through August to face a material hit from the Covid-19 pandemic, including the cost of restructuring its global business.

Snoopy

08-07-2020, 07:17 PM

Article in the Herald .... reporting some mixed bag: Performance bad, but outlook in some areas / regions better than in others:

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12346097&ref=CE-TA-DND-BUS

That Herald article is pretty much a cut and paste from Scott's press release of yesterday (albeit some details, like the business outlook, have been omitted from the Herald's version).

https://www.nzx.com/announcements/355846

I was pleased the share price went up 10% following that unscheduled update, even if 5c of that rise was given back today (SCT closed at $1.75). There was nothing that surprised me in the update though.

Underperformance from Alvey in Europe

We don't hear much about it, but the size of Scott's business in Europe (made up of mainly Alvey) now matches, in staff numbers at least, those working in Australasia. This means the performance of the European business has a large effect on how the Scott's group as a whole is traveling. My post 717 provides evidence that Alvey's contribution since acquisition by Scotts in FY2018, as reported in AR2018, has deteriorated. Europe is having a difficult time, what with trade wars with Trump and uncertainty caused by Brexit. This could very well be the cause of a continuing significant decline in palletising, conveying and warehouse automation solutions, specialised in by Alvey, being bought and sold within Europe. The only comment in the Scott half year report letter in March, regarding Europe, was that Alvey was being integrated with Scott's German division. There was no market comment on Europe, although in the same paragraph it was noted that Transbotics in the United States was providing a good growth platform. Reading between the lines: Europe in the doldrums; No growth to speak of?

I posted the above in July 2019, all pre-Covid-19!

Asia and Europe looks to be the most off target. They look to be pretty much geared to one off 'materials handing' (Europe) or 'appliance line manufacturing' (Asia) projects.

From Scott's 07-07-2020 press release:

"Signing of new contracts for materials handling and logistics solutions with a large food customer in Europe." This is good, but, with the slow down in the USA, almost half of Scott's business is with the old Alvey now. This will keep Scott's Europe occupied, but with the greater disruption from Covid-19 'over there', I still expect Scott's in Europe will be loss making this year.

"Recommenced the commissioning of an appliance line for Bosch in China." - Scott's never told us commissioning had stopped. I am pleased it has now restarted.

"An agreement in China for the design and build of a new manufacturing line for one of the world’s largest appliance brands." - This is good, but it may only kick in once the Bosch appliance line is finished and will very likely flow over into the next financial year. So maybe not a great year in China for Scott's in FY2020? Hopefully not a loss, although I am not sure if Scott's have made any money in China yet (due to 'transfer pricing' (?) ).

'The Real Pet Food Company' has bought three new Scott 'Baldestop' bandsaws in 2017 (two in NZ and one in Australia) for $NZ89,000 each. One replaced a three month old bandsaw that cost $NZ25,000.

This is a good example of a customer willing to pay top dollar to obtain a safer working environment. The replacements were the response to a staff member losing the tip of a finger while using the old equipment.

"Ongoing interest in Scott’s 'Bladestop' technology with the recent signing of a deal for the supply of 30 'Bladestop' machines to JBS USA, the world’s largest protein producer."

It is good that JBS are continuing to support Scott's by purchasing their products. But 30 'Bladestop's are worth about: 30 x $89,000 = $2.7m. A good order. But one fully automated boning room (which does not yet exist for beef remember) would be worth around $50m. This is where the real meat industry money is, not 'Bladestop'. Nevertheless, I hope the new sales staff in the USA are able to broaden the market for 'Bladestop' in the USA over there beyond Scott's own shareholder base!

While pleased to read the announcement, I see it as a springboard into FY2021. I still expect SCT to lose money this year (FY2020).

"An agreement for an industrial automation solution for a company providing services to the defence sector."

Providing the capability for weapons manufacture? I hope not!

"Cashflow management remains a priority while demand rebuilds to pre-COVID-19 levels." - Translation: No final dividend in December.

SNOOPY

Snoopy

02-08-2020, 09:03 PM

From Scott's 07-07-2020 press release:

"Signing of new contracts for materials handling and logistics solutions with a large food customer in Europe." This is good, but, with the slow down in the USA, almost half of Scott's business is with the old Alvey now. This will keep Scott's Europe occupied, but with the greater disruption from Covid-19 'over there', I still expect Scott's in Europe will be loss making this year.

"Recommenced the commissioning of an appliance line for Bosch in China." - Scott's never told us commissioning had stopped. I am pleased it has now restarted.

"An agreement in China for the design and build of a new manufacturing line for one of the world’s largest appliance brands." - This is good, but it may only kick in once the Bosch appliance line is finished and will very likely flow over into the next financial year. So maybe not a great year in China for Scott's in FY2020? Hopefully not a loss, although I am not sure if Scott's have made any money in China yet (due to 'transfer pricing' (?) ).

"Ongoing interest in Scott’s 'Bladestop' technology with the recent signing of a deal for the supply of 30 'Bladestop' machines to JBS USA, the world’s largest protein producer."

It is good that JBS are continuing to support Scott's by purchasing their products. But 30 'Bladestop's are worth about: 30 x $89,000 = $2.7m. A good order. But one fully automated boning room (which does not yet exist for beef remember) would be worth around $50m. This is where the real meat industry money is, not 'Bladestop'. Nevertheless, I hope the new sales staff in the USA are able to broaden the market for 'Bladestop' in the USA over there beyond Scott's own shareholder base!

While pleased to read the announcement, I see it as a springboard into FY2021. I still expect SCT to lose money this year (FY2020).

Interesting article referenced on another thread about the global robotics market.

https://asiatimes.com/2020/08/us-china-both-lag-badly-in-industrial-robot-race/

"What about 2020? With Covid-19, it will be bad. Perhaps as bad as 2009, when the Lehman shock led to a 47% decline in total worldwide industrial robot installations. Even if installations are down by only half that amount it would still be a major setback for the industry."

"Fanuc, Japan’s top pioneering robot maker, reported a 19% year-on-year sales decline in the three months to June and is girding for a 17% decline in the fiscal year ending March 2021. This comes after a 20% drop last fiscal year."

Unlike the manufacturers referred to in that article, Scott's tend use robots from other manufacturers rather than make them. IOW Scott's expertise is in developing project solutions using robotics rather than making the building blocks for other robotic solutions providers to use. The meat industry should be well motivated to continue with their automation projects, given the spatial distancing issues that appear to have caused infections in plants in Australia and the USA. But that combined two year decline of 44% at Fanuc for the year ended 31st March 2021 is scary. That 'light on the horizon' for Scott's seems a little further away today.

SNOOPY

emveha

07-08-2020, 11:46 AM

BeeBop

07-08-2020, 11:49 AM

That saves me a bit of work....was about to look up announcements to see what had driven this morning's rise. Nice to see them getting more work outside of the meat works etc.

Davexl

07-08-2020, 12:59 PM

Snoopy

08-08-2020, 09:50 AM

Good news!

FURTHER CONTRACT WIN STRENGTHENS SCOTT TECHNOLOGY’S POSITION IN MINING SECTOR

Automation and robotics solutions provider, Scott Technology (NZX: SCT), has been awarded a further multi-million dollar contract by Rio Tinto to provide and commission the equipment for a new sample preparation and analysis laboratory at the Robe Valley mine site in Western Australia.

Not sure why this announcement was listed as Not Price Sensitive! SP up 12% at one point at $1.90.

https://www.nzx.com/announcements/357571

Once again the wisdom of acquiring Rocklabs in 2008 has come through. Although my memory of the acquisition was that principal Ian Devereux, working in Auckland but an Otago boy by birth, was at an age that he wanted to ease out of the business that he had founded in 1969. It was Ian who sought out Scott Technology as a suitable manager of his business going forwards, not the other way around. Thus marked the start of Scott Technology's years as an 'NZ technology aggregator'. A company set on taking research projects onto the next commercial level. It has to be said that subsequent acquisitions were less successful. 'New broom' John Kippenberger has either closed them down or sold them off. Of course even before the arrival of JK as MD, we had JBS come on board as a controlling shareholder. And that has focussed future developments very much on the meat industry automation market.

On the face of it 'Rocklabs' is not a core business for Scott's anymore. For Scott's as a 'global automation business' there was very little automation in the Rocklabs core product of mineral sample testing machines. In fact I think all of the automated side of the 'automated sample preparation and analysis' is no longer done at Rocklabs Auckland base. IOW there is enough baseline work going through Rocklabs to sever all pretenses of being an 'automation company'. But there is one very important sense in which Rocklabs is core to Scotts. Rocklabs makes money! And it does so in both good and bad years. Unfortunately we can't say the same for the rest of the Scott's business units which are more 'boom and bust'. When Scott's had a bad year, invariably we got regaled with stories of how well Rocklabs was doing. On this historical precedent, that means FY2020 for Scotts will be an awful year. But, judging by the share price, I imagine the market is already looking through this, and is looking towards FY2021.

One very encouraging aspect of this latest project for Rio is that it is 'repeat business'. When Scotts know exactly what they are doing from 'day 1', there is good money to be made from such projects. As a shareholder all I can say is 'roll on 2021', as I don't see any profit contribution to the bottom line of Scotts from this latest project until then :-(.

SNOOPY

Snoopy

15-10-2020, 11:42 PM

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

Good day for Scott Technology on the market today. The share closed up 7.4% at $1.88. But the underlying rise was even better as the offer on close was at $1.93 with no sellers below $2. Based on the unfulfilled closing offer price, the price rise today was 10.3% (the figure I would use). What was the driver of this sudden price action?

From:

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SCT/361505/332962.pdf

----------

15 October 2020 Company Announcement: SCOTT AWARDED MULTI-MILLION DOLLAR CONTRACT FOR WORLD LEADING MEAT PROCESSING TECHNOLOGY

"Scott Technology Awarded Contract to Design and Build New Zealand’s Most Advanced Lamb Processing System for Alliance Group Automation and robotics solutions provider, Scott Technology Limited (NZX: SCT), is pleased to announce the award of a large contract by Alliance Group to design and build an X-ray lamb boning system for Alliance’s Lorneville plant, located near Invercargill, as the co-operative seeks to improve the operational efficiency of its largest site."

-----------

This is good news because the automated lamb boning room is an automation project that Scott has nailed. This kind of 'repeat business' becomes relatively low risk and high profit margin for Scotts, albeit this is a job for FY2021, not the financial year just ended. What is unusual is the timing of this announcement. Last year the full year result was released on October 24th, only a matter of days away. Traditionally Scott's announce significant new contracts signed on results day. So why has this announcement been brought forwards by nine days? Scott's have been subdued on what is happening at their European arm, which has historically been a very significant part of Scott's turnover and is doubtless very quiet. I wonder if CEO Kippenberger has brought forwards the positive announcement to raise the share price a week before the result so that a cash issue, to pay down debt, can be got away at a good price 'based on the market value of Scott's shares 7 days before the announcement'? I know that sounds cynical. But I have been around the markets for a while! I guess all will be revealed in a few days.

SNOOPY

discl: hold SCT

Snoopy

30-10-2020, 08:27 AM

I wonder if CEO Kippenberger has brought forwards the positive announcement to raise the share price a week before the result so that a cash issue, to pay down debt, can be got away at a good price 'based on the market value of Scott's shares 7 days before the announcement'? I know that sounds cynical. But I have been around the markets for a while! I guess all will be revealed in a few days.

SNOOPY

discl: hold SCT

Looks like we are almost a week late announcing the FY2020 financial result, if we go by the results declaration dates from the last couple of years. The second wave Covid-19 lock down in Europe can't be helpful for the formerly named Alvey business (now a Scott's subsidiary) in the short term. Stunned mullet boards on potential customer companies will be more concerned with conserving cash that splashing out on big capital projects. And then of course there is Brexit disrupting things - anyone remember that? A loss for FY2020 is I think a given. But it is the outlook for FY2021 that will drive the share price from here. I am predicting a late in the day Friday release for the market announcement. A dump to digest, that investors will hopefully forget by the opening bell on Monday. Let's see.

SNOOPY

winner69

30-10-2020, 08:54 AM

BlackPeter

30-10-2020, 09:51 AM

Must have woken them up Snoopy

Plenty of ‘normalisation’ to work on as it looks like a disaster of a year

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SCT/362274/333890.pdf

Jeez - 22.3 cents loss per share ... they could hardly do worse, even if they tried. I suppose the new CEO worked hard to uncover every skeleton - this way it will be hard not to produce better numbers than these come next year.

On the other hand ... long term PE is now 21.3, and this comes with significant negative earnings growth. Clearly a company where one need to believe the story to buy in. Does anybody remember it?

Anyway - great companies see dark times as well ... I remember a time when the SKL share was at 47 cents, and look where it is now. Maybe this is the next SKL? Full steam ahead ...

BlackPeter

30-10-2020, 10:05 AM

In May 2020, Scott announced its new ‘Engineering Scott to High Performance 2025’ strategy, which
is focused on positioning Scott as the first choice for customers around the world wanting smart
automation and robotic solutions which make their businesses safer, more productive and more
efficient.

Hmm ... Scott is (on an international scale) a dwarf competing with heavyweights like Stäubli, Rockwell Automation, Yaskawa, Epson, Mayekawa Mfg, Bastian Solutions, Kuka, Kawasaki Robotics, ABB, Fujitsu, Yaskawa, Siemens, and probably some hundred more well known and better placed automation giants. Sure - Scott found sort of a niche for meat processing robots, but - many of the others are as well in food processing - how hard an it be?

Maybe they should start their new journey with a reality check?

BlackPeter

30-10-2020, 10:19 AM

... anybody noticed that they classify the just published announcement of their annual results as "Confidential document"

12048

It is good practise to review documents before sending them to the market ... maybe they introduce in the future as well a review of NZX publications after they already realised for their strategy 2025 that a bid review might add value :p;

Incredible ...

Snoopy

17-11-2020, 09:33 AM

... anybody noticed that they classify the just published announcement of their annual results as "Confidential document"

It is good practise to review documents before sending them to the market ... maybe they introduce in the future as well a review of NZX publications after they already realised for their strategy 2025 that a bid review might add value :p;

Incredible ...

Received my Annual Report for FY2020 in the mail. It reads all right up to page 48, then jumps back to a repeat of page 33. Once again we count back up to page 48 then it jumps to page 65. So pages 49 to 64 inclusive are missing and that includes all of section C and D! Has anyone else who gets sent a paper copy of the annual report suffered the same lack of reporting fate?

I would put it down to a one off. But as BP has reported, this is now a repeat offence. Add to this the slowness in applying for the wage subsidiary earlier this year, causing some employees to run out of pay completely, and the picture painted here looks unconscionably sloppy.

Could Scott Technology be a candidate for most careless corporate of the year?

SNOOPY

winner69

17-11-2020, 10:02 AM

Robots put AR together?

winner69

19-11-2020, 05:10 PM

Beau

19-11-2020, 05:27 PM

The latest TIN Tech Report has Scott as. ‘Rising star’ ...placed 2nd behind Xero

TIN reveals NZ's largest tech exporters - and the fastest-growing
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12382899
Just a shame it doesn’t relate to share price after double down some time back hasn’t made any headway, thought about axing it today.

Snoopy

19-11-2020, 07:41 PM

The latest TIN Tech Report has Scott as. ‘Rising star’ ...placed 2nd behind Xero

TIN reveals NZ's largest tech exporters - and the fastest-growing
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12382899

Thanks for the link Winner. I scrambled to my SCT Annual Report collection to find out what those TIN table figures meant. The table is dated 2020. But as far as SCT is concerned that 'Revenue' figure of $225m relates to the FY2019 year. The growth seems to be the increase in revenue from FY2018 to FY2019. This is a little flattering to SCT, because of the timing. During FY2018 SCT bought two significant businesses .

1/ Alvey: Materials handling and logistics (acquired 23rd April 2019)
2/ Transbotics: Automated guided vehicles, (acquired 31st May 2018)

The Scott balance date is 31st August, so both of these acquisitions were only on the books for a few months of the FY2018 year.

From p62 of AR2018

"Had these acquisitions been effected from 1 September 2017 (the first day of FY2018), the revenue from the groups continuing operations would have been approximately $225m..."

And where have we heard that figure before? It corresponds to the actual revenue for FY2019. So the real underlying revenue growth between FY2018 and FY2019 was , drum roll...

A big fat zero!

Where would a no growth company fit on that TIN growth table?

SNOOPY (who did check the figures before publishing)

PS Will SCT issue a press release to telegraph their TIN achievement? Now that really woudl be embarrassing!

BlackPeter

20-11-2020, 08:48 AM

The latest TIN Tech Report has Scott as. ‘Rising star’ ...placed 2nd behind Xero

TIN reveals NZ's largest tech exporters - and the fastest-growing
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12382899

Well, yes, they are a far off second and just when they rank companies according to revenue. No need for them to earn money or - shudder - be profitable.

Making money is such an old fashioned concept, isn't it? Maybe they should instead of revenue rank them according to destruction of shareholder value. This would be at least honest.

Given that WYN and CBL earned the ultimate price in that category already in previous years and don't qualify anymore for the competition, Scott must be notching up, maybe they are even already a winner?

winner69

20-11-2020, 09:01 AM

That TIN report is ego driven with motivation to show how important the tech sector is to the NZ economy, esp the export sector - like touting huge numbers and huge growth. blah blah

Politicians fall over backwards and say NZ must give tech heaps of support to grow exports --- maybe even double them to $20 billion in a few years

Reality is tech export sales as a % of GDP has been in decline for years

Getty

20-11-2020, 09:09 AM

Well, yes, they are a far off second and just when they rank companies according to revenue. No need for them to earn money or - shudder - be profitable.

Making money is such an old fashioned concept, isn't it? Maybe they should instead of revenue rank them according to destruction of shareholder value. This would be at least honest.

Given that WYN and CBL earned the ultimate price in that category already in previous years and don't qualify anymore for the competition, Scott must be notching up, maybe they are even already a winner?

Good to see people call it as is, not weasel words & platitudes

Beau

18-12-2020, 10:25 AM

Good to see contracts rolling in and share price onwards and upwards.https://www.nzx.com/announcements/365290

Snoopy

18-12-2020, 11:59 AM

Good to see contracts rolling in and share price onwards and upwards.https://www.nzx.com/announcements/365290

Agreed, although being the resident "Scott's Grinch" I should point out:

1/ The Contract Assets in the China division at EOFY2020 were only $1.780m, well down on the $2.487m of the previous year (AR2020 p42). $1.780m is not much of a project portfolio and that balance may be mainly made up of service contracts. It could very well be that the China division had 'nothing to do', project wise, until today's "Little Swan" appliance line project announcement.

2/ The Alvey division in Europe is Scott's largest division in terms of 'Contract Assets' at EOFY2020. If the only new work they have is the carton handling, sortation and palletising system for Alliance’s Lorneville plant in New Zealand, they will be making serious losses.

