Skellerup (SKL) Fundamentals

[percy]

Get ready for the big price fall,as I brought in yesterday at $2.19.!!
Above posted a week ago.
Well that did not happen.?
Big surprise?
Share price today $2.44.

[RupertBear]

Above posted a week ago.
Well that did not happen.?
Big surprise?
Share price today $2.44.

Well done Percy, I think that means you are well positioned! :D

[percy]

Well done Percy, I think that means you are well positioned! :D

You are onto it....lol

[winner69]

Above posted a week ago.
Well that did not happen.?
Big surprise?
Share price today $2.44.

I’ve told the neighbour to stop asking for the next big thing.

I just said to him to get his bowling mates to follow what a guy called percy does on Sharetrader.co.nz

He showed me his phone and sure enough sharetrader.co.nz is on his favourites bar.

Hope he now leaves me in peace about ‘investing’ but I fear that means he’ll rave on about Jacinda more.

[percy]

I’ve told the neighbour to stop asking for the next big thing.

I just said to him to get his bowling mates to follow what a guy called percy does on Sharetrader.co.nz

He showed me his phone and sure enough sharetrader.co.nz is on his favourites bar.

Hope he now leaves me in peace about ‘investing’ but I fear that means he’ll rave on about Jacinda more.

When he tells you,you were right,Percy is a guru,then worry.!...lol.

[Scrunch]

I’ve told the neighbour to stop asking for the next big thing.

I just said to him to get his bowling mates to follow what a guy called percy does on Sharetrader.co.nz

He showed me his phone and sure enough sharetrader.co.nz is on his favourites bar.

Hope he now leaves me in peace about ‘investing’ but I fear that means he’ll rave on about Jacinda more.

Are you ready for the possibility of them saying "Great advice, I just made 20% in the last 6 months. How much did you make?"

[MauroNZ]

A few reasons.
The company seems to be well focussed.
Adding good bolt on acquistions.
I like the chair.Funny same chair as the company I sold to buy SKL,OCA,.Liz Coutts.
The pick up in the Australian mining sector should benefit SKL.
Little debt.
Growing dividend.FY 18...11cps......FY 19...13cps......FY 20....14cps....[according to Craigs]
Revenue mainly offshore, which is positive should the NZ low interest rate enviroment lead to a lower NZ $.

Percy, do you look at the basic TA to decide when to buy or what price are you willing to pay for it?. I remember a few years ago there was an article I think in NBR stating that SKL was a kind of forgotten company by the market (as I can't remember maybe I'm wrong). Since then was in my watch list but I never progressed with reading more about it. So I ask you this because following the recommendations from KW post about using TA right now looks, even better when you bought it, however now looks at the highest peak in the last 5 years.

[percy]

TA is a helpful tool,however I used FA to decide to buy SKL.Was pleased when I did look at their chart and saw my timing was pretty lucky.
SKL I have owned previously.
They had a habit of over promising .
SKL has remained on my watch list.So I know the company reasonably well.Impressed Lizz Coutts is chair.The announcements over the past year or more told me the company is in good shape,focussed and carrying little debt,and has the capacity to pay increasing dividends.
SUM agm gave me a big wake up call.My thinking that the property market had little affect on the retirement sector was wrong.So I sold my total holding in OCA.So I had money to sit on or invest.
I went back to SKL. Their earnings are mostly overseas.Therefore the low interest rates in NZ meaning a lower NZ $ would work in SKL's favour.
Price under $2.20 did not look too dear, as I saw their PE ratio was 14.5 and I expected their eps growth rate would work out between 10% and 18%.
PE ratio today is 16.13 at sp $2.42,so still reasonable value considering all the above points.

[Schrodinger]

TA is a helpful tool,however I used FA to decide to buy SKL.Was pleased when I did look at their chart and saw my timing was pretty lucky.
SKL I have owned previously.
They had a habit of over promising .
SKL has remained on my watch list.So I know the company reasonably well.Impressed Lizz Coutts is chair.The announcements over the past year or more told me the company is in good shape,focussed and carrying little debt,and has the capacity to pay increasing dividends.
SUM agm gave me a big wake up call.My thinking that the property market had little affect on the retirement sector was wrong.So I sold my total holding in OCA.So I had money to sit on or invest.
I went back to SKL. Their earnings are mostly overseas.Therefore the low interest rates in NZ meaning a lower NZ $ would work in SKL's favour.
Price under $2.20 did not look too dear, as I saw their PE ratio was 14.5 and I expected their eps growth rate would work out between 10% and 18%.
PE ratio today is 16.13 at sp $2.42,so still reasonable value considering all the above points.

Lets not get ahead of ourselves here. Its all about context. I had a few in 2012 bought for 1.55. If I had sold @2.42 it would of been a CAGR of 7.2% hardly interesting. Maybe overall a CAGR 10% incl divs. My actual exit position was 2.18 in February for CAGR 5.65%. Glad I sold there's much more exciting stuff. Made 50% on APT in 3 months...

Its all about timing not back slapping for a small gain this year. Remember to DYOR on why the SP is rising, will this continue due to an amazing market opportunity or is it a basic revaluation? Based on their past history I am favouring the latter.

[MauroNZ]

TA is a helpful tool,however I used FA to decide to buy SKL.Was pleased when I did look at their chart and saw my timing was pretty lucky.
SKL I have owned previously.
They had a habit of over promising .
SKL has remained on my watch list.So I know the company reasonably well.Impressed Lizz Coutts is chair.The announcements over the past year or more told me the company is in good shape,focussed and carrying little debt,and has the capacity to pay increasing dividends.
SUM agm gave me a big wake up call.My thinking that the property market had little affect on the retirement sector was wrong.So I sold my total holding in OCA.So I had money to sit on or invest.
I went back to SKL. Their earnings are mostly overseas.Therefore the low interest rates in NZ meaning a lower NZ $ would work in SKL's favour.
Price under $2.20 did not look too dear, as I saw their PE ratio was 14.5 and I expected their eps growth rate would work out between 10% and 18%.
PE ratio today is 16.13 at sp $2.42,so still reasonable value considering all the above points.

Thanks Percy, I understand better now.

[Patient Panda]

Always appreciate your thoughts Percy.

As you say they have a history of overpromising. Price is looking steep for what you get.

considering its high payout ratio the yield at its current price is unimpressive

[percy]

Always appreciate your thoughts Percy.

As you say they have a history of overpromising. Price is looking steep for what you get.

considering its high payout ratio the yield at its current price is unimpressive

Correction.
What I actually posted was they HAD a habit of over promising.
I think that stopped when Liz Coutts became chair.
Yes payout ratio is around 80%,which is OK considering they carry little debt.
Gross yield 6% and 50% imputed is satisfactory.FY18 11cps....FY19. 13cps and FY 20. 14 cps according to Craigs projections.
ROE of over 17% is good.

[BeeBop]

Their forward looking plans are now sitting very nicely with what I like....in past years, nothing much happened, but now it looks like it has changed. I bought back in during August last year and then added a larger holding in January. I am certainly hoping that they have become more forward looking. Coupled with the low exchange rate, and the current low interest rates, the share price was nicely undervalued in January (when everyone was running scared) and I think still has a little room to move using the current year's annual report. I am hoping that they have "grown-up" now. Mind you, I like industrials that are innovative and also service today's needs (because they make money now).

It is worth reading that report.

[Baa_Baa]

... Gross yield 6% and 50% imputed is satisfactory.

Not in my book it's not satisfactory, I don't do satisfactory, I'd rather keep the hold on OCA in the meantime (that's what you sold I think, to make this switch, taking into account trading fees which few ever disclose or even acknowledge) doing well on OCA vs accepting a mediocre x% after tax on SKL that looks fully priced. Each to their own, I think some long term investment ideals might be beguiled by some short term trading instincts. Switch and bait is an age old tactic. It takes time to settle into a truely long term returns investment portfolio that we don't feel tempted to fiddle with, at least it does for me, but SKL isn't a part of it at this stage, may never be, who knows. It needs to compete, which imo it isn't right now.

[Patient Panda]

The only time SKL has been good value IMO the last few years was when it was 1.15 in I believe it was 2016.

I can understand your reasoning for not holding OCA, I’m not a fan.

I f you’re looking for a place to put your funds I recommend briscoes at 3.30
pe 11.5
yield of 8.45%
roe last year 23% and 5 year average even higher
always under promises and over delivers
consistently growing divs
low debt
plenty of cash in the bank

[couta1]

You cant go past HLG and you cant have too many.

[Snoopy]

Percy wrote: "Gross yield 6% and 50% imputed is satisfactory."

Not in my book it's not satisfactory, I don't do satisfactory, It needs to compete, which imo it isn't right now.

I was disappointed when it was announced this year that, for the first time, dividends would no longer be fully imputed. Nevertheless I believe this 'transition' was handled well. Dividends were increased at the same time and that meant no shareholder was worse off as a result.

You have to go back several years to understand why this has happened. Skellerup have located their manufacturing close to their biggest target market. So industrial pumps sold mainly in the USA are made in Skellerup factories in the USA. Car driveshaft couplings sold in Europe are made in a Skellerup factory in Europe. Milking equipment consumables in dairy mad New Zealand are made in Skellerup's new Wigram factory in Christchurch. This is all smart thinking that will minimise the effect on Skellerup of any international trade wars.

Up until the last few years the 'industrial' division of Skellerup has been having growing pains, as the Agricultural side of the business carried the company along. But now some of those overseas industrial investment gambles are coming to fruition. Skellerup doesn't earn imputation credits from their overseas factories. The fact that dividends are no longer fully imputed is a reflection of the success of Skellerup's overseas investment strategy.

While I agree that at $2.42, SKL is no longer 'cheap', growth is available on many fronts. There is no 'king hit' product that will send the SKL share price out of the park. Think instead of Skellerup more as an investment octopus with smaller growth arms flailing out everywhere. Even if one or two of those arms wither or end up being lopped off, that won't derail the growth engine of this Skellerup beast. I am not buying more Skellerup shares at today's prices. But given the returns of alternative places to put my money, I am not selling any either.

SNOOPY

disc: Shareholder

[percy]

The only time SKL has been good value IMO the last few years was when it was 1.15 in I believe it was 2016.

I can understand your reasoning for not holding OCA, I’m not a fan.

I f you’re looking for a place to put your funds I recommend briscoes at 3.30
pe 11.5
yield of 8.45%
roe last year 23% and 5 year average even higher
always under promises and over delivers
consistently growing divs
low debt
plenty of cash in the bank

BGP are a great success story,particularly their online growth.Agree low debt,plenty of cash and paying a good divie.All ratios are very attractive.
However, I am avoiding retail,as I see low interest rates will lead to a lower NZ $,which together with the new minimum wage increase ,will add stronger headwinds for retailers..I believe they are hitting hard already.

[percy]

You cant go past HLG and you cant have too many.

Didn't some one say that about OCA or was it SUM...lol

[percy]

I was disappointed when it was announced this year that, for the first time, dividends would no longer be fully imputed. Nevertheless I believe this 'transition' was handled well. Dividends were increased at the same time and that meant no shareholder was worse off as a result.

You have to go back several years to understand why this has happened. Skellerup have located their manufacturing close to their biggest target market. So industrial pumps sold mainly in the USA are made in Skellerup factories in the USA. Car driveshaft couplings sold in Europe are made in a Skellerup factory in Europe. Milking equipment consumables in dairy mad New Zealand are made in Skellerup's new Wigram factory in Christchurch. This is all smart thinking that will minimise the effect on Skellerup of any international trade wars.

Up until the last few years the 'industrial' division of Skellerup has been having growing pains, as the Agricultural side of the business carried the company along. But now some of those overseas industrial investment gambles are coming to fruition. Skellerup doesn't earn imputation credits from their overseas factories. The fact that dividends are no longer fully imputed is a reflection of the success of Skellerup's overseas investment strategy.

While I agree that at $2.42, SKL is no longer 'cheap', growth is available on many fronts. There is no 'king hit' product that will send the SKL share price out of the park. Think instead of Skellerup more as an investment octopus with growth arms flailing out everywhere. Even if one or two of those arms wither or end up being lopped off, that won't derail the growth engine of this Skellerup beast.

SNOOPY

disc: Shareholder
SNOOPY,
Thank you for your post.

[winner69]

When he tells you,you were right,Percy is a guru,then worry.!...lol.

Neighbour interrupted me when I was out cutting the grass yesterday

Said he had read all Percy’s posts for the last few months and commented he’s one pretty clever guy ......no, no I said he’s a guru.

Sounds like he and his bowling mates might take their loss on Oceania but hold onto Turners and take a punt on Skellerup.

He got even more excited about Skellerup when I pointed to my gum boots - look Red Band made by Skellerup and they last forever (for a city person).

Good news though percy - I changed the subject as to how they buy PAZ. Thought that might be too complicated for them.

[percy]

Neighbour interrupted me when I was out cutting the grass yesterday

Said he had read all Percy’s posts for the last few months and commented he’s one pretty clever guy ......no, no I said he’s a guru.

Sounds like he and his bowling mates might take their loss on Oceania but hold onto Turners and take a punt on Skellerup.

He got even more excited about Skellerup when I pointed to my gum boots - look Red Band made by Skellerup and they last forever (for a city person).

Good news though percy - I changed the subject as to how they buy PAZ. Thought that might be too complicated for them.

Don't think they would be up to signing "The Wild West" form, so as you can buy PAZ on www.usx.co,nz.
PAZ asm this coming Thurday should be interesting.I think they will post the asm presentation on USX site on Friday.
Liquidity and few announcements are big draw backs to USX market,however there are some interesting companies for experienced investors,such as:Rangatira,Rural Equities,Skyline,and Syft.
OCA Craigs have a $1.24 target price so they should be OK.Craigs SKL target price is $2.55. So perhaps they would be best to hang onto OCA.TRA give another year or 18 months.


ps I think once you are referred to as a guru it is all down hill from there on in.

[winner69]

Percy, I know for sure the neighbour and his bowling mates read your posts.

I popped into the green today while they were having a friendly late season roll up (as a prelude to drinks no doubt) and one of them surveyed the head (the bowls they’ve bowled up around the jack) and several times I heard them so ‘well positioned’ (like we have the closest bowl to the jack)

Isn’t that cool.

[percy]

Percy, I know for sure the neighbour and his bowling mates read your posts.

I popped into the green today while they were having a friendly late season roll up (as a prelude to drinks no doubt) and one of them surveyed the head (the bowls they’ve bowled up around the jack) and several times I heard them so ‘well positioned’ (like we have the closest bowl to the jack)

Isn’t that cool.