So while positive, I would hesitate to call today's announcement 'good news'. It signals 'lower losses', not profits.

SNOOPY

Bjauck

18-12-2020, 12:11 PM

...

So while positive, I would hesitate to call today's announcement 'good news'. It signals 'lower losses', not profits.

SNOOPY

Over the past two years, the SCT share price is down 10% whereas the NZX is up over 45%. Perhaps the SCT SP deterioration had been relatively overdone?

Snoopy

18-12-2020, 12:43 PM

Over the past two years, the SCT share price is down 10% whereas the NZX is up over 45%. Perhaps the SCT SP deterioration had been relatively overdone?

I hope so as I have accumulated a couple of parcels at $2.20 and $1.65 over the last twelve months. Today's movement puts me 'back in the black' on those purchases. However, I should point out that by revenue, only 10% of Scott's business is done in New Zealand (AR2020 p11). So I wouldn't expect the SCT share price to correlate with the NZX.

SNOOPY

Bjauck

18-12-2020, 01:13 PM

I hope so as I have accumulated a couple of parcels at $2.20 and $1.65 over the last twelve months. Today's movement puts me 'back in the black' on those purchases. However, I should point out that by revenue, only 10% of Scott's business is done in New Zealand (AR2020 p11). So I wouldn't expect the SCT share price to correlate with the NZX.

SNOOPY

True. We should be grateful that they have retained a NZ listing when so many others have gone.

Snoopy

28-12-2020, 10:43 AM

I didn't get around to making a profit forecast for FY2019.

Fast forward to FY2020. The way Scott's now operate, segmented results are declared in geographical areas. This makes it difficult if you are used to thinking of results in terms of what is happening to different global industries. I think it best to think of Scott Technology as having a base of earnings that does not grow from year to year, then superimpose on this picture the earnings growth from certain fast growing business units.

Taking the base level profit of FY2019,

FY2019 Profit Normalisation:

Most of these adjustments may be found on p39 of AR2019. I have:

a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m

How do I see things developing over the current year FY2020?

AmountDescriptionCalculation

$9.464mBaseline Adjusted Profit FY2019

+$0.252mInterest saved from lower interest intellectualbill$0.350m x 0.72

+$1.649mMeat Industry Robotics (incremental)$10.994m x 0.15 [See Note (A)]

+$0.705mTransbotics (incremental)0.15 x $4.7m [See Note (B)]

-$0.500mAppliance Production LinesMy post 800

+$0.630mMining2 x $0.315m [See Note (C)]

-$1.458mLoss of NZ R&D Grant (scheme expired)0.72 x $2.026m

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9<script src="https://securepubads.g.doubleclick.net/gpt/pubads_impl_2020120801.js" id="gpt-impl-0.08732252418601888" nonce=""></script>.464m
$10.742mForecast NPAT Total

With 78.311m shares on issue, this equates to an earnings per share figure of:

$10.742m / 78.311m = 13.7cps

At $2.20,SCT is trading on a projected PE of 220/13.7 = 16.0

Notes

A/ Meat industry Robotics Thanks to the expansion of the Scott Technology site at Kaikouri Valley in Dunedin, FY2020 represents the first year in which the meat industry robotics team have double the area to build their meat industry robotics projects. From my post 485, the aim is to supply 5-10 automatic robotic projects per year. The estimated value of a full production line is $12m to $13m, or some $6.5m for half automating a production line. Most growth looks to come from Pork (see Pork Primal System already drawn up on pages 27&28 of AGM2019 presentation) and Beef processing in FY2020, because the lamb market in Australasia is significanly automated already.

Seven half projects completed over FY2020 would produce revenues of: 7 x $6.5m = $45.5m. This represents an increase of:

$45.5m - $34.506m = $10.994m

From post 485, the margin on this increased turnover is approximately 15%. This allows us to calculate the NPAT incremental profit from the increase in meat industry turnover

B/ Automatic Guided Vehicles We know from slide 6 of the Forsyth Barr March 2019 Emerging Companies Conference that the EBITDA margin at Transbotics is 20%. Interest is not negligible and Depreciation and Amortisation at Technology companies can be high. So I am assuming a NPAT profit margin of 15%

Sales over the last five years at Transbotics have ranged from $US4.5m ($NZ6.9m) to $US11m ($NZ16.4m) over the years 2014 to 2108 (slide 30 same presentation (using exchange rate of $NZ1 = $US0.67). In the year that Transbotics came into the Scott fold (FY2018) the annualised sales rate worked out to be:

$NZ4m x (365/122) = $NZ12m

The AGV market has a target growth rate of 30%+ (slide 14, Scott Presents with Moelis November 2019 Slide Show). So I am estimating Tramsbotics revenue was 1.3 x $12m = $15.6m for FY2019 and 1.3 x $15.6m = $20.3m over FY2020, That equates to incremental revenue of $4.7m. The incremental increase in NPAT from that can be estimated as follows:

0.15 x $4.7m = $0.705m

C/ Mining

Hopkins noted in his AGM address that:

"we expect Mining to rebound significantly in 2020,"

"Opportunities for the Mining sector is primarily for Scott’s sample preparation systems but through recent developments, extends into field automation ,such as robotic refuel,robotic idler change and automated fire assay."

Multiple Robo-prep installations are planned for FY2020. The addressable market for these is judged to be $20m to $50m per annum.(Moelis November 2019 Presentation , Slide 13). The largest installation so far was an automated Sample Preparation System for Pernoles, the second largest mining company in Mexico. This build took 5 months, largely at Scott's Sydney engineering base. MAR, now "Scott Australia' had a turnover of about $7.7m when acquired in FY2015. With organic growth that could be $10m today. If half of MAR's resources were assigned to this robo-prep project for 5 months, that would account for:

0.5 x 5/12 x$10m = $2.1m of turnover.

If we assume a 15% profit margin, this one project could have contributed: 0.15 x $2.1m = $0.315m of the group profit after tax. We can use this figure to judge the NPAT effect of an incremental two extra Robo-prep system sales on net profit.

D/ 'Robotworx' profit assumed unchanged.

E/ 'Alvey' profit assumed unchanged due to the continued uncertainty and flow on fall out from Brexit.

F/ 'HTS-110' Superconductor Technology Subsidiary assumed to be no longer a meaningful contributor to the group (it wasn't mentioned in the Annual Report).

G/ I have not made any allowance for costs relating to the closure of "DC Ross". However this is a 'one off' event that is unrepresentative of the ongoing operation of the business.

I always like to mark myself on my profit forecasting ability. So best to get this embarrassing exercise out of the way while everyone is on holiday so no-one reads it. The headline loss figure of Scott Technology of $17.503m is awful. But there is a lot of 'one-off' stuff in there that I like to normalise out.

In formation in the table below has largely been complied from AR2020, pp5, 35 and 36.

Declared Profit (Loss)($17.503m)

add back Asset Impairment$7.600m

add back Project Impairments$6.295m

add back Restructuring Expense$4.257m

subtract Gain on PP&E sales($0.328m)

add back Foreign Exchange Derivative Losses (unrealised)$0.082m

add back Fair Value Hedge Derivative Losses$0.890m

subtract Foreign Exchange Gains($0.450m)

subtract Fair Value Firm Commitment Gains($1.086m)

subtract Foreign Exchange Derivative Gains (unrealised)($0.146m)

subtract Interest Rate Swap Gains (unrealised)($0.146m)

equals Normalised Profit($0.535m)

During the period, $3.614m of Covid wage subsidy payments were made. I have elected, perhaps controversially, not to make a normalising adjustment for this. That is because it is in effect partially replacing an income stream that would have occurred if government imposed lock downs were not in place. I also believe that if another lock down period were to be imposed, then such supplementary payments would be available again. In previous years I haven't removed one off government supplied R&D grants from the income statement either, using similar logic.

Notwithstanding this, my profit prediction of $10.472m (normalised) was awful, even if I can claim my forecasting errors were Covid-19 related. So what on earth went wrong?

SNOOPY

Snoopy

28-12-2020, 11:44 AM

How things have changed since the rights issue was banked. Scotts have spent it all and debt is back on the balance sheet again. To get some idea of the debt holding burden going forwards, we need to look back at what the net debt balance was at the three documented points throughout the year (beginning, middle and end)

EOFY2018EOHY2019EOFY2019

Cash & Cash Equivalents$12.473m$0m$0m

Bank Overdraft$0m($5.678m)($4.737m)

Current Portion of Term Loans($3.321m)($3.996m)($4.217m)

Term Loans($4.088m)($2.904m)($7.450m)

Total Net Bank Debt$5.064m($12.578m)($16.404m)

From the published full and half year balance sheets, there is no way to know the distribution of net debt throughout the year. However, we can calculate a linear approximated average that gives us an indicative net debt figure for the year from the table above.

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - ($1.715m - $0.518m)= -$1.177m (A)

So the net indicative interest rate paid was {A}/{B}:

$1.177m / $7.996m = 14.7% (still high though, but more believable!)

I was forecasting a reduced interest rate bill over FY2020. But did it happen? Let's see.

To get some idea of the debt holding burden, we need to look back at what the net debt balance was at the three documented points throughout the year (beginning, middle and end)

EOFY2019EOHY2020EOFY2020

Cash & Cash Equivalents$0m$0m$7.745m

Bank Overdraft($4.737m)($8.975m)$0m

Current Portion of Term Loans($4.217m)($2.679m)($3.719m)

Term Loans($4.088m)($8.517m)($7.466m)

Total Net Bank Debt($16.404m)($20.153m)($3.440m)

From the published full and half year balance sheets, there is no way to know the distribution of net debt throughout the year. However, we can calculate a linear approximated average that gives us an indicative net debt figure for the year from the table above.

Indicative Net Debt Over FY2020 = (-$16.404m-$20.153m-$3.440m) / 3 = -$13.452m {B}

Now I get to the bit where I stuffed up last year. That was because I included the 'lease interest paid' with all the other interest paid. So I will take care to filter those lease interest payments out this time. Look under AR2020 section C5 to find the $0.662m adjustment

The net interest paid over FY2020 was: $0.191m - ($1.431m - $0.662m)= -$0.578m {A}

So the net indicative interest rate paid was {A}/{B}:

$0.578m / $13.452m = 4.3%

The net interest paid is a huge come down from FY2019. The interest saved is more than the $0.252m that I predicted (actual saving $0.905m). The new CFO, ex Pacific Edge, must have nailed down those Scott bankers. Good to see. But it doesn't help explain where my 'projected profit' disappeared to.

SNOOPY

Waltzing

28-12-2020, 01:46 PM

reading it....before we get in the pool...

"everyone is on holiday so no-one reads it."

Waltzing

28-12-2020, 01:50 PM

interesting posts.. reading more... pool can wait.. all afternoon... cant travel anywhere... still got a whole year and a bit to read ...

winner69

28-12-2020, 02:39 PM

Snoops - you deserve a medal for just trying to make sense of the convoluted Scott accounts and presentations

Even them saying Underlying EBITDA of $3.7m - down from $20.0m last year - doesn't seem to make sense.

Pretty shocking result eh but SCT seem to be becoming a market darling these days so things must be different this time

Jerry

28-12-2020, 02:46 PM

I had Scott for some years and it seemed a good bet with new technology for automating assembly lines in manufacturing and agricultural uses. It gave divs and increased in value until a large (Brazilian?) outfit bought a controlling interest. Divs reduced and share price went down and heeding Percy's wise words about getting out when private equity gets in, I sold out. Not been sorry.

Snoopy

29-12-2020, 08:34 AM

My profit prediction of $10.472m (normalised) was awful, even if I can claim my forecasting errors were Covid-19 related. So what on earth went wrong?

Here is my 'piece by piece' answer to the what went wrong question.

A/ Meat Industry Robotics

FY2020 represented the first year in which the meat industry robotics team had double the area to build their meat industry robotics projects. However my projected $10.994m increase in turnover for this division for FY2020 actually translated to a $5.493m fall in turnover.

The turnaround from my projection translates to a NPAT loss from my projection of:

-0.15 x ($10.994m - -$5.493m) = -0.15 x ($16.487m) = -$2.473m

(From post 485, the margin on repeat installation meat industry turnover is approximately 15%.)

The FY2020 meat industry total turnover of $29.013m represents:

$29.013m / $6.5m = just over 4 'half systems' (most installations are not full go to whoa automation).

In reality there may have been only three because this industry classification also includes installation of 'Bladestop' band-saws. 'Bladestop' sales are highly profitable which is just as well, but made in Scott's Australian base, not Dunedin. AR2020 p69 records sales of $6.8m to JBS, with the majority of that total being Bladestop saws. The expansion of meat industry production line manufacturing capacity at Dunedin's Kaikouri valley site looks to have been ill timed!

B/ Mining Industry Support

Departing CEO Hopkins noted in his AGM for FY2019 address that:

"We expect Mining to rebound significantly in 2020,"

Mining sales actually rebounded by:

$33.006m / $30.324m = +8.8%

The largest automated installation so far completed is an automated Sample Preparation System for 'Pernoles', the second largest mining company in Mexico. This build took 5 months, largely at Scott's Sydney engineering base. Since this contract was won, a further two similar builds have been announced for Rio Tinto Australia. MAR, now "Scott Australia' had a turnover of about $7.7m when acquired in FY2015. With organic growth that could be $10m today. If half of MAR's resources were assigned to a robo-prep project for 5 months, that would account for:

0.5 x 5/12 x$10m = $2.1m of turnover.

If we assume a 15% profit margin, this one project could have contributed: 0.15 x $2.1m = $0.315m of the group profit after tax.

I had assumed an incremental two extra Robo-prep system sales on net profit over FY2020. While two major new builds were announced, most of the work on these would flow into FY2021. If 3/4 of this new work was deferred, then my projected net profit for FY2020 would have reduced by:

($0.315m x 2) x 0.75 = -$0.473m

C/ Appliance Production Lines

There was a large drop off in revenue from $45.489m in FY2019 to just $20.058m over FY2020. Referring to my post 800, this is indicative of a profit drop from something like $3.716m (reference year FY2004) down to something approaching $0.597m (reference year FY2009).

Over FY2019 the revenue generated was even more than the high reference year of FY2004. But more turnover at the high end does not necessarily mean more profit. Often short term subcontractors must be hired to top up the regular workforce. That is usually negative for profits.

My low end profit reference year of FY2009 had a 10% higher turnover than the $20.258m of turnover over FY2020. Referring back to FY2020, I think it is doubtful that any money was made manufacturing Appliance Line Production Systems. My estimate for 'lost profit' from the Appliances division is therefore the full -$3.716m

D/ Materials Handling & Logistics

I was budgeting on no reduction in business for this division. My post 649 suggests an underlying NPAT for Alvey was $8.470m in good times (FY2018). With Covid-19 in Europe and Brexit weighing heavily on demand for 'Material Handling & Logistics', I would suggest that at least half of this profit has disappeared over FY2020.

$8.470m/2 = -$4.235m

This kind of permanent loss in profitability in Europe is supported by the significant sackings reported in AR2020, page 5: 316-257 = 59 people or 19% of the workforce.

Loss of Profitability Summary

-$2.473m-$0.473m-$3.716m-$4.235m = -$10.897m

Compare that to the actual difference in normalised profit between what I predicted and what actually happened

-$10.472m - $0.535m = -$11.007m

Those two totals are very close. That means I am happy that my explanation of how things went so wrong in this post is plausible.

If you can understand what happened when things went wrong, it gives a good guide to assess where any 'recovery springboard' of results going forwards might bounce to. The positive announcements of new contracts so far only gives me confidence that FY2021 will be another year of consolidation. Unfortunately for shareholders that consolidation looks to be around breakeven. I predict a very tough FY2021 for shareholders. Looking out to FY2022, with Brexit resolved and Covid-19 declining, I do see things getting brighter.

SNOOPY

discl: Still a shareholder, in for the FY2022 recovery.

Waltzing

29-12-2020, 12:35 PM

Complicated story, complicated stock. Reminds me we should have bought apple on the stock split.

looking ahead scare resources seem to be the way to invest. Water, solar power stations in deserts ect.

Snoopy

29-12-2020, 04:14 PM

Complicated story, complicated stock.

Waltzingman, here is what I wrote two years ago after the acquisition of Alvey was confirmed.

If we add to this the underlying profitability of Scott Technology today, I get an underlying profitability for the combined ‘Scott’ and ‘Alvey’ group of:

$8.959m -$0.502m + $8.470m = $16.927m

This projection assumes no profit growth or decline from either company.

I do not expect the Scott Technology result for FY2018 to be this high, because Alvey will have only been owned for part of FY2018. Nevertheless I believe this figure is representative of the ongoing profitability of the group and should be used to assess value ahead of whatever the actual FY2018 result turns out to be.

With 74.681m shares on issue, Scott/Alvey should have ‘eps’ figures of:

$16.927m / 74.681m = 22.7cps

With a share price of $3.50, this means Scott’s is currently trading on a projected PE of:

$3.50/ 0.227 = 15.4

Note that this projection does not include the expected future ramp up of Meat Industry Robotics work to be done in association with major shareholder JBS. Compared to some of the sky high valuations on the market at the moment and with much growth to come, something around $3.50 is looking reasonable

The major ramp up in work with JBS has never happened. I think this is because the automated beef boning room project has never been completed. But even without that I was still thinking $3.50 is possible, providing the existing businesses operate to their potential at the same time.

Getting all divisions synchronised and doing well might be a pipe dream. But I still believe a share price of around $3 is possible within a year or two. The problem is earnings supporting that kind of share price certainly won't happen in FY2021. So SCT looks overpriced on that basis. But if you look further out there has to be a recovery, because the sort of projects that Scott's do are really needed! This is my basis for continuing to hold against a bleak immediate picture. Given the share market is always forward looking, we still might get some price action in CY2021. This is my basis for selecting SCT in this years 'beat the brokers' competition.

SNOOPY

Waltzing

30-12-2020, 07:36 AM

Your story tells me a possible SKL but hasnt performed yet.

Snoopy

30-12-2020, 09:45 AM

I am not sure SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a dividend payer only to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s unimputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20165.5c+4.0c
7.64c + 5.56c13.20c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + 0c 5.02c + 0c5.02c

Total59.2c

Averaged over 5 years, the dividend works out at 59.2/5 = 11.8c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, 'fair value' for SCT is:

11.8 / (0.075) = $1.57

Now using my plus and minus 20% range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.57 x 1.2 = $1.89
Bottom of Business Cycle Valuation: $1.57 x 0.8 = $1.26

SCT shares were trading at $1.84 on Friday 22nd May (near the upper end of my expected range) and are IMO now fully valued (from a business cycle projected dividend income perspective). With big capital spending programs on hold for many customer companies, and dividends from more buoyant years boosting my valuation, a significant recovery in business is already priced into SCT shares as they trade today The growth story, if it still exists, has not been priced in though.

I don't think SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20165.5c+4.0c
7.64c + 5.56c5.56c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + 0c 5.02c + 0c5.02c

FY20210c + ?c 0c + ?c0c

Total51.56c

Averaged over 5 years of dividend payments, the dividend works out at 51.56/5 = 10.3c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this. The cancelling of the last two dividend payments from Scotts, I think, shows that a relatively high discount rate on those dividends that were paid is required.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, 'fair value' for SCT is:

10.3 / (0.075) = $1.37

Now using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.37 x 1.2 = $1.64
Bottom of Business Cycle Valuation: $1.37 x 0.8 = $1.10

SCT shares were trading at $2.33 on Tuesday 29th December (well above the upper end of my expected range) and are now at least 30% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 30% growth premium (because a capitalised dividend valuation assumes no growth).

History would show that such a growth premium can be justified, in my view. But such a premium also assumes successful, and profitable, execution of the growth plan. Given the much slower roll out (or even failure) of the automated beef boning room project, and an unlikely rapid bounce back in Europe, I am glad that I acquired my SCT shares at an average price of just 72.6cps (admittedly over a more than 10 year average acquisition timeframe). I still 'believe the story' which is why I am holding. But I now can't rule out a further 'down leg' before the eventual recovery.

SNOOPY

Snoopy

30-12-2020, 04:08 PM

I might argue that 'cashed up' and 'with regional and global expansion plans in place' is a good description of Scott's position since it listed in the 1990s!

It is only in recent times, with the acquistion of Robotworx (USA) and MAR (Oz) that the balance sheet has been looking strained. Now fixed of course with the cash issue. Scott's need a strong balance sheet, because they need to be able to fund projects with a time lag from many months to one to two years between 'receiving an order' and 'delivery and payment'. In this business having access to plenty of cash is a necessity. 'Ambitious' I will grant you, although Scott's have been 'pushing the limits' in engineering terms right back to the early production systems days.

Today's shareholders might be interested in how my perspective on Scott's has changed from four years ago. Under new CEO John Kippenberger, they have been told to be less ambitious, go thoroughly over new project risks before quoting a price, and if possible stick to building stuff they already know how to do well - like the 'Bladestop' band saws.

Is their relationship with their bankers fraught? Section C3 in AR2020 discloses that their main source of funding through ANZ is being 'renegotiated'. The ANZ debt facility of $19.7m is only drawn to $5.2m. So I wonder if the 'renegotiation' is at the behest of ANZ and not Scott's management?

Supporting this view is that post Covid-19, Scott's have had to draw on their majority shareholder. JBS Australia, for a $10m loan facility drawn to $2m. That quantum of loan looks to be well within the scope of the existing ANZ arrangement. So it reads like ANZ are unhappy with Scotts. Given JBS Australia is itself under pressure, after being locked out of Chinese meat export markets, I hardly think that JBS will be in a position to lend to Scotts at less than bank rates.

In pre Covid-19 days, I might have suggested that Scott's are in breach of their banking covenants. That kind of thing can happen with a dramatic fall in earnings. But as we know that can't happen now because, post Covid-19, banks have become much more 'lovey dovey' and 'friendly' and want to work with their clients.

SNOOPY

Snoopy

22-02-2021, 09:02 PM

Is their relationship with their bankers fraught? Section C3 in AR2020 discloses that their main source of funding through ANZ is being 'renegotiated'. The ANZ debt facility of $19.7m is only drawn to $5.2m. So I wonder if the 'renegotiation' is at the behest of ANZ and not Scott's management?

Trouble at Scott's?

https://stocknessmonster.com/announcements/sct.nzx-367972/

It appears the Chief Operating Officer, Chris Steedman, has been sacked. 'Virtual Command' from afar is not working.

SNOOPY

Beau

22-02-2021, 09:16 PM

Snoopy

22-02-2021, 10:20 PM

Must be hard to run 4 different regions from home base. Got to be more efficient to have Regional Director in each region. Especially with travel at present time. You would wonder why that wouldn’t be in place anyway.

I think it was in place. There were four regional directors reporting to Chief Operating Officer, Chris Steedman. I understood it was the plan to have regions as 'centres of excellence' for particular kinds of jobs. Thus being able to control them from the point of view of an inter-regional Co-Ordinator made sense. Not sure what happens now? All the regions just 'do their own thing' with no co-ordination or oversight?

SNOOPY

fastbike

23-02-2021, 06:35 AM

Press release from 1 May 2020

Scott Technology Limited is pleased to announce the appointment of Chris Steedman as Chief
Operating Officer, commencing 1 June.
...
This is an absolutely critical role for any successful organisation of Scott’s size and complexity and I am
excited to have someone of Chris’s calibre to drive operational excellence throughout our business.
Improvements in our processes and capabilities will help manage design risk, while driving production
efficiencies and better outcomes for our customers.
Yesterday's release says

The Board of Directors wishes to advise that the role of Chief Operating Officer, previously held by Chris Steedman, has been disestablished.
All reference to him in the "Our People" page has been excised.

So what has changed such that the absolutely critical role is no longer needed 7 months later ?

Snoopy

25-04-2021, 03:37 PM

The major ramp up in work with JBS has never happened. I think this is because the automated beef boning room project has never been completed. But even without that I was still thinking $3.50 is possible, providing the existing businesses operate to their potential at the same time.

Getting all divisions synchronised and doing well might be a pipe dream. But I still believe a share price of around $3 is possible within a year or two. The problem is earnings supporting that kind of share price certainly won't happen in FY2021. So SCT looks overpriced on that basis. But if you look further out there has to be a recovery, because the sort of projects that Scott's do are really needed! This is my basis for continuing to hold against a bleak immediate picture. Given the share market is always forward looking, we still might get some price action in CY2021. This is my basis for selecting SCT in this years 'beat the brokers' competition.

If you look at any portrait of CEO John Kippenberger, you can see he knows a bit about 'getting a good haircut'. The half year result shows that the razor blade approach to Covid-19 may have been what was needed at Scotts. The figure that stood out for me on the income statement was this.

HY2021HY2020

Employee Benefits Expense$30.059m$38.242m

Add back the comparative half year's '$12.212m of restructuring expenses and you have the 'total explanation' of the near $20m HY2021 to HY2020 profit turnaround. Net debt is down to a meagre $2.9m (c.f $20.9m at the last full year balance date) , which I guess must have appeased their ANZ bankers enough to agree to a new funding package going forwards.

It is the nature of Scott's big ticket business projects that debt does go up and down over many months of construction. One thing I have never quite got my head around on the balance sheet is how the 'Contract Assets' ($12.264m) relate to the 'Contract Liabilities' ($16.385m). ''Contract liabilities', are a separate balance sheet category from 'Trade creditors and accounts'. These terms are clarified in section B3 of AR2020.

1/ Contract Assets are balances due from customers under under long term project contracts that arise when the group receives payments from customers in line with a series of performance related milestones.

2/ Any amount previously recognised as a 'contract asset' is reclassified as a trade debtor at the point at which it is invoiced to the customer.

3/ A Contract Liability, as part of a long term project contract, arises if a particular milestone payment exceeds the revenue recognised to date.

I could be overthinking this. But I think what the balance sheet is telling me is that Scott's have booked:

$16.385m - $12.264m = $4,121m

of profit at the half year that they haven't really earned yet. And when the declared total half year NPAT is $4.714m, that means the real half year profit figure is a rather paltry $0.593m. Could that explain why the nevertheless welcome half year dividend of 2cps is unimputed? I guess it all goes to show that there are still some smoke and mirrors available when it comes to cashing up work from these big projects?

Taking the half year progress report at face value, I have to be satisfied with the the position of the company as it has adapted to the Covid-19 shock. The sharemarket reaction has ensconced me firmly inside the top 50 in the annual share pickers competition too, which is more than I hoped for at this point in the competition. But has Mr Market right now rewarded CEO JK a little ahead of where he and the company deserves to be?

SNOOPY

P.S. What happened to the old 'Scott Tech looking cheap' thread header? I thought it encapsulated the Scottish attitude to business rather appropriately!

Snoopy

26-04-2021, 05:29 PM

It is the nature of Scott's big ticket business projects that debt does go up and down over many months of construction. One thing I have never quite got my head around on the balance sheet is how the 'Contract Assets' ($12.264m) relate to the 'Contract Liabilities' ($16.385m). ''Contract liabilities', are a separate balance sheet category from 'Trade creditors and accounts'. These terms are clarified in section B3 of AR2020.

1/ Contract Assets are balances due from customers under under long term project contracts that arise when the group receives payments from customers in line with a series of performance related milestones.

2/ Any amount previously recognised as a 'contract asset' is reclassified as a trade debtor at the point at which it is invoiced to the customer.

3/ A Contract Liability, as part of a long term project contract, arises if a particular milestone payment exceeds the revenue recognised to date.

I could be overthinking this. But I think what the balance sheet is telling me is that Scott's have booked:

$16.385m - $12.264m = $4,121m

of profit at the half year that they haven't really earned yet. And when the declared total half year NPAT is $4.714m, that means the real half year profit figure is a rather paltry $0.593m. Could that explain why the nevertheless welcome half year dividend of 2cps is unimputed? I guess it all goes to show that there are still some smoke and mirrors available when it comes to cashing up work from these big projects?

Ah so no-one spotted the deliberate ;-) mistake in the above? Or maybe I am the last SCT shareholder left on the forum, so no-one cares?

Those 'Contract Assets', 'Contract Liabilities' and 'Trade Liabilities' are revenue figures, not profit figures. There are some occasions where revenues equal profits. Sometimes Scotts do what in effect is prototyping work that gets written off, but is later exhumed at zero cost and transformed into a customer solution down the line. Generally though you have to multiply the 'revenue' by the 'profit margin' to understand the effect on profits of the accounting shenanigans that I am describing above.

The profit margin for Scotts in the FY2021 half year was:

NPAT / Revenue = $4.714m / $104.486m = 4.512%

Using this number will likely overstate the profits on these big projects, because we know that JK is trying to shift the company to making more 'standard' equipment sales where technical risk is known and profits are greater. Nevertheless I won't try to be clever and attempt to judge how low the real profit margin is for these jobs on the books.

That means of the $4.121m of revenue that I am claiming Scott's has booked in advance, the profits booked in advance associated with that are likely to be:

0.04512 x $4.121m = $0.186m

Not nothing, but a figure that amounts to 4% of profit, not 87% of profit as I had calculated previously. Phew! I am further comforted by the fact that the 'Recognition of Revenue on Long Term Projects' remains a 'key audit matter' for auditors Deloitte.

SNOOPY

bullfrog

26-04-2021, 11:16 PM

Ah so no-one spotted the deliberate ;-) mistake in the above? Or maybe I am the last SCT shareholder left on the forum, so no-one cares?

Those 'Contract Assets', 'Contract Liabilities' and 'Trade Liabilities' are revenue figures, not profit figures. There are some occasions where revenues equal profits. Sometimes Scotts do what in effect is prototyping work that gets written off, but is later exhumed at zero cost and transformed into a customer solution down the line. Generally though you have to multiply the 'revenue' by the 'profit margin' to understand the effect on profits of the accounting shenanigans that I am describing above.

The profit margin for Scotts in the FY2021 half year was:

NPAT / Revenue = $4.7m / $104.5m = 4.5%

Using this number will likely overstate the profits on these big projects, because we know that JK is trying to shift the company to making more 'standard' equipment sales where technical risk is known and profits are greater. Nevertheless I won't try to be clever and attempt to judge how low the real profit margin is for these jobs on the books.

That means of the $4.121m of revenue that I am claiming Scott's has booked in advance, the profits booked in advance associated with that are likely to be:

0.045 x $4.121m = $0.185m

Not nothing, but a figure that amounts to 4% of profit, not 87% of profit as I had calculated previously. Phew! I am further comforted by the fact that the 'Recognition of Revenue on Long Term Projects' remains a 'key audit matter' for auditors Deloitte.

SNOOPY

You’re not the only Scott supporter! Really appreciate your insights into the financials.

My understanding is if a contract milestone payment exceeds revenue received, Scott has paid a subbie or for materials in advance of billing the client for the work, therefore it’s a liability until the client pays for it. I’d classify that as WIP, and is a risk and should not included in profit calcs.

Snoopy

27-04-2021, 09:04 AM

You’re not the only Scott supporter! Really appreciate your insights into the financials.

My understanding is if a contract milestone payment exceeds revenue received, Scott has paid a subbie or for materials in advance of billing the client for the work, therefore it’s a liability until the client pays for it. I’d classify that as WIP, and is a risk and should not be included in profit calcs.

Let's take a job where Scott takes on a project and due to time constraints they need to farm out some of that project work to a sub contractor. This is not a theoretical example. This is exactly what Scotts have had to do in the past at their Christchurch base. The work outsourced is not outside the scope of what the skilled engineers at Scott's can normally tackle. The sub contracting is purely due to a timing issue where Scott's engineers have been switched away from the project to help complete something else within the wider company, resulting in an unplanned for shortage of in house workers.

From a client perspective, Scott completes the project work on time. I think what you are implying Bullfrog is that, in this case, Scotts have ticked off the job. But as a result of Scotts having to await billing from their sub contractor, there may be a delay in receiving the bill from the sub contractor and passing on that part of the bill to the end client. Thus in the period the sub contracting work is done but has not been paid for by Scotts and/or passed on to the final client then such work becomes a 'contracting liability'.

I put it to you that the 'Work In Progress' (WIP) in these circumstances is the same work that Scotts in house team are doing in parallel for the same client. So I find it hard to come to terms with your remark that the execution risk or payment risk is any different to the risk that Scott's own engineers face in not doing the job properly and not being paid. In summary I think such work should be included in the net profit figures for the period and not rolled into a later period as the current accounting treatment seems to regard as the proper way to present things. Maybe I need to take it up with the auditors?

SNOOPY

Snoopy

27-04-2021, 09:37 AM

$16.385m - $12.264m = $4,121m

of profit at the half year that they haven't really earned yet. And when the declared total half year NPAT is $4.714m, that means the real half year profit figure is a rather paltry $0.593m. Could that explain why the nevertheless welcome half year dividend of 2cps is unimputed?

Due to an error in my calculations, the underlying profit was not a paltry $0.593m. So the reason for the lack of imputation credits is probably the same as that which former CEO Chris Hopkins reported in AR2019, prior to the payment of that years final dividend.

"The final dividend will not be fully imputed due to the greater portion of earnings being generated offshore."

With zero imputation credits for the upcoming half year dividend payment, does this mean that zero earnings were recorded onshore? The EBITDA margins for HY2021 in the territories in which Scott's operate make interesting reading.

HY2021Revenue {A}Normalised EBITDA {B}EBITDA margin {B}/{A}

Scott Europe$28.2m$2.6m9.3%

Scott Australasia$51.1m$5.8m11.4%

Scott China$1.5m$6.1m24.7%

Scott North America$19.1m$3.5m18.2%

China is leading the EBITDA contribution, But China is the smallest business unit, and when there is not a big project on there (such as HY2020) they are at the bottom of the class (EBITDA margin for China was -31.5% for HY2020).

With the continued talking up (and rightly so) of Auckland based Rocklabs, and fully accepting that Christchurch (which handles US and Oz based appliance manufacturing clients) may be a drag, 'zero profit' is not consistent with the HY Presentation Slide 8 comment:

"Strong rebuild in the ANZ work program, largely driven by mining and meat sectors."

Perhaps the strong rebuild in the work program is a forward indicator of profit, and the current half year is a result of the lower level order book from six months ago (PRHY2021 Slide 9)? Or maybe it is the Oz Workshops turning out all of those highly profitable 'Bladestop' bandsaws that is the source of those bumper Australasian turnover? I guess if the next dividend comes out with some Aussie Franking Credits attached (and that would suit majority owner JBS Australia), the question of New Zealand's unprofitability will be answered?

SNOOPY

bullfrog

27-04-2021, 10:32 AM

Let's take a job where Scott takes on a project and due to time constraints they need to farm out some of that project work to a sub contractor. This is not a theoretical example. This is exactly what Scotts have had to do in the past at their Christchurch base. The work outsourced is not outside the scope of what the skilled engineers at Scott's can normally tackle. The sub contracting is purely due to a timing issue where Scott's engineers have been switched away from the project to help complete something else within the wider company, resulting in an unplanned for shortage of in house workers.

From a client perspective, Scott completes the project work on time. I think what you are implying Bullfrog is that, in this case, Scotts have ticked off the job. But as a result of Scotts having to await billing from their sub contractor, there may be a delay in receiving the bill from the sub contractor and passing on that part of the bill to the end client. Thus in the period the sub contracting work is done but has not been paid for by Scotts and/or passed on to the final client then such work becomes a 'contracting liability'.

I put it to you that the 'Work In Progress' (WIP) in these circumstances is the same work that Scotts in house team are doing in parallel for the same client. So I find it hard to come to terms with your remark that the execution risk or payment risk is any different to the risk that Scott's own engineers face in not doing the job properly and not being paid. In summary I think such work should be included in the net profit figures for the period and not rolled into a later period as the current accounting treatment seems to regard as the proper way to present things. Maybe I need to take it up with the auditors?

SNOOPY

Maybe I’m not quite right with calling it WIP, as it could be completed work, but I do have a stumbling block in including a liability in a profit figure. Until the work is accepted and paid for by the client, regardless of who does it, the expenditure to undertake that work is a liability.

Bottom line is Scott have had a couple of horror reports, but I have confidence in the leadership team to make the hard decisions that make Scott a good long term investment.

Snoopy

27-04-2021, 07:27 PM

Maybe I’m not quite right with calling it WIP, as it could be completed work, but I do have a stumbling block in including a liability in a profit figure. Until the work is accepted and paid for by the client, regardless of who does it, the expenditure to undertake that work is a liability.

I guess it comes back to the question:

Are your workers 'liabilities', because you are contracted to give them a pay cheque each month, or an 'asset' because it is those workers that do the jobs that allow you to bill end line customers for a job well done?

An 'Account receivable' last time I looked is thought of as an 'asset' even though it is work that has not been paid for. As a company owner you don't think about the expenditure (wages) that you have already paid to allow the customers to be billed, because you are contracted to pay your employees anyway. If, however, you have to hire external contractors to complete the work then I can understand why you might regard money paid to contractors as a 'liability' until the end line customer pays the bill that pays the contractors wages. But whether you think of employees or contractors differently like that is, IMO, more a mindset. I think it is one of those questions without a black or white answer. Who was it that said you have to spend money to make money?

Going back to that original definition by Scott's themselves:

------

3/ A Contract Liability, as part of a long term project contract, arises if a particular milestone payment exceeds the revenue recognised to date.