They are out of control.!..lol.

[winner69]

They are out of control.!..lol.

I told them they should join up and discuss things with you direct

One of them did enter the picking compeition and is doing quite well in that being in the top quartile - I told him that makes him a guru :t_up::cool::eek2::p;)

[Snoopy]

Just a heads-up folks. SKL is being removed from the NZX50 index during the close of trading match process on Friday 16th Sept. Likely to see significant downward pressure by index tracking funds exiting this stock. I also note that ACC who have a superb track record of investment returns have been reducing their holding lately.

In a follow up to this post from 2016, I was chatting to my broker about what I see as the inevitable return of Skellerup to the NZX50. Then he informed me it was already back in there! He couldn't tell me how long it had been back though. I did a quick web search and came up with no clues. No announcement to the market. No press release on the website. No announcement by the NZX. Nothing from the fourth estate. Has the NZX become so 'premium buyer sensitive' that they don't see the need to update the wider market when changes to the NZX50 are made? Did Skellerup themselves even know they were back in there?

On a secondary note the ACC, had they kept their full investment in SKL, had they banked the dividends, they would have seen a near 100% return on their Skellerup investment in just two and one half years. I guess even 'superb track records' can go off track?

SNOOPY

[McGinty]

In a follow up to this post from 2016, I was chatting to my broker about what I see as the inevitable return of Skellerup to the NZX50. Then he informed me it was already back in there! He couldn't tell me how long it had been back though. I did a quick web search and came up with no clues. No announcement to the market. No press release on the website. No announcement by the NZX. Nothing from the fourth estate. Has the NZX become so 'premium buyer sensitive' that they don't see the need to update the wider market when changes to the NZX50 are made? Did Skellerup themselves even know they were back in there?

On a secondary note the ACC, had they kept their full investment in SKL, had they banked the dividends, they would have seen a near 100% return on their Skellerup investment in just two and one half years. I guess even 'superb track records' can go off track?

SNOOPY


This is the announcement that you are looking for Snoopy http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/NZXO/319120/280714.pdf

[Snoopy]

This is the announcement that you are looking for Snoopy http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/NZXO/319120/280714.pdf

Thaaks for that McGinty. So the announcement was only made on June 8th and the re-emergence of Skellerup happens on Monday 18th June. Interesting this announcement was on 'S&P Dow Jones' letterhead. Has the NZX outsourced their own index compilation function?

There doesn't seem to have been much of a market reaction to the announcement so far. Since June 8th trading volumes are down and the SKL price has weakened by a few cents. Those index hugging funds look to have only a couple of days to buy their shares. Unlike most share index adjustments the amount these funds will receive for their outgoing NZX50 shares - CBL insurance - will be nothing. So suddenly having to raise money to buy something new when you have no spare cash may prove a problem?

SNOOPY

[winner69]

Thaaks for that McGinty. So the announcement was only made on June 8th and the re-emergence of Skellerup happens on Monday 18th June. Interesting this announcement was on 'S&P Dow Jones' letterhead. Has the NZX outsourced their own index compilation function?

There doesn't seem to have been much of a market reaction to the announcement so far. Since June 8th trading volumes are down and the SKL price has weakened by a few cents. Those index hugging funds look to have only a couple of days to buy their shares. Unlike most share index adjustments the amount these funds will receive for their outgoing NZX50 shares - CBL insurance - will be nothing. So suddenly having to raise money to buy something new when you have no spare cash may prove a problem?

SNOOPY

The announcement was dated a year ago ..... 2018 ....so shouldn’t impact this week.

S&P Have been doing NZX indices for many years now

[Snoopy]

The announcement was dated a year ago ..... 2018 ....so shouldn’t impact this week.


Oooh quite right, how embarrassing :-(. I am a year out of date with my evaluation! Fortunately I was not a year behind the times accumulating my shares!

I see last year the share price ramped up from $1.99 to $2.04 between the 8th June 2008 and 18th June 2008. Not that significant? I guess considering the price plunged to below $1.95 a month later shows it wasn't

SNOOPY

[Biscuit]

Oooh quite right, how embarrassing :-(. I am a year out of date with my evaluation! Fortunately I was not a year behind the times accumulating my shares!

I see last year the share price ramped up from $1.99 to $2.04 between the 8th June 2008 and 18th June 2008. Not that significant? I guess considering teh pice plunged to below $1.95 a month later shows it wasn't

SNOOPY


I think the sp graph shows that the smart money figured out what was going to happen a month before it did - the jump in price in May. So, being on time with your evaluation wouldn't have helped you, only the early bird catches the worm!

[percy]

Volume up.
Share price up......Looks as though an 10 year all time high.
Must be a great result coming on the 23rd.?

[forest]

Volume up.
Share price up......Looks as though an 10 year all time high.
Must be a great result coming on the 23rd.?

Hope you have a few so you can profit if the upcoming results are good.

[percy]

Yes a modest amount,brought with the proceeds from selling OCA.

[Scrunch]

Volume up.
Share price up......Looks as though an 10 year all time high.
Must be a great result coming on the 23rd.?

I hope so as I've got a few, but it could just be the money chasing a better return is starting to head down to the smaller companies.

[percy]

I hope so as I've got a few, but it could just be the money chasing a better return is starting to head down to the smaller companies.

Perhaps,although I think they will be trading well,and weaker NZ $ will help.

[winner69]

Record profit ...and F20 will be another record year

Full steam ahead now the floundering ship has been righted and got a good crew on board

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SKL/339639/306027.pdf

[RTM]

Happy Percy ?
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SKL/339639/306027.pdf
I am. I like companies that make stuff. Great results presentation.
Nothing stellar in the results...they are holding there own tho. Dividend up a wee bit, nice for us retired folk.
If they were to drop to around 2.00 again (where they were before Percy inflated the price) I would buy some more,
RTM
PS I do find this interesting
"Nexus acquisition in April 2019 • Results in line with expectations"

[percy]

Happy Percy ?
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SKL/339639/306027.pdf
I am. I like companies that make stuff. Great results presentation.
Nothing stellar in the results...they are holding there own tho. Dividend up a wee bit, nice for us retired folk.
If they were to drop to around 2.00 again (where they were before Percy inflated the price) I would buy some more,
RTM

Not as good as I thought it would be.
However the market is tougher than I thought.
Yes holding their own.
Increase in divie will keep me on board.

[LAC]

Been on the sideline watching, results "ok" in my opinion. Earning look good but revenue is quite flat. Probably wait on the sidelines for now....

[percy]

Bit surprise there was no outlook.
Perhaps they will enlighten us at the agm.?

[BeeBop]

There is a 10.30am teleconference that anyone can call in on....I assume more information/padding will come from that...

[RTM]

Bit surprise there was no outlook.
Perhaps they will enlighten us at the agm.?

I would guess current trade environment makes it a bit difficult to forecast.

[nizzy]

Good respectable result. I like companies that have a specialist niche & a decent moat around them.
5% EPS growth is positive but not stellar. DPS up 18% is welcome but needs EPS to keep growing.
Supplying small but critical components to larger manufacturers is strong strategic place to be. Could be criticised for spreading itself thin across too many sectors. Innovation & responsiveness are key. Our av buy price is 1.38, so happy holders in a low interest world.

[macduffy]

I agree with that, nizzy. I would think, though, that "spreading itself thin" is rather "applying its expertise wherever there are opportunities".

[oldtech]

Oh dear, what is the problem with Skellerup these past few days? Down more than 20 cents in two weeks. :confused:

I can only put it down to Mr Trump's tweets ... but I'm fairly sure Skellerup's single biggest market is still NZ (or is that only in the agri sector?)

[percy]

Slightly weaker result than expected,and out look weaker in the sectors SKL serve.
And yes Trumps tariffs are affecting them in US market.
Dividend is expected to increase, and their yield is still attractive at over 5.5% net.

[mshierlaw]

Slightly weaker result than expected,and out look weaker in the sectors SKL serve.
And yes Trumps tariffs are affecting them in US market.
Dividend is expected to increase, and their yield is still attractive at over 5.5% net.

Bought back in yesterday after a couple of years out. Should never have sold but that was part of my growing experience.

Interesting to see opening tomorrow.

[BeeBop]

Just hold and wait...good fundamental business

[King1212]

Jarden downgraded..cited the uncertainty of the trade war

[Snoopy]

I have updated my valuation using the latest five years of 'rolling data'. FY2019 has been the first year that dividends have not been fully imputed. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off. And the reason for not fully imputing those dividends, because of the outperformance success of Skellerup's overseas subsidiaries that do not generate earnings in NZ Dollars, is hardly a negative. Although detractors might say Skellerup should be doing more of their manufacturing in New Zealand. Given the escalation in global trade tensions, I think being geographically diversified with your manufacturing plants is probably a good idea. Even if, unlike Scott Technology (as another example of a NZ based, but internationally spread exporter), the overseas manufacturing facilities are not multipurpose. Skellerup can't choose in which overseas plant they manufacture their widgets!

The calculations to work out the equivalent gross figure for FY2019's unimputed dividends, those paid in the FY2019 financial year, are as follows:

7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)





Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20155.0c+3.5c
6.94c + 4.86c11.80c


FY20165.5c+3.5c
7.64c + 4.86c12.50c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


FY20186.0c+4.0c8.33c + 5.56c
13.89c


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c
15.07c


Total65.76c




Averaged over 5 years, the dividend works out at 65.76/5 = 13.1c (gross dividend).

So based on a 7.5% gross yield, 'fair value' for SKL is:

13.1 / (0.075) = $1.75

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

Top of Busines Cycle Valuation: $1.75 x 1.2 = $2.10
Bottom of Busines Cycle Valuation: $1.75 x 0.8 = $1.40

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.10 (the upper end of my expected range) would not be unusual. The fact they are trading at $2.14, just before a 5.5c dividend is paid, puts them within the top bound of my expected trading range on an ex dividend basis. The 'growth premium' from the half year has gone. From an historical perspective I believe this is justified. Skellerup have yet to earn their 'consistent growth stripes'.

Skellerup's underlying performance has caught up with their market valuation. I felt a touch of pride when I read about the 40 Maserati Quattroporte limousines bought for the Port Moresby APEC conference (the ones that Jacinda refused to ride in), knowing that each one had a Skellerup drive coupling faithfully transmitting all that 'torque' below the floor, while our leaders 'talked' above. But is such growth in the PNG market sustainable?

I have done very nicely out of SKL over the last three to four years. My average purchase price is $1.30. But I won't be topping up at $2.14. Good company. But for me the risk/reward equation is not proven to be 'market outperforming' from here. Lots could go right and lots could go wrong. But I have faith in the direction of management and governance. When I saw the photo of Chairman Liz Coutts in the HY2019 inside cover, I thought she had a touch of the wise look of the late great Stephen Hawking about her. And that can't be a bad thing for a science lead company!


I have had a quiet look at the annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20155.0c+3.5c
N/A c + 4.86c4.86c.


FY20165.5c+3.5c
7.64c + 4.86c12.50c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


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


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c15.07c


FY20207.5c (50% I) + ?c 8.96c + ?c8.96c


Total67.78c




Averaged over 5 years, the dividend works out at 67.78/5 = 13.6c (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 SKL is:

13.6 / (0.075) = $1.81

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

Top of Business Cycle Valuation: $1.81 x 1.2 = $2.17
Bottom of Business Cycle Valuation: $1.81 x 0.8 = $1.45

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.35 (above the upper end of my expected range) are now overvalued by 10%. However an imminent dividend payment of almost 9c gross may be contributing to this. I intend to hold the SKL shares that I already own (they are not grossly overvalued after all). But I won't be looking to buy more at these levels.

SNOOPY

discl: hold SKL

[Ggcc]

Well I purchased a few shares so the price should drop now..........

[percy]

SP at $2.28 so all is well.
My divie is in my bank.
Did not get as much as I thought I would get.
Perhaps I should have brought more.?..lol.

[percy]

UK silicone products acquisition for GBP 3.3mil seems to be another worthwhile bolt on.
Pleasing that it will be immediately earnings accretive.

[percy]

Interesting to note SKL's share price [$2.30] strengthening on good volume.[339,790]

[Snoopy]

I have been looking at Skellerup as a 'measuring stick' on the Scott Technology thread. While not directly comparable in their customer target markets, there is an astonishing similarity in certain aspects of their operations. I thought Skellerup shareholders might be interested, particularly as these admittedly snapshot figures indicate that Skellerup is perhaps the slightly better buy on the market today.



SkellerupScott Technology


Operational SectorManufacturingManufacturing


Total Employees'nearly 800'784


Manufacturing HubsNZ, Australia, Europe, North America, Asia NZ, Australia, Europe, North America, Asia



Share Price 29-11-2019$2.34$2.30


Market Capitalisation 29-11-2019$456m$178m



Capitalised Dividend Valuation per share (2015.5 to 2019.5)$1.81$1.65


Declared earnings (FY2019)$29.063m$8.604m


Normalised earnings (FY2019)$29.233m$9.464m


Normalised eps (FY2019)15.1c12.2c


Normalised eps growth over 4 year period (FY2015 to FY2019)+36.0%+15.1%


Historical PE (FY2019)15.518.9


dps (paid during FY2019)7c+5.5c6c+4c


Earnings Payout Ratio (excluding DRP)83%82%


Gross dps (paid during FY2019)8.5c+6.6c8.3c+5.5c


Historical Gross Dividend Yield (using Share Price 29-11-2019)6.5%6.0%


Shareholder Equity (based on equity at EOFY2019)$178.392m$111.852m


ROE (based on equity at EOFY2019)16.4%8.5%



Sales (FY2019)$245.792m$225.093m


Net Profit Margin (FY2019)11.9%4.2%


Total Bank Debt (last balance date EOFY2019)$46.213m$16.404m


MDRT (Based on bank debt at balance date EOFY2019)1.6 years1.9 years



Having said I think Skellerup is the slightly better buy, I don't consider either as 'cheap'. A 36% growth rate at SKL over a four year period equates to an averaged annual growth rate of:

1.36^0.25 = 1.08, 0r 8% per year.

On an historic PE of 15.5, that 8% four year historical annual growth rate seems to support such a valuation. Others on this forum have suggested that in this world of low interest rates, we should adjust our expectations of PEs and they should be higher. Personally I believe that because of global trade wars and tariffs on goods there should be no such adjustment for manufacturing companies.