------

I do wonder why any customer would pay more than they have been asked to pay? Or am I reading into that definition something that is not there?

SNOOPY

Ferg

27-04-2021, 07:30 PM

Snoopy

Late edit: the SCT wording is terrible that you have quoted which is not helping you.

Deducting the 2 figures gives you the nett balance of work in progress of $4m that is sitting on the Balance Sheet. In most cases (where project costs exceed zero), this has very little bearing on the profit recognised given the low margin %. So no adjustments should be made to their reported profits from this derived figure. From memory I outlined contract accounting in the Mercer thread - found it here:
https://www.sharetrader.co.nz/showthread.php?9491-Mercer-Group-Ltd-MGL&p=840594&viewfull=1#post840594

You need to get your thinking around contract WIP where the accounting "appears" to be backwards. A liability owing to a subbie or for some equipment is actually a contract WIP asset, not a contract WIP liability which I have seen you state in this and the Mercer thread. Refer to the example journals pasted below from the Mercer thread.

From the Mercer thread:
"Construction accounting (simplistically) works like this:

Invoice (say deposit) to customer:

[*=1]Debit Receivables (and is eventually paid)
[*=1]Credit Contract WIP

Costs incurred on contract:

[*=1]Debit Contract WIP
[*=1]Credit Payables (and eventually paid)

Each contract is separately tracked. Those with a nett credit balance are classified as contract liabilities at year end, whilst those with a nett debit balance are classified as contract assets.

Profit is released to the P&L on large contracts according to percentage complete:

[*=1]debit Contract WIP
[*=1]credit P&L.

So the nett credit balance shows good working capital management in that Receivables are ahead of Payables. And while a credit balance is like deferred income, very little will actually be profit (being the project Margin).

Reading p33 of the [MGL] AR I see nothing that contradicts the above. Think of contract debit balances as a prepayment. The risk with large projects is if you overstate the costs completed to date, then you get a higher % complete and can take a higher % into profit. I'm not saying that is happening (and I haven't checked) but one way of checking this is by looking at the average days in payables to see if there is any any monkey business and/or how many projects have a nett debit balance. The other thing to be wary of is projects with debit balances may be concealing a project loss - again I'm not suggesting that is the case, just providing some background info."

If after reading this you interpret it as showing some sort of accounting impossibility or something nonsensical, then I suggest you work through some examples. If you would like to learn this in more depth, then I'm available for a fee. :)

Links for contract WIP accounting principles:
https://simplestudies.com/principles_of_long_term_contract_accounting.html
https://accounting-simplified.com/ifrs/ias-11-construction-contracts/
The worked examples I can find online are not helpful so I do not recommend reading those.

Trust me on this: there is nothing to take up with the auditors regarding the contract accounting. If the auditors have expressed concerns about contract accounting, they will be referring to the accuracy of the % complete calculation, which has two key variables being costs incurred to date (easy to check) and total estimated costs for the project (hard to check).

FERG

Snoopy

27-04-2021, 09:03 PM

Snoopy

28-04-2021, 11:10 AM

From the half year report consolidated balance sheet:.

$16.385m (Contract Liabilities) - $12.264m (Contract Assets) = $4.121m (Work in Progress) as at 28-02-2021

If I use the net profit margin for the half year (my post 939), we might expect this 'work in progress' to generate a profit of:

0.04512 x $4.121m = $0.186m. Not huge. But not small enough to have 'very little bearing on the profit recognised' - to my way of thinking.

Looking at the equivalent reference period from the previous year

$9.346m (Contract Liabilities) - $26.762m (Contract Assets) = minus $17.414m (Work in Progress) as at 29-02-2020

Negative work in progress? How can that be?

After working through Ferg's extensive reply, I have the answer to my question. Work In Progress (WIP) is the summation of many going concern contracts that are not itemised out at annual report level. WIP can be negative if the negative components of that itemised list sum to a larger absolute number than the positive components. Ferg has identified a couple of contract types where WIP is negative.

1/ Where the amount invoiced is greater than the costs and the profit.

2/ Where the customer has made a deposit in advance of any work being done.

But if we use Ferg's I= E +G + H formula, where:

I = Work In Progress
E = Costs to date (generally a positive figure)
G = Jobs Invoiced to date (generally a negative figure)
H = Profit Recognised (generally a positive figure)

We can imagine a third instance of a 'negative WIP' component. That is where the costs of the project never cover the invoices to the customer: i.e. the job is loss making. So how does all this relate to the SCT situation? My next task is to find out!

SNOOPY

Ferg

28-04-2021, 12:27 PM

Where did my post #947 go to which Snoopy refers? An hour of work plus a future reference point on contract accounting gone....was someone unhappy with the formatting?

Ferg

28-04-2021, 01:03 PM

We can imagine a third instance of a 'negative WIP' component. That is where the costs of the project never cover the invoices to the customer: i.e. the job is loss making.

Snoopy check your logic of "loss making" versus the worked example I provided that has since been deleted. I'm hoping you grabbed a copy or replicated it? Is it a loss-making contract or a profitable contract (or it could be either?) where the costs do not meet the amounts invoiced? Or am I misunderstanding what you mean by "cover"? Also, with the word "never" - can such a situation exist (where total debits never match the credits) in light of the income recognition rules?

I recommend using debit and credit balance terminology, rather than "negative WIP", to avoid potential confusion. Normally "WIP" refers to work in progress which is naturally a debit balance being an accumulation of costs (e.g. capital work in progress), whereas "contract WIP" refers to contract/construction accounting where good cash flow management naturally results in a credit balance (e.g. customer deposits per the example I posted). So negative WIP in the context of SCT contracts would be referring to negative contract WIP, and given the numbers are naturally credits, negative contract WIP would make that a debit balance. However, using the word WIP, which is naturally a debit, means negative WIP is a credit balance - a potential source of confusion. IMO better to avoid confusion by using consistent contract WIP terminology and debit/credits.

Tonight I will re-post the worked example with skinnier notes to appease the anonymous post-deleter so we have that information available for future reference.

Lastly, given you are only seeing 2 values in the AR of a possible 9 or 10 meaningful figures, it will be difficult to unpick SCT contract WIP. Instead you will need to look to the notes and/or commentary that refers to the pipeline and margins.

FERG

P.S. I am using your method of capitalising my name at the end of the post for our discussions given my propensity for editing posts. The capitalised signature shows I am finished with my edits.

Snoopy

28-04-2021, 06:22 PM

Where did my post #947 go to which Snoopy refers? An hour of work plus a future reference point on contract accounting gone....was someone unhappy with the formatting?

Tonight I will re-post the worked example with skinnier notes to appease the anonymous post-deleter so we have that information available for future reference.

I did read your post Ferg to get what I wanted out of it. I hoped to go back later for a more comprehensive look so was rather shucked to see the post deleted. Generally the only reasons for deleting are copyright issues, or if the post is abusive. Your post certainly was w--i--d--e. It could have been made narrower by referencing your very useful notes at the end of each line and putting them below the table. I will be looking forward to the reappearance of your post in a 'slimmed down; form.

It is strange the moderators deleted it, rather than just sending you a note to change the formatting if indeed that really was the problem.

SNOOPY

Ferg

28-04-2021, 06:37 PM

It is strange the moderators deleted it, rather than just sending you a note to change the formatting if indeed that really was the problem.

Agree 100%. I won't lie but I'm pretty miffed about that given the effort that went into it plus it was all my own work, not copied from anywhere else. And I no longer have the supplementary notes that supported that post.

Anyhoo, here is the table:

A
B
C = A - B
D = C / A
E
F = E / B
G
H = C x F
I = E + G + H

Project
Contract
Estimated
Estimated
Contract
Costs
Percent
Invoiced
Profit
Contract WIP

Revenue
Total Costs
Profit
Margin %
To Date
Complete
To Date
Recognised*
Balance

1
$1,000
$750
$250
25%
$750
100%
-$1,000
$250
$0

2
$2,000
$1,900
$100
5%
$950
50%
-$2,000
$50
-$1,000

3
$3,000
$3,200
-$200
-7%
$3,100
97%
-$1,000
-$200
$1,900

4
$4,000
$3,000
$1,000
25%
$0
0%
-$400
$0
-$400

5
$5,000
$4,000
$1,000
20%
$3,500
88%
-$3,000
$875
$1,375

6
$6,000
$5,500
$500
8%
$2,000
36%
$0
$182
$2,182

TOTAL
$21,000
$18,350
$2,650
13%
$10,300

-$7,400
$1,157
$4,057

OBS
OBS
OBS
Calc.
J1
Calc.
J2
J3
BS

CONTRACT WIP ->

DEBIT

CREDIT
DEBIT
NETT

Balance Sheet:

Contract Asset
$5,457

Contract Liability
-$1,400

Nett Contract WIP
$4,057

Notes:

Calc. = calculated field

OBS = Off Balance Sheet, no journals needed

J1 = Debit Contract WIP, Credit Payables

J2 = Debit Receivables, Credit Contract WIP

J3 = Debit Contract WIP, Credit P&L (profit contracts) - using % of completion method

or Debit P&L, Credit Contract WIP (loss contracts, 100% of loss)

BS = Balance Sheet Value

* The year on year movement in this value is what ends up in the annual P&L.

FERG

Snoopy

28-04-2021, 07:04 PM

Snoopy check your logic of "loss making" versus the worked example I provided that has since been deleted. I'm hoping you grabbed a copy or replicated it? Is it a loss-making contract or a profitable contract (or it could be either?) where the costs do not meet the amounts invoiced? Or am I misunderstanding what you mean by "cover"? Also, with the word "never" - can such a situation exist (where total debits never match the credits) in light of the income recognition rules?

Those 'big projects' that Scott tackles are usually done by tender. Granted all tenders like this would have variation/escalation clauses. But sometimes these projects take longer to get operating to standard than expected, or run into unexpected technical hitches, and losses are made. This is the kind of thing that new CEO JK wants to eliminate.

When I said
"We can imagine a third instance of a 'negative WIP' component. That is where the costs of the project never cover (are significantly greater than) the invoices to the customer: i.e. the job is loss making."

I meant a loss making contract. Value is permanently destroyed. Not sure how you balance the debits and credits in such a situation.

I get you don't like the idea of negative WIP. It seems a bit crazy to me too. Perhaps it is better to think of WIP in this context as an 'accounting representation of work', rather than actual work. Thus 'payment in advance' is a payment for future work that, because it has not been done at the time of payment, can be accounted for as 'negative work.' 'Negative work' in general English language terms sounds like sabotage, which is not what I mean to convey! I think if you just accept that any number in the balance sheet can go 'opposite sign' in some circumstances, without worrying too much about what the physical representation of that - negative in this case - sign might mean, the right conclusion should all fall out of the maths in the end.

SNOOPY

Ferg

28-04-2021, 07:05 PM

Supplementary notes to support post #951:

Project
Classification
Comment

1
Nil - completed
Completed Contract, profit is in P&L

2
Contract Liability
Where Invoiced > (Costs + Profit) -> Liability

3
Contract Asset
Where (Costs + Profit) > Receivables -> Asset (100% of loss*)

4
Contract Liability
Deposit invoices to clients have no P&L impact (like revenue in advance)

5
Contract Asset
Most of the profit is booked despite not being fully charged to the client

6
Contract Asset
Profit recognised despite nothing invoiced to client (costs like a prepayment)

*Under IFRS a loss making contract must have the full loss recognised immediately.

FERG

Snoopy

28-04-2021, 08:04 PM

So how does all this relate to the SCT situation? My next task is to find out!

FY2016FY2017FY2018FY2019
FY2020HY2021

'Contract Liabiliities' {A}NMNM$21.418m$16.529m$29.052m$16.385m

'Contract Assets' {B}NMNM$24.495m$32.863m$25.381m$12.264m

Work In Progress {A}-{B}NMNM-$3.077m-$16.334m$3.671m$4.121m

'Contract Work In Progress'$1.137m-$4.108m-$3.077mNMNMNM

Recent Past and Current Work {A}+{B}NMNM$45.913m$49.342m$54.433m$28.649m

Annual Long Term Contract Revenue$67.704m$81.282m$104.756m$127.934m$92.620m$ 59.275m (*)

(*) = half year figure

Notes

1/ NM = 'Not Mentioned' in the annual report directly.
2/ I have used the convention that when 'Contract Liabilities' exceed 'Contract Assets' we have a positive value of 'Work In Progress'
3/ It was only in FY2019 where the 'Contract Liabilities' and 'Contract Assets' were separately listed. Prior to that a calculated 'Contract Work In Progress' was given. If I use the 'Contract Liabilities' and 'Contract' Assets' for FY2018, as back referenced in the FY2019 year and do the subtraction myself I get the same 'Work In Progress' figure listed in AR2018. This confirms Ferg's way to calculate 'Work In Progress' from those latter reports is correct.
4/ In those earlier years Scott's seem quite happy to list their 'Contracted Work In Progress' as either a 'Current Asset' or a 'Current Liability'. That means WIP can be either a positive or negative value. In the above table, I am listing Work in Progress as 'positive' when the 'Contract Liabilities' (a promise of signed up work to do) exceed the 'Contract Assets' (the completed work).

The declared position of WIP is most likely a combined summary position of many projects currently active at balance date. My natural instinct says that having lots of 'positive' work in progress is good, as that means the workforce is busy. However, in a strict snapshot balance sheet sense, having positive work in progress (by this definition) is bad because such WIP cannot be invoiced at balance sheet date. Positive WIP by this definition is a liability on the balance sheet, notwithstanding the fact that this 'liability' will -hopefully- turn into a profit source over the ensuing financial year as the work it represents is completed.

The above thinking is consistent with the tone of the Chairman and CEOs comments in AR2020 being rather negative (remember this period includes the sub period from End of February 2020 to the end of August 2020 where the effects of Covid-19 were at their worst). However, apart from the $6.295m of project impairments - which I presume are removed from WIP by balance sheet date already - I can find no specific comments on the difficulty and profit viability of current projects.

From a particular contract perspective, the timing of the end of the Scott financial year is arbitrary. So perhaps a better indicator of Scott's profitability might be to add the Contract Revenue to the Contract Liabilities TOGETHER, as that would represent work recently completed AND that still underway?

SNOOPY

Ferg

28-04-2021, 09:01 PM

I meant a loss making contract. Value is permanently destroyed. Not sure how you balance the debits and credits in such a situation.
Understood. Refer example #3 per the table I posted. Small values but it is a loss nonetheless and under IFRS one must recognise 100% of the loss immediately as I showed per the example.
FERG

Snoopy

07-07-2021, 05:49 PM

https://www.odt.co.nz/business/some-scott-tech-staff-now-unpaid-leave

New CEO JK looks to have handled this in a sub-optimal way.

Perhaps JK needs to learn that a glib Covid 19, 19th March update which states:

"Scott’s first commitment is to the health and safety of its people."

is not consistent with sending some workers home with absolutely no pay, while saying that:

-----

"the executive and broader leadership team at Scott had agreed to a pay cut."

" "It comes at a time when we’re working very hard ... we just thought it was the right thing to do to show empathy and understanding with the group."

"He would not say how much the pay cut was but that it was a "meaningful number" and "an absolute sign that we’re all in this together"."

-------

This article is particularly worrying, because Dunedin is Scott's back yard. If they can't get it right 'at home', what does that say for what is happening in Scott's staff in the USA and Europe?

"Dear John" may have been having a 'kip' when all the Covid-19 business started, being a bit tardy to get onto the wage subsidy bandwagon. But it appears our CEO Kippenberger has come to the end of his kip and is finally wide awake accumulating SCT shares on the sharemarket. 20,000 shares bought by JK in the latter half of June. Then we find out 5,000 shares were bought on 5th July disclosed today. 73,232 shares held now by JK. SCT closed up 6c today at $2.66, the highest close in almost two years.

SNOOPY

Snoopy

11-08-2021, 11:47 AM

An open day at the Finegand Meat Works near Dunedin was held for Australasian industry players in June 2010. MD Chris Hopkins was uncharacteristically enthusiastic at the reception they got from showing that dream on paper 7 years ago was now a working reality. The robotic beef processing line has been squarely aimed at the NZ and Australian markets so far. But there are now potential customers in England and Brazil that are showing interest. Hopkins envisages selling lots and lots of these systems now. Processing of lamb would require some robot re-engineering, but remains another growth avenue for the future.

History has shown that the fully automated beef processing room has stalled, and it is the fully automated lamb processing line that has come to fruition. CEO John Kippenberger is pushing ahead with Bladestop, an excellent safety enhanced bandsaw product in its own right. But it is not part of an automated meat processing solution. There is also a lack of faith in further automation from the meat industry itself.

https://www.ruralnewsgroup.co.nz/rural-news/rural-general-news/no-resolution-to-labour-nightmare

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

Karapeeva says many people seem to think that automation is the silver bullet that can compensate for labour shortages in the industry caused by the Covid-19 pandemic.

"I struggle to see how that is possible. In the red meat sector, we have already done all that we can do in terms of the lower hanging fruit in automation," she told Rural News.

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

Those SCT engineers have spent 20 years on the automated beef boning room, and it looks like time looks to have been called. The golden goose is dead! Very unfortunate considering the 'side' project processing lamb carcasses has gone so well. But there are far fewer plants processing lamb around the world than processing beef :-(.

SNOOPY

Snoopy

31-08-2021, 08:31 PM

From a profitability perspective almost all profits that are reported have come from ‘Appliance Manufacturing Systems’ and ‘Laboratory Sample Preparation’. The most advanced of the new pipeline businesses, the joint venture lamb automated lamb boning room with Silver Fern Farms (Robotic Technologies Limited) contributed a mere $124k to net profit in FY2011 (AR2011 p36). And that joint venture business was founded eight long years ago!

There are two lessons we can draw from this:

1/ Genuinely new and innovative technology takes a long time to commercialize.
2/ There is little market value attributed to Robotic Technologies Limited, NS Innovations (the Australian market beef chain joint venture), HTS-110 (High Temperature Superconductors), and the Dairy Sector Automation project that is reflected in a Scott Technology share price at $1.55.

The existing profitable businesses have in effect entirely subsidized the new ventures thus far. In accounting terms almost all research and development costs have simply been written off as they were incurred.

If you think this sounds distortionary then take a minute to think about the alternative: that shareholders should continually front up development cash on new ventures until they become profitable. This funding method for new ventures is the essence of why I like Scott Technology.

Here is an established business that over the business cycle generates dividend returns that compare favourably with bank term deposits. Yet underlying everything, we are in effect being given ‘lottery tickets for free’ in some very exciting new business ventures. If even one of these new ventures comes off, there is potential for a significant market revaluation of the prospects of Scott Technology.

It is interesting to reflect on the above post from ten years ago. The reason I reflect on this today is that as an SCT shareholder, I am throwing away another dud lottery ticket. Scott's today announced the sale of their high tech HTS-110 superconducting magnet division to the HTS CEO Donald Pooke, supported by a series of venture capital outfits:

1/ 'New Zealand investment fund', run by venture capitalists Weijing CHEN and Li Yi CHEN,
2/ Booster Tahi Limited Partnership (https://www.booster.co.nz/booster-investments/tahi/tahi-investments.aspx) and
3/ Venture Capital fund, Matū (https://matu.co.nz/portfolio/hts-110/)/.

No sale price was announced of course. The business has been 'on the block' since John Kippenberger took over as CEO nearly two years ago. Anyway it was good to see HTS-110 not closed down. NS Innovations, an Australian take on the automated beef boning room, and the automated milking shed project were simply shuttered. So three lottery tickets are gone since the 'Kippenbeger coming'. The automated lamb boning room did eventually come good. But it has been hampered from greatness by being such a relatively small target market.

The HTS-110 sale will end up being little more than a footnote in the upcoming SCT annual report. A sad end, as far as SCT shareholders are concerned. Yet somehow, when you are given a lottery ticket for free, that loss doesn't seem quote so bad.

SNOOPY

kiora

21-10-2021, 08:58 PM

Bjauck

22-10-2021, 08:24 AM

Wow that is quiet some turn around
"Freshly streamlined automation and robotics company Scott Technology has returned to profit.

The company reported a net profit $9.5m for the year to August after restructuring costs took the company to a $17.5m loss in the prevoius year.

Scott's EBITDA came to $22.1m from a loss of $11.6m loss a year earlier."
https://www.nzherald.co.nz/business/scott-technology-returns-to-the-black-signs-20m-us-contract/QKHP2D45DL3K3CSMCCX3YN5H6U/

Revenue is only about 4% below the 2019 figure. The net profit is about the same as it was in 2019. It could have been worse in the Covid era.

The share price is up about 24% since October 2019. (NZX50G up about 20% since October 2019)

percy

22-10-2021, 08:38 AM

The net profit after tax of $9.5 mil is very modest for a company which has a market capitalisation of over $242 mil.

Arthur

22-10-2021, 09:49 AM

BlackPeter

22-10-2021, 10:36 AM

It may seem expensive, but the PE of 25 is well below NZ market average. It will be interesting to see what happens in the future. Robotics and mining equipment seems to be a good space, but Scott have a history of not meeting their potential. Is this time different?

Not sure whether this is true. FWIIW - the 80 plus stocks on my watchlist have an average PE of 19 ... and many of these companies have on top of that as well a material earnings CAGR, quite different to SCT which didn't manage to grow their average EPS for many years.

Scott is clearly dear in comparison based on backward looking indicators, and whether they will manage to turn their long term stagnation into future growth is anybody's best guess.

The current MIQ situation makes business for them obviously still harder than it used to be. Their competitors in the US, in Europe and in Asia are able to travel, to visit customers, install and maintain plants. Scott however can't - thanks to our retarded MIQ system. While they can send their specialist staff abroad, they can't get them back anymore (well, just go into the lottery to see whether you are allowed to return at some stage months or years later ...).

Quite average company now operating with additional spanners thrown in the wheels ... not my idea of a promising investment.

Ferg

24-10-2021, 11:29 AM

So perhaps a better indicator of Scott's profitability might be to add the Contract Revenue to the Contract Liabilities TOGETHER, as that would represent work recently completed AND that still underway?

Apologies for the delayed response Snoopy - I missed this earlier question.

The profitability on projects is per my workings on post #951. Unfortunately with most Annual Reports you cannot see the level of detail required to calculate what you want to see. But adding the revenue and liabilities together will give a meaningless number - refer again to the table on post #951 to see what figures you are adding for a single project and what that calculation returns versus the base figures*. Incidentally the note on page 31 of the 2020 AR confirms the method I outlined in post #951.

*Keep in mind you are adding half of the J3 journal and the WIP balance per column I - you have effectively added a transaction value to a balance value. FYI the J3 journal was simplified in my earlier post #951. I suspect the original post and notes that were lost had expanded on this.

The J3 Journal I presented for column H was:
Debit Contract WIP say 1,000
Credit P&L say 1,000

Fully expanded the journal would be:
Debit Contract WIP 1,000
Debit P&L Contract Costs say 9,000
Credit P&L Contract Revenue say 10,000 <- this is what you see in the P&L

The best assessment for future profitability would be to assess future margins being future revenues x expected margin %. I know you are a long term guy so maybe use the average margin % achieved over the past 5 years being contract margin / contract revenue, assuming those figures are disclosed. Often the AR will show the forward workload of contracts, usually the figure they quote is what has not yet been recognised per column A less column H (they do not use column G). Note 2020 AR has this on page 35 at $85,297k. This will give you the best measure of forward profitability, being future workload x average margin observed. If however the margins are not disclosed an alternative (and rather raw) method would be to compare unrecognised revenue year on year - you want to see this figure growing (in conjunction with top line revenues growing) because it means they are growing their contract register and are securing forward workload. The figure they have disclosed of $85.2m is column A (per #951) less the revenue components of column H (refer my expanded J3 note above).

Would the margins be those values disclosed on 2020AR p39 per the segment revenue & results? e.g. $6,498 / $186,073 = 3.49%? Or is that an all in margin that includes overheads etc? I don't know given I have only glanced at it. One might apply some sort of weighting assuming fast moving goods and contracts are at lower margins and long term projects are at higher margins...perhaps?

Hopefully this helps.
FERG

Snoopy

09-11-2021, 09:27 PM

Eight years on how have Scott's progressed? Looking back at my previous comparison with 'FANUC', I feel as though it wasn't fair. Scott's are more into making turnkey project solutions rather than making all the individual units of hardware that supply that solution. Having said this, Scott's are capable of making the hardware. But if a robot is available off the shelf, there is no reason to reinvent the wheel.

Today typing 'industrial automation leader' into a search engine, what comes up?

1/ Omron Automation: Integrated Robotics: Design and install flexible manufacturing enabled by the seamless integration of robotics with advanced machine control. This includes Autonomous Intelligent Vehicles (has largest installed base in manufacturing), Robotic installations include Vision, Motion and Safety functions, and Automated Warehouses. Omron is headquartered in Japan and has over 35,000 employees, with nearly 24,000 of those in overseas subsidiaries. Omron's Industrial Automation division turnover comprises 46% of total company turnover of about $US8billion.

Since the 1990s, in the industrial area, Omron has focused on microelectronics. They strove to become number one worldwide in components and industry leader in the systems field. Omron was quick to detect the emerging need for programmable controllers with a fast processing speed to facilitate a trend away from 'mass production' of a single product, to high-mix, low-volume production runs. Omron, as a company, seems to be two orders of magnitude larger than Scotts.

2/ Comau: is an Italian domiciled multinational and a subsidiary of Fiat Chrysler Automobiles. A developer of Industry 4.0 (the trend towards automation and data exchange in manufacturing technologies and processes)-enabled systems, products and services. Comau is active in vehicle manufacturing, heavy industry, railway and renewable energy. Comau have 9,000 employees, operate 32 centres across 14 countries, including 5 'innovation centres' and 14 manufacturing plants. This company is an order of magnitude larger than Scotts but in a slightly different market space: Scott's is more orientated towards light manufacturing production lines and food industry processing lines.

3/ ABB (Asea Brown Boveri Ltd): ABB, a Swiss domiciled multinational conglomerate, operate a 'Machinery and Factory Automation' division, 'MF' (formerly a separate company B&R, founded by Erwin Bernecker and Josef Rainer). MF operate in more than 200 offices worldwide and have more than 3,400 employees. MF combines state-of-the-art technology with advanced engineering to provide customers in virtually every industry with complete solutions for machine and factory automation, motion control, Human Machine Interface and integrated safety technology. MF operate in the Automotive, Printing, Food & Beverage, Handling & Robotics., Oil & Gas and Metalworking industrial spaces. MF is a complementary business to another ABB business arm: the ABB Robotics Division that actually manufactures robots. The workforce at the ABB ML division is over four times larger than the 784 that are employed at Scott Technology at EOFY2019.

With no need to take my research further, it is clear that Scott is not in the top three companies that offer integrated manufacturing solutions in the industrial automation space. But neither do Scott choose to emulate the industry big boys. This is an analogous position to Scott subsidiary 'Rocklabs'. 'Rocklabs', build sample preparation equipment. They became a friend of the smaller laboratories. These were laboratories that had formerly had been forced to wait behind bigger customers to be supplied by bigger equipment manufacturers out of Germany and the United States. Like Rocklabs, the Industrial Automation part of Scott's go after the 'second tier', in this case the appliance manufacturing industry. Appliance manufacturing is a sector without the glamour of the larger automotive companies, but which nevertheless requires first class metal pressing and component handling skills to service it well.

In the 'secondary industry space', where Scotts choose to operate, they work with the biggest names in those industries. For appliance manufacturing lines this includes Haier, General Electric, Bosch and Electrolux. For meat carcase packaging, this includes the world's largest player JBS, a multinational beef, lamb and chicken processor who are also the majority Scott's shareholder. JBS is ultimately domiciled in Brazil.

Conclusion: Pass Test

CEO of two years, John Kippenberger , has certainly made his mark on Scott Technology. JK is the architect of the "Scott 2025" vision, and its three pronged 'Systems', 'Products' & 'Services' approach. Gone is the ambition to be 'the global leader in automation'. Instead Scott's is re-orientating, looking at niche project areas, where Scotts have achieved success (rather than taking on any challenge - which technically they could do - but at an unforecastable cost).

Products

There is a big new emphasis on 'standard products', and Scotts have identified three 'core standard products'.

a/ Rock crushing and pulverizing equipment and supplying what is termed 'reference material'. This is selling equipment central to 'medium scale mining' lab analysis (testing what is actually being dug out of the ground) - a truly globally market. This 'product' is from the 'Rocklabs' business unit, based in Auckland, New Zealand.

b/ The 'Bladestop' safety bandsaw, features dual acting switching technology, to all but eliminate the possibility of maiming the bandsaw operator. This was developed for the meat industry, but has other potential applications. The technology was developed in Australia, and the IP was subsequently bought by Scotts in 2016. 'Bladestop' is manufactured by Scott’s Australian subsidiary, Scott Automation & Robotics Pty Limited.

https://www.nzx.com/announcements/291423

c/ Selling new and refurbished industrial robots under the 'RobotWorx' brand, both in the USA and Australia.

The thinking behind this 'product' strategy: if you have technically superior product, then you have 'brand recognition' and 'pricing power'.

Systems

'New thinking' has rolled into the manufacture of production lines for the world's appliance manufacturers (long a mainstay of Scott revenue) as well. From p21 AR2021 "Our goal is for production lines in the future to be at least 80% standardised."

Certainty = Cost Control = Predictable Profits

is the new Scott 'equation'.

Services

More new thinking has gone into the servicing arm of the business. From AR2021 p18

"We`re proactively seeking to become a service business, verses re-actively doing it where we can. This means we are introducing servicing earlier in the project process (at the point of sale), rather than it being an after thought." (includes regular servicing and preventative maintenance.)

This isn't just words. Scott's are about to increase the number of service technicians in each country in which they operate.

Selecting the markets in which you have greatest advantage, and successfully executing that strategy, makes answering the question at the head of this post easy.

Conclusion: Pass Test

SNOOPY

Snoopy

10-11-2021, 10:25 AM

FY2015: $4.803m / 45.474m = 10.6cps
FY2016: $8.929m / 74.681m = 12.0cps
FY2017: $8.959m / 74.681m = 12.0cps
FY2018: $10.205m / 75.903m = 13.4cps
FY2019: $9.464m / 77.545m = 12.2cps

Notes: NPAT normalisation calculations

FY2015: These adjustments may be found on p31, p32 of AR2015. I have:

a/ Subtracted the gain on sale of property plant and equipment ($0.280m)
b/ Added back fair value losses on derivatives held as fair value hedges ($0.449m).
c/ Subtracted foreign exchange gains ($1.538m) and add back unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.108m) and subtracted fair value gains on firm commitments ($0.449m).

$6.113m-($0.280m)+ 0.72($0.449m-$1.538m+$0.108m-$0.449m)= $4.803m

FY2016: These adjustments may be found on p33 of AR2016. I have:

a/ Added back a loss on sale of property plant and equipment ($0.215m) and an impairment of net assets at QMT Machinery Technology Co. Ltd in China ($0.449m).
b/ Added back fair value losses on firm commitments ($1.051m).
c/ Added back foreign exchange losses ($0.027m) and unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.155m) and subtracted fair value gains on derivatives held as fair value hedges ($1.051m).

$8.134m+($0.215m+$0.449m)+ 0.72($1.051m+$0.027m+$0.155m-$1.051m)= $8.929m

FY2017: These adjustments may be found on p30,31 of AR2017. I have:

a/ Subtracted a gain on sale of property plant and equipment ($0.073m)
b/ Added back fair value losses on firm commitments ($0.001m).
c/ Subtracted foreign exchange gains ($0.269m) and unrealised fair value gains on fair value gains on foreign exchange derivatives ($0.143m) and fair value gains held as fair value hedges ($0.001m).
d/ Subtracted a fair value gain on purchase of business "DC Ross" ($0.936m).

$10.265m-($0.073m+$0.936m)+ 0.72($0.001-$0.269m-$0.143m-$0.001m)= $8.959m

FY2018: Most of these adjustments may be found on p33 of AR2018. I have
a/ Added back the $0.021m loss on disposal of property plant and equipment.
b/ Added back in the unrealised loss on foreign exchange derivatives ($0.271m) and losses on derivatives used as fair value hedges ($1.579m) and the unrealised fair value losses on interest rate swap contracts ($0.043m) .
c/ Subtracted foreign exchange gains ($1.627m) and fair value gains on firm commitments ($1.579m).
d/ Added back $0.496m being due diligence and acquisition costs (including the $0.271m of due diligence services from the auditors)

$10.772m+($0.021m)+ 0.72($0.271m+$1.579m+$0.043m-$1.627m-$1.579m+$0.496m)= $10.205m

FY2019: Most of these adjustments may be found on p39 of AR2019. I have
a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m

Conclusion: Pass Test

FY2016: $8.929m / 74.681m = 12.0cps
FY2017: $8.959m / 74.681m = 12.0cps
FY2018: $10.205m / 75.903m = 13.4cps
FY2019: $9.464m / 77.545m = 12.2cps
FY2020: -$0.259m / 78.311m = -0.0033cps
FY2021: $11.146m / 78.636m = 14.2cps

Notes NPAT normalisation calculations

FY2016: These adjustments may be found on p33 of AR2016. I have:

a/ Added back a loss on sale of property plant and equipment, $0.215m; and an impairment of net assets at QMT Machinery Technology Co. Ltd in China, $0.449m.
b/ Added back fair value losses on firm commitments, $1.051m.
c/ Added back foreign exchange losses, $0.027m; and unrealised fair value losses on fair value losses on foreign exchange derivatives, $0.155m; and subtracted fair value gains on derivatives held as fair value hedges, $1.051m.

$8.134m+($0.215m+$0.449m)+ 0.72($1.051m+$0.027m+$0.155m-$1.051m)= $8.929m

FY2017: These adjustments may be found on p30,31 of AR2017. I have:

a/ Subtracted a gain on sale of property plant and equipment ($0.073m)
b/ Added back fair value losses on firm commitments, $0.001m.
c/ Subtracted foreign exchange gains ($0.269m) and unrealised fair value gains on fair value gains on foreign exchange derivatives ($0.143m) and fair value gains held as fair value hedges ($0.001m).
d/ Subtracted a fair value gain on purchase of business "DC Ross" ($0.936m).

$10.265m-($0.073m+$0.936m)+ 0.72($0.001-$0.269m-$0.143m-$0.001m)= $8.959m

FY2018: Most of these adjustments may be found on p33 of AR2018. I have
a/ Added back the $0.021m loss on disposal of property plant and equipment.
b/ Added back in the unrealised loss on foreign exchange derivatives, $0.271m; and losses on derivatives used as fair value hedges, $1.579m; and the unrealised fair value losses on interest rate swap contracts, $0.043m.
c/ Subtracted foreign exchange gains ($1.627m) and fair value gains on firm commitments ($1.579m).
d/ Added back $0.496m being due diligence and acquisition costs (including the $0.271m of due diligence services from the auditors)

$10.772m+($0.021m)+ 0.72($0.271m+$1.579m+$0.043m-$1.627m-$1.579m+$0.496m)= $10.205m

FY2019: Most of these adjustments may be found on p39 of AR2019. I have
a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives, $1.334m; and fair value losses on derivatives used as hedges, $1.216m; and the unrealised fair value losses on interest rate swap contracts, $0.346m.
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m) = $9.464m

FY2020: This is the year in which the Covid-19 crisis struck! Most of these adjustments may be found on p5 and p36 of AR2020.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.328m (assumed non taxable)
b/ Added back $7.600m from the impairment of assets (ceased development of projects Scott dairy and automated pork processing).
c/ Added back $4.257m of restructuring impairment related to the closure of subsidiaries DC Ross Toolmakers in Dunedin and Scott Automation GmbH, the machine tools workshop arm in Germany. Since these represent complete and final closure of these businesses I am assuming no tax is recoverable
d/ Added back $6.295m of project impairments, closing out several challenging Australasian legacy projects (assumed no tax recoverable).
e/ Added back in the unrealised loss on foreign exchange derivatives, $0.082m and fair value losses on derivatives used as hedges, $0.890m.
f/ Subtracted foreign exchange gains, ($0.450m); fair value gains on firm commitments, ($1.036m); unrealised fair value gains on foreign exchange derivatives, ($0.146m) and unrealised fair value gains on interest rates swaps ($0.146m).

-$17.503m-($0.328m)+$7.600m+$4.257m+$6.295m +0.72($0.082m+$0.890m-$0.450m-$1.036m-$0.146m-$0.146m)= -$0.259m

FY2021: Most of these adjustments may be found on p39 and p40 of AR2021.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.068m (assumed non taxable)
b/ Added back an actual foreign exchange loss of $1.706m and an unrealised fair value losses on derivatives used as hedges of $0.521m.
c/ Subtracted unrealised fair value gains on foreign exchange derivatives, ($0.132m) and unrealised fair value gains on interest rates swaps ($0.155m).
d/ Added back the amortisation of HTS 110 goodwill, now a legacy asset that has been sold, of $0.403m.