SNOOPY

[Scrunch]

Recognising its a work in progress - the dps for skellerup doesn't look right.
Since 2011 SKL has been paying two dividends a year. Most recently its been 2016: 3.5(100%)+5.5(100%), 2017: 3.5(100%)+6.0(100%), 2018: 4.0+7.0(55%), 5.5(50%)+7.5(50%). I'd be very surprised if they didn't at least maintain the dividend payment in 2020. My guess would be 5.5 and 8.0 for 2020.

[percy]

Ratios.
...................................PE............. ................dps......................yield
SKl............................15.64.............. .............13cents................5.56%
SCT............................20.34.............. .............8 cents.................3.48%

[Snoopy]

Ratios.
...................................PE............. ................dps......................yield
SKl............................15.64.............. .............13cents................5.56%
SCT............................20.34.............. .............8 cents.................3.48%


Thanks for those numbers from your broker Percy. They are slightly different from mine, and I think I can explain why.

1/ I think the profit figures used to calculate PE are last years 'headline profits'. Normalisation doesn't change the SKL profit figure much. But with SCT the profit figure jumps by 10% - a very significant change.

2/ The dividends look to be the two most recently paid dividends, not the dividends actually paid during the FY2019 year. In the case of SCT, the final dividend for FY2019, actually paid in FY2020, was cut from 6cps to 4cps. I thought about treating dividends this way. But in the case of SCT we were told that a couple of projects had incurred cost overruns. These were pioneering projects and the lessons learned should improve the profitability from similar projects installed in future years. So I have decided that the dividend consequences of these cost overruns are probably not representative of what will happen in future years. The dividends I have used for both companies represent the final dividend for FY2018 and the interim dividend for FY2019 added together.

3/ The dividend yields look to be lower than mine, so I suspect they are 'net dividend yields'. By going gross, the dividend yield looks relatively better for SCT because, the two SCT dividends I am using are fully imputed, whereas the two SKL dividends are not. However, like SKL now, I do not expect SCT dividends to be fully imputed into the future.

In summary, I think I will stick to my numbers. But in any instance I don't think it affects my conclusion.

SNOOPY

[percy]

Interim result was a disappointment to me.
Sold my holding at $2.33.

[mondograss]

Thanks Percy, I was a bit in two minds but I have another use for the money at present so decided to sell too.

[macduffy]

Yes, a bit disappointing but the company remains profitable with a strong balance sheet and solid cashflows. I'll hold for now until I can find something better.

[percy]

I am being very tough this result season.Any company that disappoints is sold straight away.However, any company that produces a result better than I thought I will buy.
PGW, whose result is not until the 26th of Feb, is the one I am waiting for.I have been looking to add to our holdings,so it will be interesting.
I expect HGH, due next Tuesday,and SPK, next Wednesday will not surprise.

[Snoopy]

I have had a quiet look at the annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20155.0c+3.5c
N/A c + 4.86c4.86c.


FY20165.5c+3.5c
7.64c + 4.86c12.50c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


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


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c15.07c


FY20207.5c (50% I) + ?c 8.96c + ?c8.96c


Total67.78c




Averaged over 5 years, the dividend works out at 67.78/5 = 13.6c (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 SKL is:

13.6 / (0.075) = $1.81

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

Top of Business Cycle Valuation: $1.81 x 1.2 = $2.17
Bottom of Business Cycle Valuation: $1.81 x 0.8 = $1.45

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.35 (above the upper end of my expected range) are now overvalued by 10%. However an imminent dividend payment of almost 9c gross may be contributing to this. I intend to hold the SKL shares that I already own (they are not grossly overvalued after all). But I won't be looking to buy more at these levels.


I have had a quiet look at the half year annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20165.5c+3.5c
7.64c + 4.86c12.50c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


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


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c15.07c


FY20207.5c (50% I) + 5.5c (50% I) 8.96c + 6.57c15.53c


Total69.49c




Averaged over 5 years, the dividend works out at 69.49/5 = 13.9c (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 of Skellerup to quickly 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 SKL is:

13.9 / (0.075) = $1.85

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

Top of Business Cycle Valuation: $1.85 x 1.2 = $2.22
Bottom of Business Cycle Valuation: $1.85 x 0.8 = $1.48

My target accumulation price is 10% below 'fair value', and that equates to $1.67.

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?

SNOOPY

discl: hold SKL

[percy]

Pleasing business upgrade today.
I sold a few weeks ago,however I retain SKL on my watch list.

[Scrunch]

I was kinda expecting that they would have experienced some supply chain disruptions. I'm not sure if its good luck or good management that they haven't. From their update today:

"Key Points
o Skellerup facilities worldwide have been and continue to operate.
o Skellerup has and continues to advise and monitor its people to help them
protect themselves and families from the Covid-19 pandemic.
o Many Skellerup products are essential and non-perishable helping to ensure
safe food and water.
o Skellerup's businesses have to date not been adversely affected from
material supply chain interruptions and have been able to meet all customer
requirements.
o Skellerup expects end demand for some of its products may be impacted but
to date there are no material changes to our business or year to date
earnings for FY20. "

If they are basically trading on a similar trajectory to before, does this mean the majority of the circa 30% price decline recently can be put down to changing market risk premium's?

[percy]

I think SKL was good buying yesterday.
May be even better today.?

[Snoopy]

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?


Here is my take on the outlook for Skellerup from Mid financial year 2020.

Agricultural Division

The Agricultural division has performed very well with both Sales and EBIT up 5% in the just finished half year for FY2020. Recession or not, people still need to eat and farmers, in NZ at least, are actually doing OK, (behind their whinging about the Labour lead government coming waterway restrictions - that's OK farmers are allowed to whinge!). Skellerup is the second largest supplier of rubber-ware to the dairy industry worldwide, and around 60% of product manufactured in NZ is exported.

The NZ dollar decline will help farmers in the future too! However, there may be a few less 'Red Band' specialist forestry boots sold, offset by more sales of 'Skellerup Fire Fighter Extreme Boots' helping our firefighting friends in Australia.

Outside of NZ, the outlook for dairy is not ideal. From:

https://www.dairyaustralia.com.au/-/media/dairyaustralia/documents/industry/industry-resources/dairy-situation-and-outlook/situation-and-outlook-december-2019-report-final.pdf

"Dairy Global supply Situation Outlook

Milk production from key global dairy exporting regions has remained subdued. Seasonal and political headwinds in the European Union have seen milk production growth slow and US production remains sluggish."

"Australian industry Situation Outlook

Australian farmers have entered a season of record farmgate milk prices however milk production has continued to contract. High input costs and an ominous weather forecast for the balance of the year is weighing on sentiment and has seen an increase in culling."

It looks like NZ remains the bright spot for marketing 'Skellerup Agriproducts'.

Industrial Division

Industrials may be a bit more challenging. The main 'driveshaft coupling gig' is Skellerup's Italian Factory supplying the Chinese manufactured (for Chinese domestic consumption) "Mercedes Benz E-Class L" cars. Sales figures to the end of January 2020 are here:

https://carsalesbase.com/china-car-sales-data/mercedes-benz/mercedes-benz-e-class/

CY2019 was a record year for this model in a year where auto sales in China were under pressure. January 2020 sales were a bit down and this was before the ramp up of the Coronavirus problems in China and subsequently Italy. Car sales in China are reported to be down 90% in February 2020. So we might be looking at a short term headwind here, even if the underlying demand for the Chinese made Mercedes product looks sound. In addition, major Automakers in Italy, including Fiat, Ferrari and Lamborghini have closed their factories in response to the Italian government’s orders on March 11th to close commercial activities for two weeks. To comply with the law, the Skellerup factory in Italy must have also closed, yet no announcement was made. I see the Skellerup share price started its recent steep decline on Mach 11th - co-incidence? According to the market update today offered by Skellerup,

"Skellerup facilities worldwide have been and continue to operate." Hmmmm....

The heavy truck market in the US (the prime application for Skellerup's Masport branded vacuum pumps) has slowed and is expected to remain subdued over 2020 and 2021. Skellerup's pumps find application in both the portable toilet and septic tank industry and also the oil and gas market. The pumps are made in China (there is a 'Trump tariff cost' here), then integrated within systems within the United States.

https://www.fleetequipmentmag.com/act-research-heavy-vehicle-market-recovery-tempered/

The Gulf division supplies rubber componentry to US based tap and shower makers. The cuts to US interest rates should stimulate the US housing market. But high construction costs will keep housing affordability at bay for many, so new build sales are likely to be limited to about 10% of the market.

https://knowledge.wharton.upenn.edu/article/whats-ahead-for-the-u-s-housing-market-in-2020/

Gulf also supplies rubber sealing components for wastewater and fresh water piping. Although not sexy, with ageing infrastructure worldwide, this is a componentry application with ongoing demand, particularly in the United States..

'Deks', based in Australia, produces sealing and waterproofing products for roofing, plumbing and civil/underground applications. Building approvals plunged 15%
in January 2020 after a 4% rise in December 2019.

https://tradingeconomics.com/australia/building-permits

"This marked the steepest decline in building permits since a 22.1 percent fall in December 2017, mainly due to a 35.5 percent slump in approvals for private sector dwellings excluding houses. In contrast, building permits for private sector houses rose slightly by 0.3 percent."

Given that the time between issuing a building permit and work starting is typically six months, the outlook for Deks does not look good for HY2021. But the outlook for the remaining financial year to the end of June looks reasonably buoyant.

In the council market, the aging water pipe infrastructure replacement business, particularly in New South Wales, provides a steady base for the business.

Skellerup themselves in their March 16th 2020 press release say:

"At this stage we continue to expect FY20 NPAT to be consistent with the result achieved in the pcp.”

Looking further out, I think we will see a decline in FY2021. But if you look at the detail of my capitalised dividend valuation model, this decline is already priced into my valuation.

SNOOPY

discl: hold SKL

[Filthy]

thanks Snoop!

[macduffy]

SKL is a prime example of the skittish mood of today's markets. Shareprice up over 12% today.

:confused:

[mshierlaw]

I sold out 3 weeks ago, my reason - will factories remain open as this crisis develops?

[Snoopy]

SKL is a prime example of the skittish mood of today's markets. Shareprice up over 12% today.

:confused:

---------

COVOID 19 Correction - NZPA 21st March 2020 for urgent release

Following a review of Skellerups' trading update earlier in the week, CEO David Mair has released some urgent revisions. Mair is now aware that the way that some of his previous comments were expressed, may have been seen as 'misleading to the market'. Further clarification is required.

Mair noted that the Italian factory of rubber driveshaft components had in fact shut down for two weeks from March 11th, in accordance with Italian government COVID19 emergency law. But Skellerup was using the opportunity to conduct annual maintenance that is part of the normal business plan. In this sense it is 'business as normal', because a stockpile of driveshaft rubber componentry had been built up in anticipation of the annual shutdown.

Mair further clarified that the reported 90% drop in the Chinese car market in February 2020 was not yet reflected in Skellerup's accounts because supply components were ordered three months in advance. Thus although there was no sign of a drop off in Mercedes sales in China in Skellerup's figures, this is likely to change over the next few months. Furthermore the Mercedes-Benz E Class L platform that Mercedes Benz builds in China is not compatible with electrification. This means that sales are likely to be regulated downwards in the medium term as China seeks to implement tough new anti-pollution measures.

In the United States there has been a drastic fall in demand for the Skellerup Masport vacuum pump. The collapse in oil price has meant that shale oil production in the United States has now been either permanently shut down or indefinitely suspended. Consequently all US domestic purchases of road based oil tankers from US based primary producers have been halted. Furthermore, the announced suspension of all outdoor festivals in the United States means that demand from the portable toilet industry that uses their tankers, equipped with Masport vacuum pumps, to empty their portable toilets has also collapsed. While neither of these effects have been felt in the accounts period to date:

"We now expect a severe downturn in the vacuum pump business in FY2021." Mair said

Australia has been particularly badly affected with a sudden market downturn in commodities. This is likely to severely affect the private house building market as workers either lose their jobs, or are subject to much reduced working hours. Thus we expected the already depressed market for commercial and public sector building to be joined by a downturn in residential sector construction. Consequently the market for the DEKs roof sealing product that we produce in Australia, while holding up now, is likely to be severely affected.

In the United States, a house construction downturn is now expected as the whole wage and salary market contracts. Skellerup's 'Gulf Rubber Products', that supplies critical components to the domestic plumbing supply industry is now a forecasting 'a significant contraction in demand' into FY2021.

"While I am cautiously optimistic of the outlook for our Agricultural division products over FY2021, in the industrial division at least it is timely to remind shareholders that past performance is no guarantee of future performance."

Full confirmation and EBITDA quantification of all these projected market effects will have to wait until the first of next month. - ENDS -

-------

The above press release, early on Saturday morning, might yet have a serious affect on the SKL share price on Monday!

SNOOPY

[Snoopy]

The above press release, early on Saturday morning, might yet have a serious affect on the SKL share price on Monday!


Lest any SKL shareholders who consider selling their shares on Monday as a result of the "COVIOD-19 Correction" update, as reported by me, let me confirm that this "press release" is a hoax. There were several clues in there for those that read the so called "press release" carefully. It was ostensibly put out by the New Zealand Press Association. But that organisation has not existed since 2011. Secondly it was put out on a Saturday. Anyone who follows the market knows that market press releases are never put out on a Saturday. Finally the confirmation press release as regards "the EBITDA effects" of what was detailed, was to come out on April 1st. More fool anyone who believed that! If you did believe the 'press release" I am sorry to say that you have been scammed. So why did I go through this exercise?

In times of turmoil, there are scammers out there waiting to take advantage of you. So when you read something "on the markets", but not put out "by the markets" your BS meter should go on full alert. I was going to announce my "COVID-19 Correction" post as 'fake news'. But is it fake news? A scam will only work if it contains some truth within it. Looking through that 'fake press release', can you be sure that any of the information content in there is not true? Well, speculation often turns out to be not true. But I would argue that there is nothing in the content of that post that defies logic. Indeed it may all turn out to "all come true" after all, even though there is no admission from Skellerup at this point to that effect.

I managed to acquire some more SKL shares myself on Thursday, prior to the Friday price jump. I expect SKL earnings to be minimally affected over FY2020, as hinted at by the 'real' press release put out by David Mair last week. However, I do expect some deterioration in FY2021, from one or more of the effects I have highlighted in the 'fake press release'. My purchase of SKL shares last week, I have made assuming a modest decline in dividends over FY2021. My purchase was based on a 'business cycle' dividend yield and made at a particular price point that satisfied my dividend yield requirement. Thank you "Mr Market" for providing me with this opportunity.

SNOOPY

[Jerry]

Phew, Snoops! Saved in the nick of time! Thank you for this heads-up!

[Snoopy]

Industrial Division

Industrials may be a bit more challenging. The main 'driveshaft coupling gig' is Skellerup's Italian Factory supplying the Chinese manufactured (for Chinese domestic consumption) "Mercedes Benz E-Class L" cars. Sales figures to the end of January 2020 are here:

https://carsalesbase.com/china-car-sales-data/mercedes-benz/mercedes-benz-e-class/

CY2019 was a record year for this model in a year where auto sales in China were under pressure. January 2020 sales were a bit down and this was before the ramp up of the Coronavirus problems in China and subsequently Italy. Car sales in China are reported to be down 90% in February 2020. So we might be looking at a short term headwind here, even if the underlying demand for the Chinese made Mercedes product looks sound.


Good news for SKL holders. The Mercedes car factory in China is back in business (Mar 26, 2020 article)

https://carbuzz.com/news/unlike-others-mercedes-benz-doesnt-need-government-money

------

"Another vital factor currently working in Mercedes' favour is that it recently re-opened its factory in China and that demand has slowly but surely been increasing once again in the world's largest auto market."

" "The vast majority of our dealerships have reopened, the customers are returning," Kallenius confirmed. "Every day more people come to the car dealerships. Demand is picking up, which makes us optimistic." "

"Both the Mercedes-Benz E-Class and C-Class sedans are manufactured in China specifically for that market."

-------

SNOOPY

[Sideshow Bob]

Market Update
30/3/2020, 9:28 amMKTUPDTE Impact of Covid-19 and Trading Update
Following its market update on 16 March 2020, Skellerup has provided a further update on the impact of Covid-19 on its business.
Many of Skellerup’s products are critical to the continuity of safe food and water and the function of health and medical devices and we therefore have an important role as a provider of essential services. Our approach during Covid-19 has been to keep the safety and wellbeing of our staff and customers paramount in our decision making. We have processes in place to protect people from, and to reduce the spread of Covid-19 wherever possible.
Recently governments around the world have imposed stronger restrictions. As a result, some of our facilities will operate at reduced levels or close temporarily during the next month as we focus on producing and delivering essential products. In New Zealand, we have completed Ministry for Primary Industries (MPI) registration of safe practice and so continue to make essential products at several of our sites for our dairy, utility, personal hygiene and healthcare customers.

We support the strong approach taken in many countries to lockdown and restrict the movement of people. Our teams have shown great skill and resilience to sustain operations to date and we are grateful for their willingness to play their part to support our essential services. They will continue to do this to ensure we can continue to safely supply key products to customers in all the markets in which we operate.
Demand throughout March has remained strong across our business. As a result, our YTD earnings continue to track ahead of pcp. However, given the restrictions now in place and uncertainty over their duration, earnings for Q4 and therefore FY20 will be lower than previously projected. Due to this uncertain timeframe we withdraw our prior guidance that FY20 NPAT will be consistent with the result achieved in the pcp.

Skellerup has a robust balance sheet, with low debt and significant undrawn, committed facilities which ensures we are well placed to manage through this uncertain period.
We will provide regular updates on our activities and results to keep shareholders informed as we navigate through this uncertain time for our people, customers and partners.
For further information please contact:
David Mair
Chief Executive Officer

[traineeinvestor]

From today's market update:

"Prior to the Covid-19 outbreak, Skellerup was on track for a record result in FY20. At the end of March 2020 NPAT for the year to date was ahead of the prior comparative period. Having absorbed increased costs of operation and demand interruption in the final quarter we expect to deliver a full year NPAT in excess of NZD 28 million."

I'm assuming a steady dividend with no risk of a value-destroying capital raising. Very happy to continue holding.

[Waltzing]

good defensive stock and still paying a dividend and NO CAP raise required so far... potential darling of the market for the next 10 years? who would have though... bargin at the bottom.. DISC: holding and will continue too. MR P sold out before the last dividend, i wonder if he bought back in at the low. This man is far and away ahead of most of us as ive read his posts for many many years. The Warren Buffet of the south....

[RTM]

I’ve said before I like companies that actually make stuff that the world needs, unlike the shoe people. Boosted my portfolio to a full position at 1.82 recently. Quite pleased with this long term investment and good to see this update today.

[Ggcc]

Beating the trend for the day and slowly increasing over the week

[BeeBop]

About time....good solid stock...and has/had a good dividend...boring and has been unexciting.

[bull....]

pretty good result considering covid

Skellerup FY20 NPAT equals prior year record result
https://www.nzx.com/announcements/358410

[percy]

Yes they certainly did well.

[macduffy]

Yes, a good result in difficult circumstances. I hold.

[RTM]

We should be proud of companies like Skellerup. Doing well on the international stage, actually making stuff. And quite a variety into a variety of markets.
Disc: Held for quite a while and topped up @ 182. Never enough of the good ones, is it.

[winner69]

Agreed, a good result in difficult circumstances

Doing better now than the good old days yearly disappointments

[Soolaimon]

In 50 years of investing, this one has been one of, if not the best performer I have held. I can't remember if it was Para Rubber before Skellerup or Skellmax etc.

[Snow Leopard]

As a recent re-entrant to register I am excited by this result.

Should never have sold them in the first place
https://thediplomat.com/wp-content/uploads/2016/10/sizes/medium/thediplomat_2016-10-24_18-48-17.jpg

[nztx]

A very good result in current times

Discl. Holder

[bull....]

yep im a holder to now , if they can do this result in a bad year and div yield pretty good too

[Biscuit]

Ok, but not really that great a result? I first bought in 2012 and they went nowhere for about five years. Only in recent years have they got their act together. But, yes, times are tough.

[winner69]

In 50 years of investing, this one has been one of, if not the best performer I have held. I can't remember if it was Para Rubber before Skellerup or Skellmax etc.

That's some time

Didn't Brierley take it over in the 80's and then refloated it as a 'Baby Brierley' and things were pretty bad when Murray Bolton got involved in the 90's with a leveraged buyout (Maine Investments). Bond holders took a real haircut with that fiasco

At least on a steady keel but its taken many many years

[Waltzing]

DISCL sold out in the 2:40's after taking the divs for a year. I bet Percy is not happy unless he bought back in in the big dipper!

[percy]

I sold out on 13th February at $2.33.Share price today is $2.65,So have gone up 13.7%.
Brought the wife some PGW for $2.27, received their fully imputed divie and sold at on Tuesday at $2.65...So up 20%inc divie.
Guess what ? On 13th Feb PAZ's share price was 30 cents.Today 55 cents Up an incredible 83.33%
So am extremely happy...lol.
Although I thought SKL's result was a very good one, I have not brought back in.

[Waltzing]

The Impressive Mr P..... nothing more to say.

[percy]

The Impressive Mr P..... nothing more to say.

Don't worry I have made plenty of mistakes.
If the reason I brought into a company changes,[and I do not like the changes], I sell.

[BeeBop]

I have been buying these for a few years. They have been so under the radar a bit like NPX, HBY, FPA etc....but they all went off-shore. Maybe SKL will stay around if they are valued correctly.

[RTM]

https://www.nzx.com/announcements/358669

Interesting announcement ! ? Is this required ?

[winner69]

https://www.nzx.com/announcements/358669

Interesting announcement ! ? Is this required ?

Yes

New Director and disclosing he has no shares

[traineeinvestor]

https://www.nzx.com/announcements/358669

Interesting announcement ! ? Is this required ?

Yes. Regulatory requirement to file a disclosure notice on being appointed a director even if the disclosure in NIL.

[RTM]

Yes

New Director and disclosing he has no shares

Thanks...thought as much. Always learning. I bet he's cursing how high the price is !

[bull....]

this stocks going well since there result , still climbing

[Ggcc]

this stocks going well since there result , still climbing
It seems one of the few beating the trend. I am happy to still be invested

[Waltzing]

Well its a buy on any pull backs in a few weeks. Well i never... we sold out at 2.40 thinking that was a good price for now.... this just demonstrates the power of dividends above 4% ... in this environment..I really should believe my own assessments more often.

[bull....]

new highs again

[Snoopy]

Skellerup is organised into two principal divisions:

1/ Agri: manufactures and distributes milking liners, tubing, filters and feeding teats. It also sells dairy vacuum pumps and other agricultural products, notably rubber footwear. Skellerup is the second largest manufacturer of dairy rubberware in the world. The new dairy rubber-ware manufacturing facility at Wigram is the base for future growth. 60% of Agridivision sales are now outside of NZ. Markets targeted for future growth are Brazil, India, China and Russia as these nations gear up to meet pent up home market demand. Growth prospects come from the ability to customise short runs of products based on Skellerup's intimate knowledge of their rubber raw materials and how it reacts with dairy animals. Given Skellerup make all their production tooling 'in house', there is no better company to design products that are lighter and more ergonomic to use. The Skellerup market presence through 'Argi' is definitely major.

2/ Industrial: manufactures technical polymers for construction, infrastructure, automotive, mining and general industrial applications. This division also sells industrial vacuum pumps. The static revenue performance of the industrial division over recent years does not give an accurate picture of the potential for this division. The near simultaneous collapse in iron ore and oil prices after 2013 hit this division hard with 50% of Industrial Division sales going to iron ore mining companies in Australia and petroleum companies in the USA. Fast forward to FY2017 and the iron ore and oil industries make up just 20% of sales. 50% of sales today are from potable water and waste water projects.

How did this market adaptation take place? In simple overall terms, much of what Skellerup does can be summed up by using rubber compound engineering to to keep liquids either 'in' or 'out'. When put in these simple terms you can see how existing rubber technology can be relatively easily adapted to other industries. Lessons learned in oil and gas transportation were directly applicable to the waste and potable water markets. Fundamental global trends of 'growing populations', 'changing weather patters (flooding more common)' , and 'ageing infrastructure in many developed cities' all produce a tailwind of opportunities that is less susceptible to the vicissitudes of commodity markets. A rubber seal is not the most expensive component of an underground piping system. But it is an absolutely critical components. So saving money on a seal is likely a poor risk strategy when the quality of the competition is unknown. Skellerup works closely with pipe manufacturers and this gives them a competitive 'moat' that potential competitors will find hard to breach.

So is Skellerup's presence in industrial rubber 'major' in a global context? Skellerup supplies critical rubber componentry for other industrial manufacturers. Few would know that Skellerup manufactures all the drive shaft couplings in their Italian factory for the Mercedes Benz E class cars that are made for the Chinese market , for example. Yet no-one would call Mercedes Benz a minor player in the luxury Chinese car market. I think being a manufacturer of world class componentry qualifies Skellerup as 'major players', albeit in their own specialised niche of rubber products.

To summarize,

1/ Strong and deep relationships not just with manufacturing partners but also final end users, AND
2/ Industrial standards and approval processes that provide a barrier to entry for competitors, AND
3/ Adaptability of rubber technology across industries opening up organic growth opportunities

provide solid reasons to expect that Skellerup will continue as a strong player in the niche markets where they choose to operate.

Conclusion: Pass Test


Skellerup are a brand that stands behind the big brands as crucial component suppliers. For governance purposes , Skellerup is split into two divisions: 'Agri' and 'Industrial'.

Agri

As supplier to the share holders of Fonterra, our dairy farmers, Skellerup supplies the milking liner that attaches each cow teat, via a Skellerup supplied silicone hose to the milking machine. The dairy worker keeps their feet dry wearing Skellerup 'Red Band' gumboots. After milking the chances of teat infection is reduced by using the Skellerup supplied "Ambic Jetstream" Teat Sprayer. This is a fully automated device that operates on vacuum power which means no electricity is needed. Skellerup remain the world's second largest supplier of disposables to the dairy industry worldwide, and their target growth market is the United States where sales are catching up to their home market stronghold level in New Zealand.

Industrial

The industrial division is driven by strong and effective partnerships at research and development level, between Skellerup and their customer companies. The focus is on mechanically challenging problems that nevertheless lend themselves to quick solutions by leveraging on the skills and experience of a multi-disciplined Skellerup technology team. Skellerup's strategy is not to patent exclusive technology, but to cleverly apply their materials knowledge to what some might be seen as 'out of the square' applications. Many of these problems involve sealing off one liquid or gas so that it does not mix with another.

Declining markets over FY2020 included oil & gas, an industry into which Skellerup supplies space efficient vacuum pumps for fuel transporter trucks. Furthermore the closure of the Australian car industry and weaker automotive component sales in Italy has meant lower rubber drive coupling sales for Skellerup. However Ultralon U-deck is finding favour as a preferred decking covering for boats, especially in the United States of America. New products and improved sealing applications are driving sales of the Deks roofing product in Australia. Sales relating to the pumping and piping of potable water still make up the largest category of gross industrial division sales for Skellerup. Some projects in this space were deferred due to Covid-19, so Skellerup have high hopes for a sales bounce back in FY2021.

Skellerup is keen to pursue the advantageous properties of silicone to augment their undoubted prowess in conventional rubber componentry. In July 2018 they forked out $US1.1m for a minority stake in 2015 start up 'SimLim' in the United States. Partnering with business founder Michael O'Hara, SimLim's silicone products are very sterile which sets them up for good use in various medical applications and sophisticated consumer products. Then in November 2019, Skellerup purchase 'SilClear' for GBP3.3m. 'Silclear' is the global market leader in making innovative silicone rubber products, in particular food grade tubing diaphragms valves and liners, a good fit for crossover applications into the dairy industry.

Skellerup remain number two globally in the disposable dairy supplies market (second only to DeLavel), and are a well entrenched supplier to various leading industrial brands. At the end of FY2020, 17 of Skellerup's top twenty customers by revenue were also in the top twenty in FY2016 (four years earlier). Customer retention is a measure of enduring relationships not easily usurped.

Q/ Does Skellerup qualify as a key (or top three) supplier in their chosen markets?
A/ Yes, this test is passed.

SNOOPY

discl: holding

[Snoopy]

2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps
2016: ($29.099+$0.800+$1.275-$8.429+0.28*$0.145)m /192.806m = 11.8cps
2017: ($31.435-$2.507-$9.300+0.28*$0.025)m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.7cps

Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs.
d/ Result for FY2017/FY2016 adjusts for not including a $25,000/$145,000 cost from relocation expenses respectively, by adding back the 'after tax' effect of not having incurred these costs.