$9.527m-($0.068m) +0.72($1.706m+$0.521m-$0.132m-$0.155m) + 0.72x$0.403m= $11.146m

Conclusion: You will notice that I calculated six years of results, whereas I am meant to be considering only five. I have done this because for Scotts, I believe the FY2020 result was so unusual (Covid-19 related), that it would be misleading to to think of it as any part of a 'normal business cycle'. Thus for the first time ever in an analysis like this, I am going to 'look through' FY2020 as though it didn't happen. The one sense where I will consider FY2020 is that on normalised profit metrics the business was close to break even. So with the benefit of hindsight government support, and no doubt lots of prudent management behind the scenes, we can see that the SCT business was not put at risk of closing by Covid-19. Consequently I do not think that SCT will be forced to close down should Covid-19 restrictions again come to the fore. With FY2020 excluded, and only one blip on the 'eps' growth scoreboard, the result of the second Buffett test is clear.

Conclusion: Pass Test

SNOOPY

Snoopy

10-11-2021, 11:39 AM

FY2015: $4.803m / $50.618m = 9.5%
FY2016: $8.929m / $94.600m = 9.4%
FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.464m / $111.817m = 8.5%

Conclusion: Fail Test (a comprehensive fail covering each of the last five years). The last time Scott's passed this test for a single year was back in 2010!

FY2016: $8.929m / $94.600m = 9.4%
FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.464m / $111.817m = 8.5%
FY2020: -$0.259m / $92.947m = -0.29%
FY2021: $11.146m / $98.195m = 11.4%

Is FY2021 a portent to a much improved utilisation of shareholder funds in the future? It could be, but Scott's have a lot of catching up to do in the return on shareholder equity space.

Conclusion: Fail Test

SNOOPY

Snoopy

10-11-2021, 11:42 AM

Here are the net profit margins for the last five years.

FY2015: $4.803m / $72.298m = 6.6%
FY2016: $8.929m / $112.044m = 8.0%
FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%

Doing more and more business while making proportionately less profit over many years is not the way to go. The 'glitch' in FY2016 saw Scott's sell multiple repeat sales of automated lamb boning room units (the most profitable business that Scott's does) coupled with a good year at 'Rocklabs'. More of this will be required if there is to be any hope of restoring net profit margins to respectable levels.

Conclusion: Fail test

Here are the net profit margins for the last six years.

FY2016: $8.929m / $112.044m = 8.0%
FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%
FY2020: -$0.259m / $186.073m = -0.14%
FY2021: $11.146m / $216.234m = 5.2%

We have had a blip up from the lows of FY2019 (ignoring the one off FY2020 Covid-19 genesis year). Is this a result of the new 'product lead' and 'standardised unit' policy? I think it is too early to tell if this uptick in net profit margin will form part of a trend. One thing that is clear is that the net profit margin trend was all down before FY2021

Conclusion: Fail Test

SNOOPY

Snoopy

10-11-2021, 01:30 PM

I don't think SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20165.5c+4.0c
7.64c + 5.56c5.56c

FY20175.5c+4.0c
7.64c + 5.56c
13.20c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + 0c 5.02c + 0c5.02c

FY20210c + ?c 0c + ?c0c

Total51.56c

Averaged over 5 years of dividend payments, the dividend works out at 51.56/5 = 10.3c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this. The cancelling of the last two dividend payments from Scotts, I think, shows that a relatively high discount rate on those dividends that were paid is required.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, 'fair value' for SCT is:

10.3 / (0.075) = $1.37

Now using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.37 x 1.2 = $1.64
Bottom of Business Cycle Valuation: $1.37 x 0.8 = $1.10

SCT shares were trading at $2.33 on Tuesday 29th December (well above the upper end of my expected range) and are now at least 30% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 30% growth premium (because a capitalised dividend valuation assumes no growth).

History would show that such a growth premium can be justified, in my view. But such a premium also assumes successful, and profitable, execution of the growth plan. Given the much slower roll out (or even failure) of the automated beef boning room project, and an unlikely rapid bounce back in Europe, I am glad that I acquired my SCT shares at an average price of just 72.6cps (admittedly over a more than 10 year average acquisition timeframe). I still 'believe the story' which is why I am holding. But I now can't rule out a further 'down leg' before the eventual recovery.

I don't think SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20175.5c+4.0c
7.64c + 5.56c
5.56c

FY20186.0c+4.0c8.33c + 5.56c13.89c

FY20196.0c+4.0c 8.33c + 5.56c13.89c

FY20204.0c (18.41% I) + 0c 5.02c + 0c5.02c

FY20210c + 2c (NI) 0c + 2.00c2.00c

FY2022 4c (NI)+ ?c 4.00c + ?c4.00c

Total44.3c

Averaged over 5 years of dividend payments, the dividend works out at 44.3/5 = 8.86c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. Scott's seem to have been remarkably adept at solving the logistical transport problems created by Covid-19. They have even completed factory acceptance testing by virtual technology. I am now of the opinion that my previously selected sought after 7.5% gross yield over an historic five year business cycle window, should be reduced to 7.0%. This means that 'fair value' for SCT, based on the, 5 yearly historic dividend record is:

8.86c / (0.07) = $1.27

Now using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.27 x 1.2 = $1.52
Bottom of Business Cycle Valuation: $1.27 x 0.8 = $1.02

SCT shares were trading at $3.25 on Wednesday 10th December as I write this (more than double the upper end of my expected range) and are now ($3.25-$1.27=$1.98) 155% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 155% growth premium (because a capitalised dividend valuation assumes no growth).

It is clear the market is pricing SCT well above what we might expect from the dividend payer that I am modelling. And this is assuming SCT will increase the current annual dividend rate of 2c +4c = 6cps, to more than 8cps. This means the market clearly believes the growth story. But a capitalised dividend valuation relies on 'runs on the board', not future hope.

SNOOPY

Snoopy

11-11-2021, 11:10 AM

The current MIQ situation makes business for them obviously still harder than it used to be. Their competitors in the US, in Europe and in Asia are able to travel, to visit customers, install and maintain plants. Scott however can't - thanks to our retarded MIQ system. While they can send their specialist staff abroad, they can't get them back anymore (well, just go into the lottery to see whether you are allowed to return at some stage months or years later ...).

From HYR2021

Covid-19 Update

"The impact of Covid-19 is still being felt deeply across the Group, as travel restrictions within markets and across continents often prevent dales meetings in person and continues to inhibit some projects with balancing the project skills needs with the resources available within that state or region. However the Scott team, through its agility in adapting to new ways of working - including completing factory acceptance testing by virtual technology- has seen many examples of positive forward progress notwithstanding the travel challenges."

The 80 plus stocks on my watchlist have an average PE of 19 ... and many of these companies have on top of that as well a material earnings CAGR, quite different to SCT which didn't manage to grow their average EPS for many years.

Scott is clearly dear in comparison based on backward looking indicators, and whether they will manage to turn their long term stagnation into future growth is anybody's best guess.

Quite average company now operating with additional spanners thrown in the wheels ... not my idea of a promising investment.

If I use my normalised profit for FY2021 of $11.146m (14.2cpc), and compare that to the trading price today of $3.25, then I get a PE ratio of:

325/14.2 = 23

Almost down to the average of your 'hot 80' BP. I feel an investment slogan coming on:

"Buy Scott Technology: almost an average business." !

SNOOPY

Snoopy

11-11-2021, 01:01 PM

Australasia ManufacturingAmericas ManufacturingEurope ManufacturingChina ManufacturingOverall

Revenue (a)$112.060m$37.248m$53.981m
$12.945m$216.234m

Revenue %ge51.82%17.23%24.96%
5.986%100%

Segment NPBT (a)$16.291m$3.322m$1.895m$2.534m$24.042m (b)

subtract Admin NPBT Adjustment($6.242m)($2.075m)($3.006m)
($0.721m)($12.044m)

equals NPBT Adjusted$10.049m$1.247m($1.111m)$1.813m$11.998m

less Taxation (a)($1.112m)($0.737m)($0.501m)
($0.121m)($2.471m)

equals NPAT adj$8.937m$0.510m($1.612m)
$1.692m$9.527m

Notional Tax rate (T / NPBTadj)11.1%59.1%-45.1%
6.7%20.6%

NPAT profit margin (NPATadj / R)8.0%1.4%(3.0%)
13.1%4.4%

Divisional Interest Income (a)$0m$0m$0.003m
$0.099m$0.102m

less Divisional Interest Costs (a)($0.160m)($0.194m)($0.392m)
($0m)($0.746m)

less Admin Interest Costs($0.329m)($0.109m)($0.158m)($0.038m)($0.634m)

equals Divisional Net Interest Expense (I)($0.489m)($0.303m)($0.547m)
$0.061m($1.278m)

EBIT Adjusted (NPBTadj+I)$10.538m$1.550m($0.564m)$1.752m$13.276m

Notes

a/ Information marked (a) in the above table is straight from Section A3 in the annual report. Other rows of information are derived.
b/ But an individual entry marked (b) is derived.

Observations from the Above

1/ Australasia is from where most of the 'product' output (Bladestop and Rocklabs Output) is sourced. Perhaps then, it is unsurprising that this geographical region is the most profitable?
2/ The very low tax bill from Australasia may be a reflection of tax being offset by government grants of $0.625m (AR2021 p39).
3/ The 'standard product line' based in the Americas - Robotworx - looks to have had a poor year, given the other substantive US based business, Transbotics Automated Guided Vehicles, seems to have had a good year with the tyre manufacturers (AR2021 p10). Although maybe the closing remark on Transbotics "we see a positive future'" means that the present is not yet so positive?

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

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

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

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

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

4/ The Alvey acquisition (automated conveying systems) in Europe (c.f. my post 649 estimated EBT = $11.764m) looks like it has turned to disaster (EBT now is -$1.111m). O.K. that actual figure for FY2021 includes a Scott machine shop workshop and assembly area in the Czech republic, and 'Normaclass' in France. Nevertheless I don't believe EBT for Europe reflects well on what was principally the old Alvey automated conveyor business.

5/ China manufacturing, which designs and installs production lines for appliance manufacturers, had the highest net profit margin. But they are very dependent on workload. During the outbreak of the Covid-19 crisis over FY2020 work dried up, and so did profits. Scott's China, over 2HY2021, moved to a new facility almost three times the size of the old location "to maintain their growth trajectory" (Ref: Cover letter from AR2021 announcement). Meanwhile new appliance manufacturing lines in the US (as opposed to US manufacturers with their appliance production lines based in China) continue to be serviced from the 'appliance line centre of excellence' in Christchurch N.Z..

SNOOPY

Marilyn Munroe

13-11-2021, 02:38 AM

Snoopy

13-11-2021, 08:30 AM

The North American manager of key Scott stakeholder JBS has a moan about the indolence of the serfs.

https://www.zerohedge.com/commodities/worlds-largest-meat-company-warns-labor-shortages-holding-back-production

Boop boop de do
Marilyn

Interesting reading some of the comments on that article:

From drch
"I was in management at a large Cargill meat facility for years. They work their employees hard and long. They injure them with carpal tunnel syndrome and other repetitive action injuries at an alarming rate and throw them away like a broken machine. The employees make a living wage but barely and that is if they don't get injured. Cargill is not alone. JBS and Tyson and all the others are the same."

"The consumer wants cheap products and those big companies provide them at the expense of their employees. Corrupt government regulators have been captured by the industry (like banking and everything else)."

Mr Schnitzelface
"The only real way for working people to get a substantial raise promptly is to change jobs. If you don't pay top money, expect high turnover. Cost of living has never been higher and anyone worth keeping isn't looking to just scrape by."

bshirley1968
"Care to offer any suggestions to the group?"

"$20 an hour x 40 hrs = $800 a week. Then you can take 20% out for taxes bringing it to $640 take home."
"That's $2560 a month or $30,720 a year."

"$20 is above average, but we will use average rent of $1,124 for a one bedroom. That's $13,488 a year." (or $260 per week)."

"Can you eat on $300 a month? Let's say you can. $3,600"
"Insurance on that crappy car $120 a month and fuel $150 a month. $3,240"
"Utilities including cell phone and Internet $200. $2,400"

"I am up to $22,728.....on conservative expenses. That leaves roughly $8,000 or $666.67 a month for whatever else is on the list."

"Hell a refrigerator cost $1500 these days."

"Two points:"

"Do you see much of a future in that? I didn't even throw in any child expenses. Secondly, are you going to change jobs for what?......another $5 dollars an hour? Sure, that will make a big difference."

"People can see the future today like never before. They can see that the carrot is always going to be out of reach. 95% of the population doesn't have the ambition and drive to have it all. They just want to live without working themselves to death and destroying their bodies by the time they are 60.......and they would like to enjoy life along the way.....just a little."

Just as well our meat industry workers are paid much better in Australia and New Zealand isn't it?

SNOOPY

kiora

13-11-2021, 09:46 AM

Interesting reading some of the comments on that article:

From drch
"I was in management at a large Cargill meat facility for years. They work their employees hard and long. They injure them with carpal tunnel syndrome and other repetitive action injuries at an alarming rate and throw them away like a broken machine. The employees make a living wage but barely and that is if they don't get injured. Cargill is not alone. JBS and Tyson and all the others are the same."

"The consumer wants cheap products and those big companies provide them at the expense of their employees. Corrupt government regulators have been captured by the industry (like banking and everything else)."

Mr Schnitzelface
"The only real way for working people to get a substantial raise promptly is to change jobs. If you don't pay top money, expect high turnover. Cost of living has never been higher and anyone worth keeping isn't looking to just scrape by."

bshirley1968
"Care to offer any suggestions to the group?"

"$20 an hour x 40 hrs = $800 a week. Then you can take 20% out for taxes bringing it to $640 take home."
"That's $2560 a month or $30,720 a year."

"$20 is above average, but we will use average rent of $1,124 for a one bedroom. That's $13,488 a year." (or $260 per week)."

"Can you eat on $300 a month? Let's say you can. $3,600"
"Insurance on that crappy car $120 a month and fuel $150 a month. $3,240"
"Utilities including cell phone and Internet $200. $2,400"

"I am up to $22,728.....on conservative expenses. That leaves roughly $8,000 or $666.67 a month for whatever else is on the list."

"Hell a refrigerator cost $1500 these days."

"Two points:"

"Do you see much of a future in that? I didn't even throw in any child expenses. Secondly, are you going to change jobs for what?......another $5 dollars an hour? Sure, that will make a big difference."

"People can see the future today like never before. They can see that the carrot is always going to be out of reach. 95% of the population doesn't have the ambition and drive to have it all. They just want to live without working themselves to death and destroying their bodies by the time they are 60.......and they would like to enjoy life along the way.....just a little."

Just as well our meat industry workers are paid much better in Australia and New Zealand isn't it?

SNOOPY

Paid a bonus if they turn up for work???

Snoopy

13-11-2021, 11:27 AM

The earnings per share picture, once normalised, is quite consistent over five years.

But eps growth at Scott's over a five year period of 15% compares poorly with (say) Skellerup's 36%. One argument as to why the comparison is unfavourable could be that Scott's is going through a more transformative phase. Scotts want competent and adaptable engineering teams worldwide at several sites.

The drop in staff numbers in Asia since 2015 is because a then four year agreement with 25% China partner 'Teknatool International Ltd' came to an end in October 2015, with Scott's former joint venture staff then resized and reskilled to pursue Scott Technology projects only.

The good thing about Scotts having a manufacturing base in China, the United States, Europe and Australasia is that you can make your projects in a location that will avoid trade barriers. But the bad side to that strategy is that while trade barriers exist, you will always have some of your manufacturing base in the wrong place. Given Scott's results since the 'globalised bases of scale' strategy has come to fruition, I am not clear it is the right strategy. The fact that Scott's have been able to maintain fully imputed dividends while only around a quarter of the workforce is NZ based, shows how 'profitable' (sic) the overseas manufacturing bases are. Of course there may be some internal transfer pricing that artificially inflates the New Zealand contribution to profit when more than one manufacturing base contributes to a project, But it isn't clear that any of the overseas bases are real profit stars.

With Scott Technology we have a highly skilled workforce doing clever things and making very average profits. Of course there are plenty of technology companies out there that make no profits at all, and Scott's deserve kudos for actually making money while doing smart stuff. But the automated boning room project has been a disappointment of late, principally because the lamb boning room which was technologically very successful and profitable has such a small potential market. The real money in automated meat processing is in processing beef. And the larger beef carcass, more variable in size, seems to be proving problematic to adapt to the robotised technology proven in the lamb boning room.

It seems like CEO John Kippenberger looked at the business upon taking the CEO reins two years ago, then had some of the same doubts that I did. The 'adaptable teams' way of doing business at Scotts has been replaced by 'centres of excellence': Specialists doing what they do best at one site. Potential geographical constraints on trade have been (mostly) worked around - kudos for that! The Covid-19 pandemic means that it is difficult to judge the effectiveness of what looks like a radical rethinking of the way Scott's works 'by the numbers'. But what I can say is that 'earnings per share' of 14.2c (adjusted) is the best it has been since 2004 (when eps was 14.9cps, and Scott's was a very different and much smaller 'appliance production line manufacturer' only).

The one truth that has remained from those earlier days is that when appliance manufacturing line sales go well, then Scotts does well. That stands to reason. When you employ a lot of highly skilled tradespeople, you don't want them hanging around the workshops underutilised. It is difficult to get a good 'return on assets' (and in the case of Scotts, their best assets are not on the balance sheet, they are people) when the type of projects you are geared up to run are not firing. Adjusted ROE over FY2021, at 11.4%, was the best it has been since FY2013 (12.3%). But the more diversified Scotts becomes, the harder it becomes to get the whole internationally spread and diveresly experienced 'project teams' operating 'near peak' at the same time.

Right now 'Europe manufacturing' (see post 971) is effectively 'on the bench' as the rest of the Scott team plays on. I have looked at some of the Scott youtube videos on palletising and packing systems, showcasing the largely Belgian headquartered 'Scott Europe'.

https://www.youtube.com/c/ScottAutomationRobotics

It does look like very clever stuff. There has been cost cutting in Europe with the closure of the German workshop base, and with some work moving the Czech republic premises. 'In theory' Covid-19 should be a tailwind for 'Scott Europe'. Automated packaging systems reduce the human 'touch', and should combat disease spread (also through having less workers in a confined space). Yet capital commitments by manufacturing customers at a time when a business is under pressure is never a straightforward sell. Nevertheless I do think a real key to lifting the performance of the Scott group as a whole is a resurgence of 'Scott Europe'. By 'lift' I mean the potential to lift profits 50% above today's levels. That kind of profit lift is a juicy carrot worth staying invested for! But by when could that happen? I note as an aside that, as it stands today, profit margins for the group as a whole, at 5.2% for FY2021, are well below the pre-Covid-19 norms of 7 to 8%.