Conclusion: Fail test



Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2016: ($29.099+$0.800+$0.145m+$1.275-[$8.429+0.28*$0.145])m /192.806m = 11.9cps
2017: ($31.435-$2.507+$0.025m-[$9.300+0.28*$0.025])m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.6cps
2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2017 $2.507m, FY2018 $1.123m, FY2020 $0.685m) and losses added back (FY2016 $1.275m, FY2019 $0.170m). Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2016 adds back $800,000 in restructuring costs (AR2016 p7).
c/ Result for FY2017/FY2016 adjusts for removing the one off $25,000/$145,000 earthquake relocation expenses (AR2017 p39) respectively, by adding back the effect of a hypothetical situation where these losses were not incurred. The $9.300/$8.429m tax figures used for FY2017/FY2016 respectively have already incorporated the tax relief on these expenses which did occur. But we are modelling the situation where they did not occur. So we have to:

i/ Add in the extra tax payable when certain expenses did not occur (because profits would be higher than anticipated) .
ii/ Add back the expenses themselves that were not incurred, because expenses not paid amount to profit before tax.

d/ FY2020 result adds back an after tax $0.400m 'before IFRS16' adjustment to allow a like with like comparison of NPAT with previous years.
e/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: I believe the 0.2cps drop in profit shown from FY2019 to FY2020 is within the margin of error of the inputs used to get the two figures. We know that until Covid-19 (a black swan event) the previous year's result would have been beaten. I am therefore declaring this result a 'pass test'.

SNOOPY

[Snoopy]

2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%
2016: $22.786m /$155.855m= 14.6%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%

Conclusion: Fail test



Return on Equity = Net Profit After Tax / Shareholder Funds at End of Financial Year

2016: $22.849m /$155.855m= 14.7%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%

14.7% rounds up to 15% in whole number terms.

Conclusion: Pass Test

SNOOPY

[Arthur]

15% is a big hurdle when the risk free rate is zero

[Snoopy]

15% is a big hurdle when the risk free rate is zero


There is a point I have not communicated well in this quest for ROE Arthur.

ROE or 'Return on Shareholder Equity' is a company operational and internally generated statistic. If the NZX were closed forever and if interest rates were pinned at zero forever, none of that would make any difference to ROE. You can't compare a 'risk free rate of return' with 15% hurdle that I mention, as an investor would not make 15% per year they bought into Skellerup today. An investor would only be able to make 15% if they were able to buy SKL shares at net tangible asset backing. At balance date NTA was 94.8c, but unfortunately for investors the market price for Skellerup shares is about three times that figure. So investors buying into today will only be getting about a 15%/3 = a 5% return on their investment dollars. But all of this assumes that Skellerup pays all of their earnings out as dividends.

If Skellerup :

1/ Retains some of their earnings, AND
2/ If they can retain that 15% ROE earnings rate on the newly retained shareholders funds

THEN shareholders buying in today will get a 15% return on just that small portion of retained earnings. That may not sound like much as over FY2020, Skellerup paid out 12.5cps as dividends and only retained 2.5cps. But this ignores the compounding effect of such earnings continually being retained and compounding upon themselves over the years. This is where a company generating a high ROE on its retained funds can really surprise. But even then your initial acquisition price has to be cheap enough to make the investment equation work. And it is at this point that 'prevailing interest rates' and the 'risk free rate' start to come into consideration as a 'measuring stick' of what alternative investment returns are available. Stay tuned. All of this is yet to come under the bridge.

SNOOPY

P.S. I should add that Buffett proposed the 15% ROE figure over an extended period of time because he was/is only interested in exceptional investments. These are difficult hurdles to meet. But if Buffett could find just one or two investments like this that satisfied his investment screening criteria per year, then he would be more than satisfied.

[Snoopy]

2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%

I see a 'steady margin' picture with a low year of FY2017 offset by a higher year in FY2014

Conclusion: Fail test



Net Profit Margin = Net Profit / Revenue

2016: $22.849m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.6%

I see a good margin lift from FY2016 to FY2018, with most of those gains being retained under the Covid-19 influenced period.

Conclusion: Pass test

SNOOPY

[Snoopy]

I open this post with a couple of quotes from the Panda which I think are both poignant and sobering.

Quote Originally Posted by Patient Panda
"not a great track record, don’t really own up to bad results and always optimistic for future only to contradict themselves with the result. Maybe Liz Coutts will be an improvement over Selwyn."

"Until they get some wins under their belt a PE of 14.7 looks very rich."

Over the past few years the majority of share price gains have been made up of PE expansion rather than a business going gangbusters. Just something to keep in mind for future risk weighted returns. The historic PE at 30-09-2015 was 11.6. Three years later and it is 15.6 (both with my adjustments).

One good result does not a trend make. The result was good but, as an investor, the likes of Buffett must always consider the multi year perspective. The performance of Skellerup isn't consistent enough to apply the Buffett multi year growth model reliably. This doesn't mean it isn't a good investment. It just means we can't use a technique like Buffett might use to value it.


Two years on and how things change. All four of the Buffett investment criteria are satisfied. That is not an invitation to invest in Skellerup of course. Passing the four Buffett criteria only gets a place at the Buffett evaluation start line. Two very important tests remain. For a start we must determine if Skellerup is too heavily indebted. Overleverage can push up ROE and that is not a good thing as the company could become unstable in a market downturn. Finally we must determine if the recent rise in the share price already reflects the value of future business improvements. No matter how good a company is at the operational level, it is still possible to pay too much for the shares.

'Good Company' + 'Paying too much for Shares' = 'A Poor Investment'

One thing that is certain is that the historical PE ratio has continued to expand. The share price is flirting with $3. If it gets there that will imply an historical PE ratio of 20, which in historical terms is quite a lot for a 'boring industrial'. Still Skellerup's Covid-19 resilience and their ability to keep paying dividends is impressive.

SNOOPY

[Snoopy]

A note of warning here. It can be extremely dangerous to rely on ROE as a stand alone indicator. A company can be very highly leveraged which artificially raises their ROE above what it would be if it was more prudently capitalised. But is this the case with Skellerup?

From the FY2015 interim report Balance Sheet:

Cash: $10.678m

Interest Bearing Loans and Borrowings: $2.900m

Net cash position: $7.778m

Skellerup has no term debt and a very strong positive cash position. This is very different from even a few years ago when Skellerup ran up quite a lot of debt. Granted the Christchuch earthquakes and resultant payout relating to their Woolston site has boosted the cash position for now. Some debt may creep back into the balance sheet once the new Wigram factory is built. Offsetting that will be efficiency gains from what will be a thoroughly modern factory. Nevertheless no term debt today is a very good reason to like this company.


'MDRT' is the answer to the question:

"If all profits for the year were put towards paying off the company's debts, how long would that take?"

My rule of thumb for the answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern



FY2016FY2017[/TD]FY2018
FY2019FY2020


Bolt on AcquisitionsNew Wigram factory opens
Nexus Foams (NZ) & 35% of SimLim (USA)Silclear (UK)


Cash & Cash Equivalents: {A}
$9.510mOpens
$6.022m
$9.681m
$9.639m
$13.617m


Non Current Borrowings:
$36.413m
$41.777m
$40.400m
$46.215m
$41.300m


add Current Borrowings:
$0.0m
$0.0m
$0.0m
$0.0m
$0.830m


equals Total Borrowings: {B}
$36.413m[/
$41.777m
$40.400m
$46.215m
$42.130m


Total Net Borrowings: {B} - {A}
$26.903m
$35.755m
$30.719m
$36.576m
$28.513m


Net profit declared {C}
$20.525m
$22.110m
$27.277m
$29.063m
$29.064m


MDRT ({B} - {A}) / (C}
1.3 years
1.6 years
1.1 years
1.3 years
1.0 years



In the case of MDRT it is really only the latest figure that matters. All other figures are historical, but I have included them anyway because I didn't do the calculations 'in period'. Historical figures do give a feel for how conservatively (or not) the business has been run in recent years. But having a good debt position last year is of no help if the debt has blown out this year. Fortunately debt hasn't blown out and Skellerup are in the most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some key bolt on acquisitions along the way. Growth is being pursued while debt, although low, is being repaid. There is a lot to like in this picture. I have no qualms about giving Skellerup a 'pass' on the MDRT front.

Now having reassured ourselves that the Buffett growth model is relevant to apply in this case. let's see what happens when we apply it.

SNOOPY

[winner69]

'MDRT' is the answer to the question:

"If all profits for the year were put towards paying off the company's debts, how long would that take?"

My rule of thumb for the answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern



FY2016FY2017[/TD]FY2018
FY2019FY2020


Significant Event[/u][/TD]First full year owning AbsoluteIT
JacksonStone Acquired


Cash & Cash Equivalents: {A}
$0.0m
$1.225m
$6.269m
$6.357m
$6.178m


Non Current Borrowings:
$18.500m
$18.500m
$36.000m
$33.000m
$36.000m


add Current Borrowings:
$2.500m
$0.0m
$0.0m
$0.0m
$0.0m


add Overdraft:
$0.870m
$0.108m
$0.0m
$0.0m
$0.0m


equals Total Borrowings: {B}
$21.870m
$18.608m
$36.000m
$33.000m
$36.000m


Total Net Borrowings: {B} - {A}
$21.870m
$17.323m
$29.731m
$26.643m
$29.822m


Net profit declared {C}
$22.849m
$19.635m
$26.154m
$29.233m
$28.969m


MDRT ({B} - {A}) / (C}
4.2 years
3.0 years
5.8 years
13.2 years
11.1 years



That 11.1 years is a bit of a worry

[percy]

SKL projected eps.
................................2020.............. .......2021........................2022.
Market Screener..........15cps....................15cps.. ...............,,,16cps
eps growth..................................0%........ ................6.67%
Craigs........................14.96cps............ ....15.10cps.................16cps
eps growth..................................0093%..... ...............5.9%
Current PE ratio is 19.5 which looks rather high for less than 1% eps growth in 2021 year and just over 6% in 2022 year. ie current PE ratio is over 3 times 2021/2022 eps growth rate.
Looks to me as though the current share price has a lot of forward growth priced into it.Yet it is extremely doubtful this growth will eventuate.
Take care.

[Southern Lad]

'



FY2016
FY2017
FY2018
FY2019
FY2020


Significant Event


First full year owning AbsoluteIT

JacksonStone Acquired


Cash & Cash Equivalents: {A}
$0.0m
$1.225m
$6.269m
$6.357m
$6.178m


Non Current Borrowings:
$18.500m
$18.500m
$36.000m
$33.000m
$36.000m


add Current Borrowings:
$2.500m
$0.0m
$0.0m
$0.0m
$0.0m


add Overdraft:
$0.870m
$0.108m
$0.0m
$0.0m
$0.0m


equals Total Borrowings: {B}
$21.870m
$18.608m
$36.000m
$33.000m
$36.000m


Total Net Borrowings: {B} - {A}
$21.870m
$17.323m
$29.731m
$26.643m
$29.822m


Net profit declared {C}
$22.849m
$19.635m
$26.154m
$29.233m
$28.969m


MDRT ({B} - {A}) / (C}
4.2 years
3.0 years
5.8 years
13.2 years
11.1 years




Snoopy, I’m confused by the result of your ({B} - {A}) / {C} calculation. For FY20, if net debt is $29.822m and net profit is $28,969m, how do you get 11.1 years profits to pay off the debt?

Looking at the FY20 results, I see your net profit figure is before tax. The need to pay tax even if dividends aren’t paid presumably should presumably factor into the calculation somewhere.

[Snoopy]

That 11.1 years is a bit of a worry

You are a bit quick off the mark Winner. That figure is for AWF Madison, because I pinched the table format I wanted from my equivalent post on that thread. The table you are looking at, when you looked at it, was still a 'Work in Progress'. The post will be finished when I put my 'shouty SNOOPY signature' at the end of it. I have taken to doing my calculations on line these days rather than destroying a bit of paper beforehand and then writing the results up. So even I don't know what the result is when I post. I guess it is the 'sharetrader' equivalent of watching sport live! Exciting eh ;-)

SNOOPY

[Snoopy]

Snoopy, I’m confused by the result of your ({B} - {A}) / {C} calculation. For FY20, if net debt is $29.822m and net profit is $28,969m, how do you get 11.1 years profits to pay off the debt?


Check back at my post 863 now. It should all be fixed.



Looking at the FY20 results, I see your net profit figure is before tax. The need to pay tax even if dividends aren’t paid presumably should presumably factor into the calculation somewhere.


Except for the above bit that was OK when you looked at it. It was an NPAT figure and you are quite right, the tax paid does come off the profit before you calculate MDRT.

SNOOPY

[Southern Lad]

Check back at my post 863 now. It should all be fixed.



Except for the above bit that was OK when you looked at it. It was an NPAT figure and you are quite right, the tax paid does come off the profit before you calculate MDRT.

SNOOPY

Cheers Snoopy - makes more sense now and it now passes the Southern Lad Test No. 1: Do the numbers make sense when you apply the 'what do I expect the answer to be' before I delving into the detail of the calculation test. I appreciate the big effort you put into the in-depth analysis that you regularly share with us.

[Ggcc]

SKL projected eps.
................................2020.............. .......2021........................2022.
Market Screener..........15cps....................15cps.. ...............,,,16cps
eps growth..................................0%........ ................6.67%
Craigs........................14.96cps............ ....15.10cps.................16cps
eps growth..................................0093%..... ...............5.9%
Current PE ratio is 19.5 which looks rather high for less than 1% eps growth in 2021 year and just over 6% in 2022 year. ie current PE ratio is over 3 times 2021/2022 eps growth rate.
Looks to me as though the current share price has a lot of forward growth priced into it.Yet it is extremely doubtful this growth will eventuate.
Take care.
I agree take care. The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.

Off topic I know l, but I have been looking at buying a new house and just inquired about a relatively nice house in a relatively nice area of Napier. $1.2 million for the house.......... I was like geez???? The agent asked where I was situated and mentioned houses around my area were going for close to 1 million and some above as well. A year ago I was told $880 tops. So, in relation to SKL. People are prepared to pay more for something that seems overvalued to others, for what seems a secure dividend and some including myself are not prepared to pay so much for Their “investment”.
It just seems like one giant bubble ready to pop.

[Waltzing]

SKL is paying over 4% - at this price.. cheap as chips .. its the market. They will be bringing back there Euros and Pounds..

[Snoopy]

FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)



The above is how I have previously dealt with this issue as regards Skellerup. The other way is to take advantage of our knowledge that says:

1/ the way to convert an unimputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by one (that is a complicated mathematical way of saying that with no imputation credits a 'net dividend' and a 'gross dividend' are the same thing).
2/ the way to convert a fully imputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by 'one minus the company tax rate' (1-0.28) which is 0.72.

Partially imputed dividends are calculated using a divisor that is between the two extremes of '1' and '0.72'. If you think of the distance between the two extremes as 28 steps, then exactly half way between (50% imputation) is 14 steps. That corresponds to a divisor of: 1-0.14= 0.86

For 55% imputation we are going to end up closer to full imputation than the 50% imputation case. The number of steps we have to cover is 0.55x28=15.4. 1-0.154= 0.846

So using this method on the gross dividends I have calculated above

FY2019 P1/ 7.0c (55% imputed) = 7.0c/0.846 = = 8.27c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 5.5c/0.86 = = 6.40c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 7.5c/0.86 = 8.72c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 5.5c/0.86 = 6.40c (gross dividend)

These answers should be identical with the answers I used in my alternative calculation method in my quote bubble above, but they are not. Can anyone explain the difference?

SNOOPY

[Snow Leopard]

The above is how I have previously dealt with this issue as regards Skellerup. The other way is to take advantage of our knowledge that says:

1/ the way to convert an unimputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by one (that is a complicated mathematical way of saying that with no imputation credits a 'net dividend' and a 'gross dividend' are the same thing).
2/ the way to convert a fully imputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by 'one minus the company tax rate' (1-0.28) which is 0.72.

Partially imputed dividends are calculated using a divisor that is between the two extremes of '1' and '0.72'. If you think of the distance between the two extremes as 28 steps, then exactly half way between (50% imputation) is 14 steps. That corresponds to a divisor of: 1-0.14= 0.86

For 55% imputation we are going to end up closer to full imputation than the 50% imputation case. The number of steps we have to cover is 0.55x28=15.4. 1-0.154= 0.846

So using this method on the gross dividends I have calculated above

FY2019 P1/ 7.0c (55% imputed) = 7.0c/0.846 = = 8.27c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 5.5c/0.86 = = 6.40c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 7.5c/0.86 = 8.72c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 5.5c/0.86 = 6.40c (gross dividend)

These answers should be identical with the answers I used in my alternative calculation method in my quote bubble above, but they are not. Can anyone explain the difference?

SNOOPY

Why would you think that?

With a declared dividend of N imputed to a percent P then the Tax T always is (at the current corporate tax rate of 28%):

T = N * P/100 * 0.28 / 0.72

and the gross dividend G is

G = N + T

Just us that formula and trust me, I am not an accountant ;)

[Snoopy]

With a declared dividend of N imputed to a percent P then the Tax T always is (at the current corporate tax rate of 28%):

T = N * P/100 * 0.28 / 0.72

and the gross dividend G is

G = N + T

Just us that formula and trust me, I am not an accountant ;)


Ok Snow Leopard, Let's tax the latest 5.5c dividend and apply your tax calculation formula:

T = N * P/100 * 0.28 / 0.72 = 5.5c * 50/100 * 0.28/0.72 = 1.07c

Now work out the gross dividend

G = N + T = 5.5c + 1.07c = 6.57c

Now compare that to my first effort below



FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)


and you will see that we both have the same answer. But is it the right answer?

---------

I want to introduce the algebraic entity 'TD' for 'Tax divisor', I am defining this as the number you must divide into the Net Profit to get the gross profit. For a fully imputed dividend TD =0.72. For an unimputed dividend TD = 1

T = G-N = N/TD - N = N( 1/TD - TD ) = N (1-TD)/TD = N *(0.28/0.72) for a fully imputed dividend.

Now compare that to your formula SN for a 100% imputed dividend

T = N * P/100 * 0.28 / 0.72 = N *100/100 * 0.28/0.72 = N *(0.28/0.72)

So for 100% imputation we get the same answer. This is getting promising. We have now agreed twice within the same post!

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

But look what happens when we change the imputation rate to only 50%, which equates to 'TD =0.86'

T = G-N = N/TD - N = N( 1/TD - TD ) = N (1-TD)/TD = N *(0.14/0.86) for a 50% imputed dividend.

Now compare that to your tax formula SN for a 50% imputed dividend

T = N * P/100 * 0.28 / 0.72 = N *50/100 * 0.28/0.72 = N *(0.14/0.72)

and you will see that we no longer agree. So which is the right approach?

SNOOPY

[Snow Leopard]

Snoopy

The formula I provided is ALWAYS correct.

[Snoopy]

Snoopy

The formula I provided is ALWAYS correct.

Here is the information from my March 19th 2020 dividend statement, normalised down to one share:



Payment Rate5.5000c


less Withholding Tax1.0985c



equals Net Dividend4.4015c








NZ Imputation Credits1.0694c


Withholding Tax1.0985c


Gross Dividend6.5694c




Using the SN formula for calculating imputation credits

T = N * P/100 * 0.28 / 0.72 = 5.5c * 50/100 * (0.28 /0.72) = 1.0694c

This is the same imputation figure printed on my dividend statement. So it looks like the SN formula is consistent with the information that Computershare is giving me.

SNOOPY

[Waltzing]

remark removed.

[Snoopy]

Using the SN formula for calculating imputation credits

T = N * P/100 * 0.28 / 0.72



I still don't get the derivation of the above formula. However, given it has the Snow Leopard 'black spot' of approval, and the answers line up with the dividend statements coming out of Computershare, I will carry on with it.

Tax isn't such an issue from a Skellerup management perspective. They invest in different centres all over the world, manufacture in different centres all over the world, and pay tax in different jurisdictions all over the world. The problem is that our Inland Revenue department only recognises imputation credits on that part of the profit generated in New Zealand. If we shareholders get a part of dividend from profits earned offshore, then that part of the profit is 'double taxed' in our hands. By this I mean that if Skellerup profit is earned in the United States (as an example) it will be tax in the United States. But if that U.S. profit is passed on to resident New Zealand shareholders, then that bit of the profit that as already been will be taxed again by order of the New Zealand government as if no prior tax has been paid.

The partially imputed dividends that have suffered from this effect, I requote in the bubble below:




The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)



The imputed tax bill of each of these dividends is as follows:

FY2019 P1/ 7.0c (55% imputed) = 7.0c * 55/100 * 0.28 / 0.72 = 1.50c

FY2019 P2/ 5.5c (50% imputed) = 5.5c * 50/100 * 0.28 / 0.72 = 1.07c

FY2020 P1/ 7.5c (50% imputed) = 7.5c * 50/100 * 0.28 / 0.72 =1.46c

FY2020 P2/ 5.5c (50% imputed) = 5.5c * 50/100 * 0.28 / 0.72 = 1.07c

A New Zealand shareholder on a 28% tax rate (e.g. an NZ Company investing in Skellerup) will have the following total tax deducted from their respective dividends:.

FY2019 P1/ 7.0c (55% imputed) = 8.5c * 0.28 = 2.38c

FY2019 P2/ 5.5c (50% imputed) = 6.57c * 0.28 = 1.83c

FY2020 P1/ 7.5c (50% imputed) = 8.96c * 0.28 = 2.51c

FY2020 P2/ 5.5c (50% imputed) = 6.57c * 0.28 = 1.83c



So the extra tax levelled on NZ shareholders, due to the dividend not being fully imputed, was:



NZ Shareholder Taxless Imputed Taxequals Additional NZ Resident Tax


FY2019 P1: 7.0c (55% imputed)2.38c1.50c0.88c


FY2019 P2: 5.5c (50% imputed)1.83c1.07c0.76c


FY2020 P1: 7.5c (50% imputed)2.51c1.46c1.05c


FY2020 P2: 5.5c (50% imputed)1.83c1.07c0.76c



For a 50% imputed dividend, the Additional NZ resident tax amounts to 14% of the net declared dividend.

SNOOPY

[Snoopy]

For this model I am using an ROE of 17.8% (the actual average of the last 9 years) and a dividend payout ratio of 62% (the actual dividend payout of the last 9 years).

using a PE of 12.6 (actual average over the last 9 years)


The last time Skellerup qualified for this kind of analysis was FY2014, incorporating the previous five year perspective that went with this date. There were three crucial parameters involved in the modeling which I have quoted above. For the FY2020 edition of the Buffett growth model, I have recalculated these parameters as below.




FY2016
FY2017
FY2018
FY2019
FY2020
Average



New Wigram factory opens

Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)


Return on Shareholder Equity
14.7%
12.3%
15.2%
16.4%
15.6%
15.0% (rounded up from 14.8%)


Dividend Payout Ratio
92%
88%
71%
83%
87%
84%


PE Ratio at 30th September
11.5
16.6
15.7
15.2
19.9
15.8



The dividend payout ratio is based on the dividends actually paid out in the financial year under question - normally the final dividend for the previous year and the interim dividend for the current year, (not the dividends declared relating to the results of that year).

The number of previous years that I use to generate my data is a judgement call. Last time I used nine years of data. The more years of data that you use, the better longer term picture you get. But over time a business evolves. So the longer series of data may be less representative of the business today, and going forwards. And it is the future that is of most interest when we are making future projections. FY2016 marked the start of a 'new era' for Skellerup. I quote from the Chairman's address in the FY2016 Annual Report.

"The FY16 year included a number of notable milestones. The most significant is the completion of the of the base build of our new facility at Wigram which has enabled us to commence the careful and gradual relocation of our Agri business from Woolston to Wigram."

"Another notable milestone has been the growth we have achieved in international markets."

So this time I have elected to use my 'minimum period' of just five years, to keep my Return on Equity, Dividend Payout Ratio and market rated PE position most relevant.

Some financial analysts might see the idea of a 10 year projection forwards as absurdly unreliable, because so much can happen in that time. Buffett argues that for a special subset of businesses, that have strong internal fundamentals, it is actually easier to predict where that business will be in ten years than two. In two years any short term shock might hit. But over the much longer time period of 10 years, the underlying competitive advantage of this select group of businesses that can pass the Buffett tests are unlikely to be derailed.

SNOOPY

[percy]

I think Ggcc's post #870 helps explain why the market is prepared to pay above the average PE of 15.6 ie 19.7.It is certainly not based on eps growth.
'The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.'

[RTM]

I think Ggcc's post #870 helps explain why the market is prepared to pay above the average PE of 15.6 ie 19.7.It is certainly not based on eps growth.
'The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.'

No guarantees...., I agree. No matter where one looks there are risks and no guarantees.
Even money in the bank could evaporate in the event of a bank failure. Being well diversified has served us well through the current market issues. I am anticipating further issues next year and hold sufficient cash to "see us through" (hopefully).
Disc: Long Time Holder and topped up at 182

[Snoopy]

Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the numbers into the Buffett style ten year growth model.

For this model I am using an ROE of 17.8% (the actual average of the last 9 years) and a dividend payout ratio of 62% (the actual dividend payout of the last 9 years).



SOFY


FYAsset BackingEarningsDividendRetained Earnings


20130.630.0940.0800.014


20140.650.1150.0850.030


20150.750.1340.0830.051


20160.800.1430.0880.054


20170.850.1520.0940.058


20180.910.1620.1010.062


20190.970.1730.1080.066


20201.040.1850.1150.070


20211.110.1980.1230.075


20221.190.2110.1310.080


20231.270.2250.1400.086


20241.350.2410.1490.091


20251.440.257


Total1.13=align:right



With a 2025 year earnings of 25.7cps and using a PE of 12.6 (actual average over the last 9 years) the expected share price for Skellerup in ten years time is:

12.6 x 0.257 = $3.24

The dividend return over that time is $1.13 (as per above table)

Using a market share price today of $1.39, the expected compounding annual return 'i' can be calculated from the following equation.

$1.39(1+i)^10 = (3.24 +1.13) => i=12.1%

This return is a net return, before imputation credits. I haven't seen anywhere else on the NZX I can get a return so strong for so long. So for me investment in SKL at under $1.39 is a no brainer.

Some however, may consider a 12.1% return not good enough. What price (P) would you need to buy at to get a 15% compounding return?

P(1+0.15)^10 = (3.24+1.13) => P= $1.08




Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the modelling numbers that I have generated into the Buffett style ten year growth model.

For this model I am using:

a/ an ROE of 15.0% (the actual average of the last 5 years) AND
b/ a dividend payout ratio of 84% (the actual dividend payout of the last 5 years).

I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax (at a rate of 28%) must be deducted from half of all future dividends, compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction (assuming all dividends going forwards are 50% imputed, 50% non-imputed).




SOFY


FYAsset BackingOperations Earnings
add OCI (*)less Dividend
equals Retained EarningsUnimputed Dividend Tax


2020 (historical)0.9160.1500.0110.130
0.031
(0.018)


20210.948
0.142

0.1200.022(0.017)


20220.9700.146

0.1230.023(0.017)

][
20230.9930.149
0.1250.024(0.018)


20241.0170.153
0.1290.024(0.018)


20251.0410.156
0.1310.025(0.018)


20261.0660.160
0.1340.026(0.019)


20271.0920.164
0.1380.026(0.019)


20281.1180.168
0.1410.027(0.020)


20291.1450.171
0.1440.027(0.020)


20301.1720.176
0.1480.028(0.021)


20311.2000.180



Ten Year Total
1.333(0.205)



(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

With FY2031 projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price today of $2.95, the expected compounding annual return 'i' can be calculated from the following equation.

$2.95(1+i)^10 = (2.84 +1.13) => i=3.01%

This projected 3.01% return is a net return per year. The equivalent gross return is 3.01%/0.72 = 4.18%. While this kind of return looks attractive, compared with term deposit interest rates under 2%, I don't believe it is sufficient for Warren to be interested in buying into Skellerup. What we have here is a very good company, but one that is what I would term 'fully priced'. The fact that I am predicting the share price in ten years time ($2.84) to be slightly lower than the share price today ($2.95), despite solid incremental operational growth says it all.

What Skellerup share price (P) would Warren need to buy at to get his much touted 15% compounding return per year?

P(1+0.15)^10 = (2.84+1.13) => P= 98.1c

SNOOPY

[glennj]

Snoopy there is very little or nothing around that meets the Buffet criteria. I do some screening with adapted "softer" criteria and it has served me well. The average cost of my current Skellerup holdings is c. 103c per share. Were I to have sold at the end of August price; return including all dividends and realised capital gain would have been close to 20% pa compounding according to my bookkeeping software. I'm happy to have owned this investment for quite some time but if I'd strictly applied Buffet criteria it would likely have kept me out of this investment.

[Snoopy]

Snoopy there is very little or nothing around that meets the Buffet criteria. I do some screening with adapted "softer" criteria and it has served me well. The average cost of my current Skellerup holdings is c. 103c per share. Were I to have sold at the end of August price; return including all dividends and realised capital gain would have been close to 20% pa compounding according to my bookkeeping software. I'm happy to have owned this investment for quite some time but if I'd strictly applied Buffet criteria it would likely have kept me out of this investment.