There are other headwinds too. Transbotics has moved on from its first generation AGVs that just followed painted lines, to 2G AGVs that navigate via lasers, to now looking at moving to a 3G system, where GPS guides a driverless vehicle's movements. I am not sure how much R&D is needed to make the transition to 3G AGVs. But I can't imagine the move is cheap. Elsewhere in the USA, Ohio, 'Robotworx', the reseller of refurbished robots, looks to be 'just plugging along' under a wave of Covid-19 uncertainty..

The biggest disappointment for me, from two years ago, has been the closing down of the automated pork processing project in Australia and the seeming end (although it hasn't been formally announced) of the fully automated beef processing project as well. Could it be that:

a/ The larger nature of these animals (as compared to a lamb),
b/ The more varied size of the carcass, and
c/ The consequent necessity to process these animals by halves (IOW you can't just take the way lambs are processed and 'scale it up'.)

are technical hurdles that are too difficult to clear? Ironically the great success of Scott's 'Bladestop' product in the beef industry, the safety bandsaw that nevertheless requires a human hand to operate, suggests that the prospects of a more comprehensive automation of the beef and pork processing lines may have indeed receded over the horizon.

There have been other failures too. Scott Milktech, the robotised milking shed project, was first absorbed into the parent Scott Technology in 2017, as their industry partner sold out, and now it doesn't rate a mention in this years annual report or presentations. The HTS-110 company in Lower Hutt, a full subsidiary since 2014 battles away building applications with magnetic superconductor technology that is globally well respected in international academia and industry. Yet so far the king hit application that will really put HTS-110 on the map remains illusive. No matter. Should either of these business units get on board the commercial express train, then shareholders buying at today's prices will get the benefits 'for free'. In cutting edge technology, ultimate success is often the outcome of a series of failures.

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

To summarise, the Warren Buffett snapshot view: Well chosen operating niche, increasing profits, rather average return on capital (not unusual for a capital intensive industry I might add) with shrinking profit margins. There is as a bonus, no net company debt, which is always helpful when navigating uncertain times.

The 'glass half full' interpretation is that the company has been reset. And once the USA, and particularly Europe, gets back on line, sales and profits should accelerate. The 'glass half empty' interpretation is that the favourable confluence of cyclical factors in the Asia Pacific rim will turn south, capital expenditure on new projects will become more difficult to justify, and sales will settle at a level a little below what we see today.

I continue to have the 'glass half full' outlook. But I see the 'no net debt' position as a kind of 'safety net', that should allow the company to regroup again, should I be proven to be wrong. There is a significant growth premium (see my post 969) built into the share price today ($3.25 -$1.52=) $1.73. I think such a premium could be justified, if the full 'JK vision' for Scotts pans out. But I won't be adding any more shares to my holding at today's prices ($3.25, an adjusted PER of 23). And I think it is fair to say that I wouldn't expect Warren Buffett to be joining me on the share register any time soon.

SNOOPY

discl: hold SCT

Snoopy

16-11-2021, 05:43 PM

The profitability on projects is per my workings on post #951.

The best assessment for future profitability would be to assess future margins being future revenues x expected margin %. I know you are a long term guy so maybe use the average margin % achieved over the past 5 years being contract margin / contract revenue, assuming those figures are disclosed. Often the AR will show the forward workload of contracts, usually the figure they quote is what has not yet been recognised per column A less column H (they do not use column G). Note 2020 AR has this on page 35 at $85,297k. This will give you the best measure of forward profitability, being future workload x average margin observed. If however the margins are not disclosed an alternative (and rather raw) method would be to compare unrecognised revenue year on year - you want to see this figure growing (in conjunction with top line revenues growing) because it means they are growing their contract register and are securing forward workload. The figure they have disclosed of $85.2m is column A (per #951) less the revenue components of column H.

I had to dive back into my SCT annual report collection, in order to notice that this extra contract declaration information we are talking about has only been available since FY2019. The extra disclosure appears to result from the implementation of IFRS15 on 'Revenue from Contracts with Customers'.

FY2019FY2020FY2021

Unsatisfied long term fixed price contracts$78.205m$85.297m$71.302m

Total Operational EBT Margin12.2%3.49%15.0%

Would the margins be those values disclosed on 2020AR p39 per the segment revenue & results? e.g. $6,498 / $186,073 = 3.49%? Or is that an all in margin that includes overheads etc? I don't know given I have only glanced at it.

Yes, the figures you have used to do your calculation 'Segment Profit' (EBT) of $6,498, divided by total revenue $186,073, would give an 'operational EBT profit margin' of 3.49%. (I have added into the table above the other two years for which this information is available). Back to FY2020, most of the overheads are in the 'Unallocated' column and total ($7.984m) before tax. If you regarded overheads as a 'fixed cost', then you could use your calculated 'operational EBT profit margin' to estimate a profit contribution from incremental projects. FY2020 looks to have been an outlier thanks to Covid-19 shock disruption.

One might apply some sort of weighting assuming fast moving goods and contracts are at lower margins and long term projects are at higher margins...perhaps?

Good idea, although it might be difficult to tease out the different profit margins on 'standardised contracts' verses 'system contracts' in practice. John Kippenberger's pledge to use more 'standardised modules' in system projects is his attempt to smooth out profitability across all categories of work. If the company can do incremental work while not increasing their labour bill (I am thinking Scott workers will be on a base pay rate, no matter how much work is on the company books) then incremental work should equal 'good profits'. So maybe a general EBT profit margin, such as you calculated, could work well as part of a future profit estimating forecast?

If we use an extrapolation form the FY2021 figures:

EBT (forecast from unsatisfied contracts) = 0.150 x $71.308m = $10.7m

How that figure will relate to EBT for HY2022 remains to be seen.

It can all go wrong though. I remember one year that Scott's were so busy, much of the work had to be farmed out to sub contractors to meet deadlines and shareholder profit virtually disappeared.

SNOOPY

Snoopy

25-11-2021, 10:33 PM

The biggest disappointment for me, from two years ago, has been the closing down of the automated pork processing project in Australia and the seeming end (although it hasn't been formally announced) of the fully automated beef processing project as well. Could it be that:

a/ The larger nature of these animals (as compared to a lamb),
b/ The more varied size of the carcass, and
c/ The consequent necessity to process these animals by halves (IOW you can't just take the way lambs are processed and 'scale it up'.)

are technical hurdles that are too difficult to clear? Ironically the great success of Scott's 'Bladestop' product in the beef industry, the safety bandsaw that nevertheless requires a human hand to operate, suggests that the prospects of a more comprehensive automation of the beef and pork processing lines may have indeed receded over the horizon.

I got a surprise today to see this press release, issued in parallel with the virtual AGM.

https://www.nzx.com/announcements/383599

The automated beef boning room project is back on, with avengeance! There are a couple of odd features of the announcement though.

"This announcement sees Scott Technology partner with Teys, one of Australia’s leading protein producers, and Meat & Livestock Australia (MLA), to develop a revolutionary beef solution"

So the solution has not yet been developed, after,-what?- over 15 years of trying? Isn't this the kind of project that CEO JK was trying to snuff out? The kind of project with indeterminate costs on a fixed budget ($18m). Actually $18m does not sound that much. I believe a fully functioning automated lamb processing line is around $12m-$14m, with all the design work pre-done. The machinery to handle a beef carcass is consummately bigger. So I can't see much 'development' money in that $18m develop, build install and commission project budget.

There is another thing odd about this announcement. JBS tout themselves as Australia's largest meat and food processing company. JBS are Scott's largest shareholder. Yet Scott's have selected meat processor Teys as their development partner, a direct competitor to JBS! Beef is the biggest meat processing industry in Australia by far. So JBS would have a huge amount to gain from the success of this automated beef room project. Yet they have chosen to 'sit back' and let their competitor steal the automation advantage. Huh?

Notwithstanding my confusion on which customer stands up first, this will be massive for Scott's as Australia (representing 4% of the global beef market) is only the beginning. This beef boning room will be the bridge to the USA, a market five times the size of Australia.

SNOOPY

Snoopy

22-12-2021, 08:32 AM

'In theory' Covid-19 should be a tailwind for 'Scott Europe'. Automated packaging systems reduce the human 'touch', and should combat disease spread (also through having less workers in a confined space). Yet capital commitments by manufacturing customers at a time when a business is under pressure is never a straightforward sell. Nevertheless I do think a real key to lifting the performance of the Scott group as a whole is a resurgence of 'Scott Europe'. By 'lift' I mean the potential to lift profits 50% above today's levels. That kind of profit lift is a juicy carrot worth staying invested for! But by when could that happen? I note as an aside that, as it stands today, profit margins for the group as a whole, at 5.2% for FY2021, are well below the pre-Covid-19 norms of 7 to 8%.

There are other headwinds too. Transbotics has moved on from its first generation AGVs that just followed painted lines, to 2G AGVs that navigate via lasers, to now looking at moving to a 3G system, where GPS guides a driverless vehicle's movements. I am not sure how much R&D is needed to make the transition to 3G AGVs. But I can't imagine the move is cheap. Elsewhere in the USA, Ohio, 'Robotworx', the reseller of refurbished robots, looks to be 'just plugging along' under a wave of Covid-19 uncertainty..

The biggest disappointment for me, from two years ago, has been the closing down of the automated pork processing project in Australia

There has been a big fall in the SCT share price over the last month: down from a high of $3.75 to $3.25, a fall of around 15%. Given a slightly longer time perspective, this is only returning to the share price levels of mid-November. Effectively the surge on the announcement of the Tey's beef processing project in Australia has been reversed. As of now the company is on an historical PE of 27. Certainly no bargain, although with a more focussed management on projects based on proven previous experience, and the promising technology pipeline, I can't say it isn't justified.

The share price fall could be reflecting the surge of Omicron in Europe will delay some capital projects, and certainly won't be helping the commissioning of projects already in the system. Or it could just a a liquidity issue for what is a thinly traded shares. Either way I don't see any fundamental causes of concern for long term shareholders. I will be sitting tight on my SCT shares.

SNOOPY

BlackPeter

22-12-2021, 09:24 AM

There has been a big fall in the SCT share price over the last month: down from a high of $3.75 to $3.25, a fall of around 15%. Given a slightly longer time perspective, this is only returning to the share price levels of mid-November. Effectively the surge on the announcement of the Tey's beef processing project in Australia has been reversed. As of now the company is on an historical PE of 27. Certainly no bargain, although with a more focussed management on projects based on proven previous experience, and the promising technology pipeline, I can't say it isn't justified.

The share price fall could be reflecting the surge of Omicron in Europe will delay some capital projects, and certainly won't be helping the commissioning of projects already in the system. Or it could just a a liquidity issue for what is a thinly traded shares. Either way I don't see any fundamental causes of concern for long term shareholders. I will be sitting tight on my SCT shares.

SNOOPY

I like your persistency ... and I guess sure, you are right - they say every dog has its day, and hey, even this one might.

The industry clearly should have some tailwinds with the problems in the meat processing industry, however - there are plenty of big players in Europe as well as Asia understanding automation as well (and having ways larger resource pools). Scott is a minnow in the world of automation and it is everybody's best guess how they as company will perform in future. Sure - they might produce the world best beef slicing and processing factory and market, sell and service it all over the world - but then, they might not. Not even sure whether IP might be able to protect them if they have a good idea how to cheaper or better slice a carcass ... but so far they anyway first need this great idea.

Having seen what they are doing a couple of years ago ... it looked pretty much what you would expect to get anywhere in the world if you mix a handful of reasonably bright engineers and give them some toys to play. I don't think there is anything which a reasonably resourced German or other European or Japanese or other Asian technology company couldn't do as well ... i.e. not sure, what Scott's moat might be.

The Pareto principle applies as well to the share market, which means (less than) 20 percent of the listed companies produce (more than) 80% of the market gains. This means as well that 80% of the listed stocks produce very little gains indeed.

So far I haven't seen any reason why Scott should be part of the 20% of high performers performers instead of the 80% "also running". It is more or less solid engineering what they are doing, but no rocket science.

Did you?

percy

22-12-2021, 09:59 AM

Question.
Is SCT share price higher today than it was 21 years ago.?

BlackPeter

22-12-2021, 10:20 AM

Snoopy

23-12-2021, 10:36 AM

The industry clearly should have some tailwinds with the problems in the meat processing industry, however - there are plenty of big players in Europe as well as Asia understanding automation as well (and having ways larger resource pools).

Some still think that Scott aims to conquer the world from their Kaikouri Valley base in Dunedin. But Scott's are players in Europe already with 'Scott Europe' being the old Alvey (Belgian based) company plus a significant workshop and development capacity in the Czech Republic.

There was a potential competitor who started up in Europe to build a competitive equivalent of the 'meat boning room'. But a word to the lawyers in Europe about the patent protection filed on that continent put paid to that little venture.

Not sure about your point of others having 'larger resources'. At face value level, that claim is true. But is Scott's short of the resources it needs? They claim that majority shareholder JBS is there to guarantee more funds should that be required. Since JBS took their controlling stake there has been no mention of Scott's not having enough cash. And currently they are 'net debt free'.

Also. Scott are in the process of doubling their capacity in Asia via Scott China.

Scott is a minnow in the world of automation and it is everybody's best guess how they as company will perform in future.

But Scott are aiming to be a 'global leader in automation'. So that must be true ;-P

Sure - they might produce the world best beef slicing and processing factory and market, sell and service it all over the world - but then, they might not. Not even sure whether IP might be able to protect them if they have a good idea how to cheaper or better slice a carcass ... but so far they anyway first need this great idea.

Having seen what they are doing a couple of years ago ... it looked pretty much what you would expect to get anywhere in the world if you mix a handful of reasonably bright engineers and give them some toys to play. I don't think there is anything which a reasonably resourced German or other European or Japanese or other Asian technology company couldn't do as well ... i.e. not sure, what Scott's moat might be.

Scott's have patent protection on what they are doing re meat processing across Australasia. , Europe, U.K. and North America. A lot of the patenting is software based too. So a competitor couldn't just buy a piece of boning room equipment, strip it down and reverse engineer it from a strictly hardware perspective. Scott relies on clever people but doesn't pay them too much. So the German branch got shut down a few years ago, and they have never attempted to set up shop in the likes of the U.K. or Japan.

For some years at the AGM Scott rolled out a chart showing the ever growing number of international patents relating to their self developed (and in some case 'bought in' like Bladestop) technology.

SNOOPY

percy

06-01-2022, 10:20 AM

I got a surprise today to see this press release, issued in parallel with the virtual AGM.

https://www.nzx.com/announcements/383599

The automated beef boning room project is back on, with avengeance! There are a couple of odd features of the announcement though.

"This announcement sees Scott Technology partner with Teys, one of Australia’s leading protein producers, and Meat & Livestock Australia (MLA), to develop a revolutionary beef solution"

So the solution has not yet been developed, after,-what?- over 15 years of trying? Isn't this the kind of project that CEO JK was trying to snuff out? The kind of project with indeterminate costs on a fixed budget ($18m). Actually $18m does not sound that much. I believe a fully functioning automated lamb processing line is around $12m-$14m, with all the design work pre-done. The machinery to handle a beef carcass is consummately bigger. So I can't see much 'development' money in that $18m develop, build install and commission project budget.

There is another thing odd about this announcement. JBS tout themselves as Australia's largest meat and food processing company. JBS are Scott's largest shareholder. Yet Scott's have selected meat processor Teys as their development partner, a direct competitor to JBS! Beef is the biggest meat processing industry in Australia by far. So JBS would have a huge amount to gain from the success of this automated beef room project. Yet they have chosen to 'sit back' and let their competitor steal the automation advantage. Huh?

Notwithstanding my confusion on which customer stands up first, this will be massive for Scott's as Australia (representing 4% of the global beef market) is only the beginning. This beef boning room will be the bridge to the USA, a market five times the size of Australia.

SNOOPY

https://sendy.tarawera.co.nz/l/J6oLVth2f3f6IXNYvUBQEg/Yzja8LoOb763nMr7PuwyxiVw/xxH03hNrLiIesb82J8929Cxw

Snoopy

06-01-2022, 11:38 AM

Question.
Is SCT share price higher today than it was 21 years ago.?

Great question.

13345

Not really .... but hey, they had their ups and downs and they paid in roughly half of the years (based on Yahoo finance) a quite mediocre dividend.

However, to be fair ... they might have had as well a few share splits as well as Cap rises over the decades ... i.e. the comparison may or may not be fair. I don't know. Anybody does?

As a shareholder over the last 21 years (actually more) I can answer that question.

1/ On 31st March 2001 the share price was $1.65
2/ On 8th December 2002 there was a 1:8 tax free bonus issue.
3/ On 4th December 2003 there was a 1:8 tax fee bonus issue,
4/ On 26th March 2010 there was a 1:10 tax free bonus issue
5/ On 4th August 2011 I took up a rights issue at at rate of 1 share for every 4 that I owned at $1.20 per share.
6/ On 14th April 2016 I took up a rights issue at a rate of 1 share for every 8 that I owned at $1.39 per share.

Question: That means for every share in existence today, from a shareholder perspective, if they had taken up their rights when offered, this is equivalent to owning how many shareholder owned shares in March 2001?

Answer: Equivalent Shares owned on 2001 = {No. Shares Owned Today) x 8/9 x 4/5 x 10/11 x 8/9 x 8/9 = 0.5108 x (No. Shares Owned Today).

OR put another way if you owned 10,000 shares today you could have built that shareholding up from owning 5,108 shares 21 years ago without buying any shares on the market.

At a share price of $3.58 today, your shareholding would be worth 10,000 x $3.58 = $35,800.00
On 31st March 2001 your equivalent holding would have been worth 5,108 x $1.65 = $8,428.20

There is one more bit of this 'capital puzzle' to fill in. We have to subtract from the present capital value, the cost of the rights issues that a shareholder would have had to subscribe to to make these capital gains.

a/ April 2016 Rights Issue: 8/9 x 10,000 = 8889 shares. Rights Issue Contribution = (10,000-8,889) x $1.39 = $1,544
b/ August 2011 rights issue: 8/9 x 8,889 = 7901 shares. Rights Issue Contribution = (8.889-7,901) x $1.20 = $1,186

This means the annual compounding capital gain (excluding dividends) over 21 years was:

$8,428.20 x (1+i)^21 = ($35,800- $1,544 -$1,186) = $33,070

=> (1+i)^21 = 3.924

=> 1+i = 1.067

This is a compounding capital return rate of 6.7% per year (excluding dividends). Not a 'get rich quick' scheme, but a fairly tidy return for long term investors who have 'kept the faith' over the years nevertheless.

SNOOPY

Snoopy

07-01-2022, 09:52 AM

Great question.

13345

Not really .... but hey, they had their ups and downs and they paid in roughly half of the years (based on Yahoo finance) a quite mediocre dividend.