Hi GlennJ; Holding an investment in Skellerup at an average price at $1.03 is a great result: Well done! I present my work on Skellerup as tool you can use however you like. Not a lesson from the pulpit on what to do. Ultimately it would be fantastic to plug into an investment that gave a 15% compounding return. But as you have noted, the chances of finding such an investment is slim. I don't see that as a reason not to do the work though. You can lower your standards a bit and be happy with a return of 'only' 12% compounding, for example. That is what I did when I did the exercise below in 2014




Using a market share price today of $1.39, the expected compounding annual return 'i' can be calculated from the following equation.

$1.39(1+i)^10 = (3.24 +1.13) => i=12.1%

This return is a net return, before imputation credits. I haven't seen anywhere else on the NZX I can get a return so strong for so long. So for me investment in SKL at under $1.39 is a no brainer.

Some however, may consider a 12.1% return not good enough. What price (P) would you need to buy at to get a 15% compounding return?

P(1+0.015)^10 = (3.24+1.13) => P= $1.08



I have been accumulating SKL since and my average entry price is $1.33. Not as good a price as you achieved but I can't complain. I didn't wait for the share price to drop to $1.08 which would have seen me miss out. With the impressive rally since Covid-19, SKL is now my largest NZX holding, which is another -personal- reason to up the work I am doing on Skellerup. As well as telling investors when the time might be to buy, a Buffett style analysis can also tell you when it might be time to sell down. I don't think we are at the sell down point yet, But it will pay to keep an eye on things going forwards.

SNOOPY

[Snoopy]

I have had a quiet look at the half year annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20165.5c+3.5c
7.64c + 4.86c12.50c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


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


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c15.07c


FY20207.5c (50% I) + 5.5c (50% I) 8.96c + 6.57c15.53c


Total69.49c




Averaged over 5 years, the dividend works out at 69.49/5 = 13.9c (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 of Skellerup to quickly 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 SKL is:

13.9 / (0.075) = $1.85

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

Top of Business Cycle Valuation: $1.85 x 1.2 = $2.22
Bottom of Business Cycle Valuation: $1.85 x 0.8 = $1.48

My target accumulation price is 10% below 'fair value', and that equates to $1.67.

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?


I have had a quiet look at the FY2020 annual report that arrived in my mailbox on Friday. I have done a Buffett style evaluation and found the company to be at best fairly valued. So for a different perspective, what does the announcement of the October 2020 dividend payment do for valuing the company based on capitalised payments?

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's, FY2020s and FY2021s unimputed dividends, those actually paid in the FY2019, FY2020 and FY2021 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2021 P1/ 5.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20165.5c+3.5c
N/Ac + 4.86c4.86c


FY20175.5c+3.5c
7.64c + 4.86c
12.50c


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


FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c15.07c


FY20207.5c (50% I) + 5.5c (50% I) 8.96c + 6.57c15.53c


FY20217.5c (50% I) + ?c (50% I) 8.96c + ?c8.96c


Total70.81c




Averaged over 5 years, the dividend works out at 70.81/5 = 14.2c (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 of Skellerup to quickly 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 SKL is:

14.2 / (0.075) = $1.89

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

Top of Business Cycle Valuation: $1.89 x 1.2 = $2.27
Bottom of Business Cycle Valuation: $1.89 x 0.8 = $1.51

My target accumulation price is 10% below 'fair value', and that equates to $1.70.

SKL shares are trading at $2.94 as I write this (well above the upper end of my expected valuation range) and as such are now overvalued by at least 30%. An alternative way of looking at this result is to say 'forget dividend capitalisation' and accept that there is now a 'growth premium' built into the share price. That means that the Buffett style valuation model is the best way to look at the true value of SKL going forwards.

SNOOPY

discl: hold SKL

[Ggcc]

https://www.nzx.com/announcements/362244

Very Nice

[Waltzing]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!

[percy]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!

No not for us,but very pleasing seeing them trading well,and shareholders doing so well..

[Biscuit]

https://www.nzx.com/announcements/362244

Very Nice

Yes, they have got their act together these days.

[Snoopy]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!


Mid point of outlook for FY2021 is a 10% profit rise to $32.5m. This is very welcome but with the share price at $3.14 (up 6%), we are still looking at a PE of near to 30. Traditionally this company has traded on a PE of 15. So I think the 'party' has already happened.

SNOOPY

[Biscuit]

Mid point of outlook for FY2021 is a 10% profit rise to $32.5m. This is very welcome but with the share price at $3.14 (up 6%), we are still looking at a PE of near to 30. Traditionally this company has traded on a PE of 15. So I think the 'party' has already happened.

SNOOPY


Really, that doesn't sound right? I thought the PE was around 20? Halving the share price would bring me back to where I started 8 years ago and earnings have gone up since then.

[Snoopy]

Really, that doesn't sound right? I thought the PE was around 20? Halving the share price would bring me back to where I started 8 years ago and earnings have gone up since then.


That will teach me to rely on memory..... You are quite right Biscuit. Looking back in this thread to my post 857 I have been using a normalised earnings for FY2020 of $28.969m. So $32.5m is actually a 12% year on year profit rise from 14.9cps to 16.7cps.

At $3.17 we are on a projected PE of $3.17/ 0.167 = 19.

That is still high given an historical context five year average PE for Skellerup of 15.6. But not outrageously high given where the market is today. I am happy to sit on my holdings at this price for what is now my largest NZX investment.

SNOOPY

[winner69]

Really, that doesn't sound right? I thought the PE was around 20? Halving the share price would bring me back to where I started 8 years ago and earnings have gone up since then.

I reckon at $32.5m NPAT the PE is 19.1

[macduffy]

I reckon at $32.5m NPAT the PE is 19.1

Which sounds about right for a company earning increasing profits - in today's market.

:)

[Bjauck]

That is still high given an historical context five year average PE for Skellerup of 15.6. But not outrageously high given where the market is today. I am happy to sit on my holdings at this price for what is now my largest NZX investment.

SNOOPY SKL has now become one of my largest holdings too. Held since 2015, it has had a less dynamic (roller coaster) performance compared with some.

The whole NZ market seems to have received a (placebo) Covid inoculation. I don’t know how long it will last.

[Soolaimon]

Not my largest investment on nzx but it is probably the most lucrative and consistant performer in my portfolio. I bought my first shares in this company many years and name changes ago. A great example of bottom drawing..

[bull....]

havnt posted on this for a while either but it is going nicely , rsi on weekly monthly just entering over brought territory but when a trend is in place this can remain like this for a while

[Ggcc]

Nicely above $3.35 and it keeps on rising. One of my best holds so far. Although I can’t see it going too much higher unless we get a massive profit upgrade, or another company they intend to take over.

[RTM]

Nicely above $3.35 and it keeps on rising. One of my best holds so far. Although I can’t see it going too much higher unless we get a massive profit upgrade, or another company they intend to take over.

Yes....pleased I topped up back in April.....more than doubled my holding.
A little bit surprised, I thought the strength of our dollar might hold them back a bit.

[Ggcc]

Looking good at $3.60. One of my top picks for 2021. But how high can it actually grow?

[Jantar]

Looking good at $3.60. One of my top picks for 2021. But how high can it actually grow? I am happy with where it is. In my opinion it is slightly overpriced even allowing for a 15% sustained rate of growth. I have it as a hold, but I shall sell a few if it goes much higher.

[Czechmate]

It will depend on expected announcement on projected div about Feb probably. Yield driven but instos much more aware than the were.
Still reasonable price given the environment we are in methinks.

[nztx]

A fairly resilient stock through recent times .. one of the few which continued paying div's
unaffected through C-19 turbulent times

discl: hold a small parcel & pleased I do .. after reading postings of earlier contributors on here

[Snoopy]

Once the new factory at Wigram is built, I believe that greater efficiency will result boosting ROE


I am having another look at how Skellerup has treated the 'make good' provisioning relating to the relocating of plant and equipment for its Dairy Rubber Development and Manufacturing activity to the new site at Wigram and costs to complete exit from the former operating at Woolston. Why does this matter? Because when looking at 'normalised profits', some of these adjustments are significant.

Specific numbers may be found under the 'Provisions' section of the Annual Report (which in FY2018, the last year this figure was referred to, was listed under 'Note 12').



FY2014FY2015FY2016FY2017FY2018

can search
Make Good Provisions$3.191m$3.082m$3.082m$1.528m$0.0m


Change in Make Good Provisions over Year+$3.191m-$0.109m$0m-$1.554m-$1.528m



As you can see, this provision first appeared on the accounts at EOFY2014. Annoyingly, AR2014 seems to have been removed from the Skellerup website, But it is still to be found on Stocknessmonster, even though I can't figure out how to save it from there. If I could save it as a 'pdf' then I could search it electronically. But right now I am restricted to dissecting the report manually.

The official opening of the Wigram site was in November 2016. The fully operational Agri manufacturing operation transfer was completed in the first two months of CY2017. The smaller Industrial manufacturing transfer was scheduled for completion by year end (End of June 2017).

This $3.191m provision has come from the 'FY2014 Income Statement' under 'Costs Incurred' under 'Income and Expenditure related to Canterbury Earthquakes' of $5.119m. This is confirmed under Note 6 as being made up of "Business interruption, material damage, increased costs of working and make-good costs'. .

Looking back at what I did for FY2014, I see that I based my 'eps' calculation on the "Profit for the year before tax and earthquake insurance income and expenditure." That figure did not take into account the $5.119m of one off costs that i referred to above. So I think my normalised income calculations are safe after all. What I am concerned about is if those annual change in provisions have somehow found their way into subsequent income statements. I think the answer is no. But if anyone with greater accounting knowledge that me can confirm this, that would be great.

TIA

SNOOPY

[Waltzing]

we think we have the 2014 PDF. we havnt tried loading it thought a PDF dot net csharp class reader though.

DISC: sold it went it went back into profit , bit premature. But like so many stocks it took off later then we thought it should. The market seems to have reacted to low interest rate about 3 months later then we though it should have. Very annoying how slow NZ has been to pile into some stocks.

[Snoopy]

we think we have the 2014 PDF. we havnt tried loading it throught a PDF dot net csharp class reader though.


Thanks for the pdf offer Waltzingman. But after a bit more effort on my behalf, my manual inspection of the accounts revealed what I needed to know.

SNOOPY

[CD_CHCH]

Try this link:

http://www.skellerupholdings.com/Reports/Skellerup_Annual_Report_2014_Final_sent_to_NZX.pdf

[Snoopy]

Try this link:

http://www.skellerupholdings.com/Reports/Skellerup_Annual_Report_2014_Final_sent_to_NZX.pdf


Awesome CD_CHCH. saved for future reference, should I need it!

SNOOPY

[Waltzing]

NZX should have reports that far back.

[Snow Leopard]

....But it is still to be found on Stocknessmonster, even though I can't figure out how to save it from there....

12181

Click on download - circled in Red.

Depending on what you have set defines happens next but it *should* be straight-forward.

I can do Tech Support via PM - guaranteed same year response :sleep:

[Snoopy]

I can do Tech Support via PM - guaranteed same year response :sleep:


I just want to express my heartfelt thanks to all of you, both on the thread and by PM, who have offered to assist me tracking down a downloadable copy of the FY2014 annual report, which I now have. It was quite humbling to have so many offers of help, and not only from those on my side of the opinion fence.! I think 2021 is going to get very difficult from an investment perspective, as even what I have thought of as 'safe' investments become dangerously overpriced. They say knowledge is power, so I intend to keep sharing mine. And the more we share, the better investors we can all become.

Wishing everyone all the best for a rewarding 2021. I think we are all going to need it :-(

And now back to Skellerup.........

SNOOPY



.

[CD_CHCH]

It's the least any of us can do Snoopy considering all the knowledge and research you freely share on this site, which really assists those of us who are less experienced and knowledgeable.

I for one really appreciate all you share and your posts - thank you and please keep up the good work.

[kiora]

My thoughts also CDCHCH. Thanks for sharing Snoopy
Snoopy puts my analysis to shame.
It always seems to be that I will be more thorough on financial results but need to regard paralysis through analysis

[Snoopy]

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Agricultural Division

The Agricultural division has performed very well with both Sales and EBIT up 5% in the just finished half year for FY2020. Recession or not, people still need to eat and farmers, in NZ at least, are actually doing OK, (behind their whinging about the Labour lead government coming waterway restrictions - that's OK farmers are allowed to whinge!). Skellerup is the second largest supplier of rubber-ware to the dairy industry worldwide, and around 60% of product manufactured in NZ is exported.

The NZ dollar decline will help farmers in the future too! However, there may be a few less 'Red Band' specialist forestry boots sold, offset by more sales of 'Skellerup Fire Fighter Extreme Boots' helping our firefighting friends in Australia.

Outside of NZ, the outlook for dairy is not ideal. From:

https://www.dairyaustralia.com.au/-/media/dairyaustralia/documents/industry/industry-resources/dairy-situation-and-outlook/situation-and-outlook-december-2019-report-final.pdf

"Dairy Global supply Situation Outlook

Milk production from key global dairy exporting regions has remained subdued. Seasonal and political headwinds in the European Union have seen milk production growth slow and US production remains sluggish."

"Australian industry Situation Outlook

Australian farmers have entered a season of record farmgate milk prices however milk production has continued to contract. High input costs and an ominous weather forecast for the balance of the year is weighing on sentiment and has seen an increase in culling."

It looks like NZ remains the bright spot for marketing 'Skellerup Agriproducts'.


It is always a useful exercise to look at predictions compared with what actually happened.

Agricultural Segment EBIT rose to $25.405m from $22.792m, a rise of 11.5%. Given that the year on year half year rise was only 5% pre-lockdown, that means extraordinary gains were made in the second half. The revenue picture for the Agricultural division was $122.976m (HY2020) vs $128.413m (2HY2020), a rise of 4%. Since the profit rise was much greater than this, it implies that the statement:

"Operational process and efficiency gains (process, operating levels, mechanisation, inventory) at Wigram continue." (PR2020, slide4)

was not a set of empty words.

Contrary to what I expected "Growth in sales of dairy rubber-ware to international customers." was significant. The US market in particular was highlighted as strong (PR2020 p4, I note that strong second half profits co-incides with peak the US milking season). The USA now makes up 30% of Agri division revenue. (AR2020 p11). The NPAT gain for the year from dairy looks to be $1.5m (PR2020, slide 3).