I have just had a more detailed look at the 'yahoo' chart you posted BP. It includes the three bonus share issues that I documented from 2002, 2003 and 2010. But curiously it did not include the 2011 and 2016 cash issues. I imagine those exclusions were deliberate, maybe a policy of not including cash issues? I do remember at the time of the 2016 capital raising, the share price dropped to around the level of the capital raising price and I managed to buy some more shares at the capital raising price 'on market'. So perhaps the argument is that if the capital raising price is around the market price, then that doesn't represent a gain that is fit for charting? History records that after taking up my rights and some more via the market at $1.39, I subsequently sold down my holding in two tranches at $2.10 and $2.60, to bring the value of the overall holding back into balance. Then a few years down the track just before Covid-19 hit in 2020, and just after, I bought those shares back again at $2.20 and $1.65 (only to rebalance the value of my holding up again you understand).

That little exercise plus some earlier rebalancing down then up some years before has seen the average holding price of my SCT shares fall to 73c. Compare that to the $1.65 reference share price from March 2001 and it looks like my own capital gains on SCT were approximately double that of the mythical buy and hold investor I outlined in my post 984 - very nice.

The yahoo chart also suggests that there were no dividends paid before November 2009. There was a dividend hiatus in 2008. But there were dividends paid before that, and at a higher level than today in the early 2000s. I can only assume that yahoo does not have this information. I guess it goes to show that you should take some of this yahoo information with a grain of salt. IOW just because it says so on the internet, that doesn't necessarily mean you are getting the full picture (who would have thought!)

For the future I was happy to pick SCT again as my technology investment of most conviction for the 2022 beat the brokers share pick competition. And this year complete with the endorsement of 'The big O' (from the Shareholders Association) what could possible go wrong ;-P

SNOOPY

percy

07-01-2022, 10:15 AM

I have just had a more detailed look at the 'yahoo' chart you posted BP. It includes the three bonus share issues that I documented from 2002, 2003 and 2010. But curiously it did not include the 2011 and 2016 cash issues. I imagine those exclusions were deliberate, maybe a policy of not including cash issues? I do remember at the time of the 2016 capital raising, the share price dropped to around the level of the capital raising price and I managed to buy some more shares at the capital raising price 'on market'. So perhaps the argument is that if the capital raising price is around the market price, then that doesn't represent a gain that is fit for charting? History records that after taking up my rights and some more via the market at $1.39, I subsequently sold down my holding in two tranches at $2.10 and $2.60, to bring the value of the overall holding back into balance. Then a few years down the track just before Covid-19 hit in 2020, and just after, I bought those shares back again at $2.20 and $1.65 (only to rebalance the value of my holding up again you understand).

That little exercise plus some earlier rebalancing down then up some years before has seen the average holding price of my SCT shares fall to 73c. Compare that to the $1.65 reference share price from March 2001 and it looks like my own capital gains on SCT were approximately double that of the mythical buy and hold investor I outlined in my post 984 - very nice.

The yahoo chart also suggests that there were no dividends paid before November 2009. There was a dividend hiatus in 2008. But there were dividends paid before that, and at a higher level than today in the early 2000s. I can only assume that yahoo does not have this information. I guess it goes to show that you should take some of this yahoo information with a grain of salt. IOW just because it says so on the internet, that doesn't necessarily mean you are getting the full picture (who would have thought!)

For the future I was happy to pick SCT again as my technology investment of most conviction for the 2022 beat the brokers share pick competition. And this year complete with the endorsement of 'The big O' (from the Shareholders Association) what could possible go wrong ;-P

SNOOPY

Great investing on your part.
Certainly a different story from the chart,which left me wondering if SCT had been a dead duck for long term investors.
Although some would disagree, I think it is wise to take a bit off the top at times to reduce your average holding cost,as you did.
I think the real bonus is when you manage to achieve a free ride.

Walter

07-01-2022, 11:35 AM

Reinvesting dividends has also played a part in increasing the return. 20 years ago the share price was in the 80 cent range. Dividend in 2003 was 14 cents a share, not a bad return.

winner69

07-01-2022, 11:52 AM

percy

07-01-2022, 12:02 PM

So if one bought $1,000 worth of SCT shares in March 2001 at $1.65 what’s that worth now?

Including bonus issues and reinvested divies the answer is $X

Would partaking in rights issue (adding to the $1,000 made much difference.

Thanks W69 that is the question I should have asked.

Snoopy

07-01-2022, 02:38 PM

Reinvesting dividends has also played a part in increasing the return. 20 years ago the share price was in the 80 cent range. Dividend in 2003 was 14 cents a share, not a bad return.

I have the SCT share price at $1.13 on 30th September 2021 (did it really go as low as 80c around then? It may have, but my records show that price much later in 2009 when the dividend vanished). The 14c annualised dividend ( interim dividend of 8cps (12-12-2002) + final dividend of 6cps (01-05-2003) ) from FY2003 was when the share price was higher ($2.37 on 31-03-2013). There has been a dividend reinvestment plan over the years. But due to the somewhat cyclical nature of the SCT business (up until now at least, who knows if that cycle has been broken?) I always figured that I could time my own purchases better, rather than rely on the DRP to gradually increase my holding. Each to their own though, and I imagine all of those who have built up their DRP holdings in past years are feeling rather good about that right now.

Still back in 2003, Scott's was a very different business to what it is now. So I think we can forget those 14cps annual dividends (fully imputed no less) going forwards. How do you know all of those details Walter? Could it be that I have found a fellow SCT investor as patient as I am?

SNOOPY

Walter

07-01-2022, 05:01 PM

Hi Snoopy, we have chatted at a AGM in Dunedin. The food is usually good. I think I got some of mine when they spun out of Donaghys in 1997.
Somewhere in the basement I have better records. I just took the price info off a chart in 2004 investment yearbook (Access brokerage, since deceased). I have definite memories of it being in the 80s around then. For what it's worth Jarden tells me I paid 60cents at some stage. It has always been cyclical, so I'm tempted to trim while the going is good. I almost gave in when they gifted the company to the Brazilians....thanks for your analysis back then.

Snoopy

08-01-2022, 06:46 PM

So if one bought $1,000 worth of SCT shares in March 2001 at $1.65 what’s that worth now?

Including bonus issues and reinvested divies the answer is $X (or if easier just add the $ value of divies on at the end)

I think the easiest way to solve this problem is to look at what happens to one share and derive what happens to $1,000 worth of shares from that.

The 'dividends per share' are laid out in the table below. Bonus Shares increase the 'dividend per share' purchased on 31st March 2001 'forever after' for no more capital outlay. I adjust for this by using a 'dividend growth factor' which shows 'per share dividend growth' from the base date the investment started. A similar adjustment is made for 'Rights issues'. However, in the case of a 'Rights issue' a cash outlay is made, and this must be subtracted from the overall return.

Winner, you asked for the divvies to be reinvested as we go. I think I know why you asked for that, because this is how the NZX50 return is calculated. And for a direct comparison to NZX50 returns, I should calculate the overall investment return this way. There has been a stopped and started DRP scheme which allows shareholders to do this. But such a scheme has not been available for the entire 21 years under study. Furthermore prior to the arrival of the likes of Sharsies, it would not have made economic sense to reinvest dividends unless you were a very large shareholder. So I am not going to grant this part of your request. If I had done so, the return I would have calculated would be slightly greater than the return I have calculated.

Scott Technology 21 year dividend history (per share)

Financial YearNet Dividend (Final + Interim)Dividend Growth FactorAdjusted Dividend (Factored & Summed)

FY20012.0c+1.5c1.03.5c
.

FY20028.0c+3.0c1.011.00c
)+

FY20038.0c+6.0c(9/8)x(9/8), (9/8)16.88c

FY20047.0c+6.0c81/6416.45c

FY20050c+4.0c81/645.06c

FY20063.0c+0c81/643.80c.

FY20076.0c+3.0c81/6411.39c.

FY20080c+0c81/640c

of

FY20091.0c+0c81/641.27c

FY20104.0c+1.25c(11/10) x (81/64)7.31c

FY20115.0c+2.0c(5/4)x(891/640), 891/64011.49c

FY20125.5c+2.5c4455/256013.92c

FY2013(5.5c+2.0c)+2.5c4455/256017.40c

FY20145.5c+2.5c4455/256013.92c

FY20155.5c+2.5c4455/256013.92c

FY20165.5c+4.5c(9/8)x(4455/2560), 4455/256018.60c

FY20176.0c+4.0c40095/2048019.58c

FY20186.0c+4.0c40095/2048019.58c

FY20193.62c(PI)+4.0c40095/2048014.92c

FY20200c+0c40095/204800c

FY20212.88c(NI)+1.44c(NI)40095/204808.46c

Total208.81c

Notes

1/ Final dividend for FY2019 of 4.0c only partially imputed to 65.75%.
2/ Final 4.0c and interim 2.0c dividend for FY2021 not imputed.
3/ 1:8 bonus issue made immediately following FY2002 final dividend.
4/ 1:8 bonus issue made immediately prior to the FY2003 final dividend.
5/ 1:4 rights issue offer at $1.20 per share made and shares issued (04-08-2011). This implies a one off capital adjustment downwards of $1.20/4 = 30c per share. However the per share figure has to be corrected for the difference between the number of shares on issue at the time this exercise started and the number of shares on issue at the time the cash issue was made. 30cps x 891/640 = 42cps
6/ 1:8 rights issue offer at $1.39 per share made and shares issued (14-04-2016). This implies a one off capital adjustment downwards of $1.39/8 = 17.38 cps. Once again we have to correct for the number of shares on issue at the time the cash issue was made 17.38cps x 4455/2560 = 30cps

From my post 984, the number of shares on issue has increased in total from an existing shareholder perspective over 21 years by a factor of:

1/ 0.5108 = 1.958

The share price at the start of the study period was $1.65 and at the end $3.58.

This means the total increase in value per share (including dividends) over the study period was:

($3.58 x 1.958) - ($1.65) + $2.09 - ($0.42 + $0.30) = $6.73

We can therefore calculate the compounding rate of return over 21 years as follows:

$1.65(1+i)^21 = ($1.65+$6.73)

=> (1+i)^21 = 4.079
=> i = 1.069

This means the total compounding return for SCT investors over the last 21 years, who partook in the two rights issues, 'after tax' was 6.9% per year.

Now back to your specific...

...Question. What would $1,000 invested in SCT shares on 31st March 2001 be worth today?

Answer: $1,000 x ($1.65+$6.73)/$1.65 = $5,079

Would partaking in rights issue (adding to the $1,000) have made much difference?

The first rights issue was made at $1.20 and the second rights issue was made at $1.39. Considering all of those shares are now valued at $3.58 each, that has definitely added to the return. The second rights issue was 1:8. So 1/(1+8) = 1/9th of the shares at the end of the study period were affected. So the increase in shareholder value attributable to the second cash issue was:

1/9 ($3.58 - $1.39) = 24cps

That represents 24/673 = 3.6% of the gain.

The equivalent calculation for the earlier cash issue 1:4 at $1.20 would have been

(8/9) x [ 1/5($3.58 - $1.20)] = 42cps

This represents 42/673 = 6.2% of the gain

Add those two together and they account for nearly 10% of the gain. I think that is too large a fraction to ignore.

SNOOPY

BlackPeter

09-01-2022, 10:00 AM

I think the easiest way to solve this problem is to look at what happens to one share and derive what happens to $1,000 worth of shares from that.

The 'dividends per share' are laid out in the table below. Bonus Shares increase the 'dividend per share' purchased on 31st March 2001 'forever after' for no more capital outlay. I adjust for this by using a 'dividend growth factor' which shows 'per share dividend growth' from the base date the investment started. A similar adjustment is made for 'Rights issues'. However, in the case of a 'Rights issue' a cash outlay is made, and this must be subtracted from the overall return.

Winner, you asked for the divvies to be reinvested as we go. I think I know why you asked for that, because this is how the NZX50 return is calculated. And for a direct comparison to NZX50 returns, I should calculate the overall investment return this way. There has been a stopped and started DRP scheme which allows shareholders to do this. But such a scheme has not been available for the entire 21 years under study. Furthermore prior to the arrival of the likes of Sharsies, it would not have made economic sense to reinvest dividends unless you were a very large shareholder. So I am not going to grant this part of your request. If I had done so, the return I would have calculated would be slightly greater than the return I have calculated.

Scott Technology 21 year dividend history (per share)

Financial YearNet Dividend (Final + Interim)Dividend Growth FactorAdjusted Dividend (Factored & Summed)

FY20012.0c+1.5c1.03.5c
.

FY20028.0c+3.0c1.011.00c
)+

FY20038.0c+6.0c(9/8)x(9/8), (9/8)16.88c

FY20047.0c+6.0c81/6416.45c

FY20050c+4.0c81/645.06c

FY20063.0c+0c81/643.80c.

FY20076.0c+3.0c81/6411.39c.

FY20080c+0c81/640c

of

FY20091.0c+0c81/641.27c

FY20104.0c+1.25c(11/10) x (81/64)7.31c

FY20115.0c+2.0c(5/4)x(891/640), 891/64011.49c

FY20125.5c+2.5c4455/256013.92c

FY2013(5.5c+2.0c)+2.5c4455/256017.40c

FY20145.5c+2.5c4455/256013.92c

FY20155.5c+2.5c4455/256013.92c

FY20165.5c+4.5c(9/8)x(4455/2560), 4455/256018.60c

FY20176.0c+4.0c40095/2048019.58c

FY20186.0c+4.0c40095/2048019.58c

FY20193.62c(PI)+4.0c40095/2048014.92c

FY20200c+0c40095/204800c

FY20212.88c(NI)+1.44c(NI)40095/204808.46c

Total208.81c

Notes

1/ Final dividend for FY2019 of 4.0c only partially imputed to 65.75%.
2/ Final 4.0c and interim 2.0c dividend for FY2021 not imputed.
3/ 1:8 bonus issue made immediately following FY2002 final dividend.
4/ 1:8 bonus issue made immediately prior to the FY2003 final dividend.
5/ 1:4 rights issue offer at $1.20 per share made and shares issued (04-08-2011). This implies a one off capital adjustment downwards of $1.20/4 = 30c per share. However the per share figure has to be corrected for the difference between the number of shares on issue at the time this exercise started and the number of shares on issue at the time the cash issue was made. 30cps x 891/640 = 42cps
6/ 1:8 rights issue offer at $1.39 per share made and shares issued (14-04-2016). This implies a one off capital adjustment downwards of $1.39/8 = 17.38 cps. Once again we have to correct for the number of shares on issue at the time the cash issue was made 17.38cps x 4455/2560 = 30cps

From my post 984, the number of shares on issue has increased in total from an existing shareholder perspective over 21 years by a factor of:

1/ 0.5108 = 1.958

The share price at the start of the study period was $1.65 and at the end $3.58.

This means the total increase in value per share (including dividends) over the study period was:

($3.58 x 1.958) - ($1.65) + $2.09 - ($0.42 + $0.30) = $6.73

We can therefore calculate the compounding rate of return over 21 years as follows:

$1.65(1+i)^21 = ($1.65+$6.73)

=> (1+i)^21 = 4.079
=> i = 1.069

This means the total compounding return for SCT investors over the last 21 years, who partook in the two rights issues, 'after tax' was 6.9% per year.

Now back to your specific...

...Question. What would $1,000 invested in SCT shares on 31st March 2001 be worth today?

Answer: $1,000 x ($1.65+$6.73)/$1.65 = $5,079

The first rights issue was made at $1.20 and the second rights issue was made at $1.39. Considering all of those shares are now valued at $3.58 each, that has definitely added to the return. The second rights issue was 1:8. So 1/(1+8) = 1/9th of the shares at the end of the study period were affected. So the increase in shareholder value attributable to the second cash issue was:

1/9 ($3.58 - $1.39) = 24cps

That represents 24/673 = 3.6% of the gain.

The equivalent calculation for the earlier cash issue 1:4 at $1.20 would have been

(8/9) x [ 1/5($3.58 - $1.20)] = 42cps

This represents 42/673 = 6.2% of the gain

Add those two together and they account for nearly 10% of the gain. I think that is too large a fraction to ignore.

SNOOPY

Interesting stuff, and not a bad return.

The other obvious question would be - how would the SCT investor have done, if they would have put their money in March 2001 in e.g. MFT or FPH shares instead?

Or - maybe a fairer question ... how did a SCT investor fare compared to somebody who invested without any analysis just into the NZX50 (which includes dividends - i.e make the comparison easy ...).

I suspect MFT and FPH did spectacularly better, but I am now too lazy to add up the dividends. Looking at the (anyway more relevant) NZX50 comparison:

In March 2001 NZX50 index was 1986, currently it is sitting at 12970.

This would make the NZX50 in that timeframe to a 6.5 bagger - or in other words it returned 9% per year (all numbers rounded, I like slide ruler precision :p ) over these 22 years.

Looks like Scott slightly underperformed the NZX 50. Not spectacular, but not too flash either.

Snoopy

09-01-2022, 03:12 PM

Interesting stuff, and not a bad return.

The other obvious question would be - how would the SCT investor have done, if they would have put their money in March 2001 in e.g. MFT or FPH shares instead?

Or - maybe a fairer question ... how did a SCT investor fare compared to somebody who invested without any analysis just into the NZX50 (which includes dividends - i.e make the comparison easy ...).

I suspect MFT and FPH did spectacularly better, but I am now too lazy to add up the dividends. Looking at the (anyway more relevant) NZX50 comparison:

In March 2001 NZX50 index was 1986, currently it is sitting at 12970.

This would make the NZX50 in that timeframe to a 6.5 bagger - or in other words it returned 9% per year (all numbers rounded, I like slide ruler precision :p ) over these 22 years.

Looks like Scott slightly underperformed the NZX 50. Not spectacular, but not too flash either.

My post was simply to answer Winner's question. I didn't wish to imply that SCT was the 'best pace to invest' over the last 21 years. So yes MFT and FPH may have been better places to put your dollar, if indeed they even existed as separate listed investable entities way back in 2001. SCT has also consumed a huge amount of my analysis time over the years on my behalf, because it hasn't been well covered by the brokers. Offsetting that I have previously disclosed that my average holding price is 73c, not the $1.65 that I assumed at the start of my analysis. The result of some judicious rebalancing of my holding over my holding period, to counteract the share price volatility. So I have obviously done rather better than the 6.9% compounding annual gain that I calculated in the analysis of our mythical 'buy and hold' investor's position. I have no regrets about my SCT shareholding over the years, and see my actual return as some payback for all the hard research I have put in. That is reading like an obituary. But I feel there are more profitable chapters in my relationship with SCT yet to play out.

One further point on the comparison with the NZX50. Mark Wheldon arranged that index so that all dividends were reinvested back into each share at the time they were paid. No one I know actually does this, so it really presents an unattainable picture that compounds to greater unattainability the longer the timeframe you use. I suspect a not insignificant part of the NZX50 outperformance is because of this effect.

SNOOPY