Recent acquisition UK based 'Silclear' (only acquired on 1st November 2019) , which makes silicon tubes and fittings primarily used by the dairy industry separately boosted NPAT by $0.9m (PR2020 p4),. Total acquisition cost for 'Silclear' was $6.423m. Annualising the profit over the acquisition price, I get a return rate on this investment of:

$0.9m x (12/8) / $6.423m = 21%

This is an astonishingly good incremental acquisition for Skellerup.

Skellerup's previous acquisition of 'Nexus foams' (high performance foams and soft material for healthcare, electronics, construction and comfort applications} on 30th April 2019. Thus FY2020 (1st July 2019 to 30th June 2020) was the first full year of profit contribution from Nexus. The result for Nexus from 1st May 2019 to 30th June 2020 were not disclosed, apart from saying they were "in line with expectations" (PR2019 slide 2). I am going to make the conservative assumption that no profits were made in this period of establishment. This means the incremental Nexus NPAT for FY2020 of $0.6m (PR2020 slide 3) represents the whole profit for this division that was acquired in FY2019 for a cash consideration of $6.663m

$0.6m / $6.663m = 9%

Not as good as 'Silclear', but still a great result.

I got the fire boot forecast wrong. It seems that any incremental sales made to Australian firefighters was wiped out as European sales reduced due to reduced firefighting boot sales half a world away. Nevertheless footwear profits were up by a 'small green slither' (PR2020, slide 3), which I estimate to be a $0.1m increase in NPAT for the year.

Skellerup look to be increasing their profits in what globally is not an easy market. That kind of performance would have to be confidence inspiring for shareholders. Whether they can maintain that profitability of 2HY2020 into HY2021 just finished will be the key to see if SKL's optimistic valuations by Mr Market are justified. But will the rising NZ dollar prove a profit sapping headwind? If we look in AR2020 p69.

"The Group seeks to cover up to 100% of the net foreign currency cashflow forecast for the next 12 month period with foreign exchange contracts."

So no currency headwinds, for FY2021 at least.

SNOOPY

[Snoopy]

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Industrial Division

Industrials may be a bit more challenging. The main 'driveshaft coupling gig' is Skellerup's Italian Factory supplying the Chinese manufactured (for Chinese domestic consumption) "Mercedes Benz E-Class L" cars. Sales figures to the end of January 2020 are here:

https://carsalesbase.com/china-car-sales-data/mercedes-benz/mercedes-benz-e-class/

CY2019 was a record year for this model in a year where auto sales in China were under pressure. January 2020 sales were a bit down and this was before the ramp up of the Coronavirus problems in China and subsequently Italy. Car sales in China are reported to be down 90% in February 2020. So we might be looking at a short term headwind here, even if the underlying demand for the Chinese made Mercedes product looks sound. In addition, major Automakers in Italy, including Fiat, Ferrari and Lamborghini have closed their factories in response to the Italian government’s orders on March 11th to close commercial activities for two weeks. To comply with the law, the Skellerup factory in Italy must have also closed, yet no announcement was made. I see the Skellerup share price started its recent steep decline on Mach 11th - co-incidence? According to the market update today offered by Skellerup,

"Skellerup facilities worldwide have been and continue to operate." Hmmmm....


The November 2020 year to date sale for the Mercedes E class sold in China shows sales down 37.6% in the calendar year to date, down to 62,155 units sold . This represents a drop of more than 37,000 drive couplings required for manufacture by Skellerup.

https://carsalesbase.com/european-car-sales-analysis-november-2020-models.

In a Covid-19 year, where total European brand sales look to be down between 15 and 20%, this is a large market under-performance.

Skellerup is also the preferred drive coupling supplier for Maserati. Maserati sales crashed by 45% between CY2018 and CY2019 down to 19,300 vehicles.

https://www.statista.com/statistics/463009/worldwide-vehicle-shipments-of-maserati/

I doubt if things improved when Covid-19 took hold of Italy in the second half.

Automotive was responsible for a NPAT profit decline of $1.2m (PR2020, p3).

I didn't expect a good result from Skellerup's driveshaft coupling manufacturing unit. But this is quite a lot worse than I expected. Skellerup acknowledge the decline, but say the automotive division is 'not a focus' (PR2020 slide 3). The bright side is that better things can be expected when the automotive market recovers. But with an ageing model line up for both Maserati and the Benz E Class, that could be some time away. I think a bounce back in Skellerup's 'Automotive' division is unlikely for FY2021.

SNOOPY

[Snoopy]

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Industrial Division

The heavy truck market in the US (the prime application for Skellerup's Masport branded vacuum pumps) has slowed and is expected to remain subdued over 2020 and 2021. Skellerup's pumps find application in both the portable toilet and septic tank industry and also the oil and gas market. The pumps are made in China (there is a 'Trump tariff cost' here), then integrated within systems within the United States.

https://www.fleetequipmentmag.com/act-research-heavy-vehicle-market-recovery-tempered/



Skellerup has taken their biggest hit of some $2m NPAT (PR2020 slide 3) from the US Oil and gas sector and the effect of US tariffs (Skellerup's tanker gas pumps are manufactured in China) . Low crude oil prices are bad for heavy truck tractors and their associated liquid tank trailers. This is because oil companies clamp down on capital expenditure when oil prices are low. However oil prices have since risen to pre-Covid levels again.

Furthermore A reduction of large crowd events would have dampened the demand for the truck pumps associated with the portable toilet and the septic tank industry. I concur with my previous comment about there being little prospect of recovery until FY2022 (although that is only 6 months away).

SNOOPY

[Snoopy]

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Industrial Division

Gulf supplies rubber sealing components for wastewater and fresh water piping. Although not sexy, with ageing infrastructure worldwide, this is a componentry application with ongoing demand, particularly in the United States..

'Deks', based in Australia, produces sealing and waterproofing products for roofing, plumbing and civil/underground applications.

In the council market, the aging water pipe infrastructure replacement business, particularly in New South Wales, provides a steady base for the business.



Sales of potable water and waste water sales were impacted by COVID-19 as infrastructure work was suspended and delayed. This is reflected in a year on year Infrastructure NPAT drop of $0.6m (PR2020 slide 3). I didn't predict such a downturn and I expect we will see a catch up. Water infrastructure is something that is essential. But given continued Covid-19 disruption, I would not expect any such catch up to be reflected in annual results until FY2022.

SNOOPY

[Snoopy]

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Industrial Division

The Gulf division supplies rubber componentry to US based tap and shower makers. The cuts to US interest rates should stimulate the US housing market. But high construction costs will keep housing affordability at bay for many, so new build sales are likely to be limited to about 10% of the market.

https://knowledge.wharton.upenn.edu/article/whats-ahead-for-the-u-s-housing-market-in-2020/

'Deks', based in Australia, produces sealing and waterproofing products for roofing, plumbing and civil/underground applications. Building approvals plunged 15%
in January 2020 after a 4% rise in December 2019.

https://tradingeconomics.com/australia/building-permits

"This marked the steepest decline in building permits since a 22.1 percent fall in December 2017, mainly due to a 35.5 percent slump in approvals for private sector dwellings excluding houses. In contrast, building permits for private sector houses rose slightly by 0.3 percent."

Given that the time between issuing a building permit and work starting is typically six months, the outlook for Deks does not look good for HY2021. But the outlook for the remaining financial year to the end of June looks reasonably buoyant.



'Roofing and Construction' boosted Skellerup's NPAT by $1.2m over FY2020 (PR2020 p3). Management cited "New products and improved execution in Australian market in particular" (PR2020 p4) as a reason for this. One such new product is the 'Dekdrain A15' for driveways and patios, designed for an axle weight of 1.5tonnes.

https://www.barbourproductsearch.info/A15_compressed+(2)-file105806.pdf?org=newspdf

Another is the new 'Deks Duobond' 'two part epoxy' for joining cast iron and concrete pipe and fitting components, which is approved for use with drinking water.

https://www.facebook.com/DEKS.products/videos/introducing-deks-duobond2-part-epoxy-for-water-infrastructure-commercial-and-res/580975766130532/

The US building permit trend is looking strong, with building permits issued in November 2020 higher than last years five year high in November 2019

https://www.census.gov/construction/nrc/pdf/newresconst.pdf?

Australia had three straight months of rises in building permit approvals in September, October and November of 2020,

https://tradingeconomics.com/australia/building-permits.

This augers well for the rest of the current financial year. Actual building activity tends to follow six months after a new building permit is issued. It appears, in retrospect, that the Covid-19 lock downs in Australia have transferred what was looking to be an extremely busy building period during HCY2020 into 2HCY2020. 2HCY2020 pre-Covid was looking weaker. 2HCY2020 is the same as HFY2021 for Skellerup, That means my previous forecast for HFY2021 was wrong, although with Covid delaying previous work at least I have an excuse to be wrong. If FY2020 for Skellerup 'Roofing & Construction' finished in a relatively weak way, yet profits were still up, I am expecting a strong FY2021 from 'Roofing and Construction'. If the FY2020 profit growth is matched, this will equate to a further rise in NPAT of $1.2m

SNOOPY

[Waltzing]

Great posting from MR S. Many thanks.

[Snoopy]

Skellerup themselves in their March 16th 2020 press release say:

"At this stage we continue to expect FY20 NPAT to be consistent with the result achieved in the pcp.”

Looking further out, I think we will see a decline in FY2021. But if you look at the detail of my capitalised dividend valuation model, this decline is already priced into my valuation.


The above is what I wrote in March 2020, So how is FY2021 looking after another nine months of wisdom?



Normalised Profit for FY2019$29.969m


add Agri Increment (a)$0.887m


less further Automotive decline($0.200m)


add US Oil/Gas recovery$1.000m


add Water Systems change$0.000m


add Further Roofing & Construction gain$1.200m


equals Total Forecast NPAT for FY2021$32.856m



This equates to earnings per share of: $32.856m / 194.753m = 16.9cps (based on EOFY2020 share numbers)

On 29th October 2020, Skellerup made their own estimate of a profit for FY2021: An NPAT of between $30m and $35m. However, there was no guidance given as to how this improved profitability might be achieved. My own figure is somewhere in the middle of that range, but does include some explanation as to where that extra profit might be coming from. Now we just need to wait for the half year result to see if Skellerup is on track.

Notes

(a) First half year Agricultural division revenue in the previous year was $44.214m (my post 921). Full year Agricultural division revenue was $93.609m (my post 922). So second half Agricultural division revenue was:

$93.609m - $44.214m -= $49,395m

Annualizing second half revenue to give an estimate of FY2021 revenue:

2x $49,395m = $98,650m

This gives an incremental profit gain of: 0.178 x ($98.650m - $93.609m) = $0.887m

(b) The interest bill has slightly increased during FY2020. The net interest payment over HY2020 was $1.268m (my post 921). The interest paid in the second half was (using figure in post 932):

$2.582m - $1.268m = $1.314m

However, the difference is too small to consider using it to adjust my estimate of the following year's interest bill.

SNOOPY

[Snoopy]

I am using the table below as a tool for predicting FY2021 income. The input figures are taken from the Segment Information in the half year report.



Agri DivisionIndustrial DivisionTotal DivisionsTax as Declared


1/ EBIT$10.092m$9.919m


Liabilities$11.414m$34.989m$46.403m
segment

% Liabilities24.6%75.4%100.0%


2/ less Apportioned Finance Cost($0.312)($0.956m)($1.268m)


Revenue$44.214m$78.850m$123.064m
segment

% Revenue35.9%64.1%100%


3/ less Apportioned Corporate Cost($0.723m)($1.290m)($2.013m)


4/ equals Divisional EBT$9.057m$7.673m$16.730m


5/ less Tax at 28%$2.536m$2.148m$4.684m$4.626m


6/ equals Divisional NPAT (as calculated)$6.521m$5.525m$12.046m



Notes

a/ There is an error of $68,000 in the tax paid over the half year. This is because not all income tax is paid at 28% (Skellerup's international facilities are domiciled for tax purposes in different countries and are under different tax regimes) and there is some variation in tax payment timing. Nevertheless I consider this error too small to correct for.

SNOOPY

[Snoopy]

I am using the table below as a tool for predicting FY2021 income. The input figures are taken from the Segment Information in the full year report.



Agri DivisionIndustrial DivisionTotal DivisionsTax as Declared


1/ EBIT$25.405m$30.862m


Liabilities$16.069m$35.990m$52.059m
segment

% Liabilities30.9%69.1%100.0%


2/ less Apportioned Finance Cost($0.798)($1.784m)($2.582m)


Revenue$93.609m$157.932m$251.541m
segment

% Revenue37.2%62.8%100%


3/ less Apportioned Corporate Cost($1.407m)($2.376m)($3.783m)


4/ equals Divisional EBT$23.200m$26.702m$49.902m


5/ less Tax at 28%$6.496m$7.477m$13.973m$10.767m


6/ equals Divisional NPAT (as calculated)$16.702m$19.225m$35.927m


Net Profit Margin (NPAT/Revenue) 17.8%12.2%



Notes

a/ There is an error of $3.206m in the tax paid over the full year. This is because not all income tax is paid at 28% (Skellerup's international facilities are domiciled for tax purposes in different countries and are under different tax regimes) and there is some variation in tax payment timing. I don't have sufficient information about tax bills in differing overseas jurisdictions to correct for this.

SNOOPY

[Snoopy]

Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the numbers into the Buffett style ten year growth model.

For this model I am using an ROE of 15.0% (the actual average of the last 5 years) and a dividend payout ratio of 84% (the actual dividend payout of the last 5 years). I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax must be deducted from dividends compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction assuming all dividends going forwards are 50% imputed.




SOFY


FYAsset BackingOperations Earnings
add OCI (*)less Dividend
equals Retained EarningsUnimputed Dividend Tax


2020 (historical)0.9160.1500.0110.130
0.031
(0.018)


20210.948
0.142

0.1200.022(0.017)


20220.9700.146

0.1230.023(0.017)

][
20230.9930.149
0.1250.024(0.018)


20241.0170.153
0.1290.024(0.018)


20251.0410.156
0.1310.025(0.018)


20261.0660.160
0.1340.026(0.019)


20271.0920.164
0.1380.026(0.019)


20281.1180.168
0.1410.027(0.020)


20291.1450.171
0.1440.027(0.020)


20301.1720.176
0.1480.028(0.021)


20311.2000.180



Ten Year Total
1.333(0.205)



(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

With FY2031 projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price today of $2.95, the expected compounding annual return 'i' can be calculated from the following equation.

$2.95(1+i)^10 = (2.84 +1.13) => i=3.01%

This projected 3.01% return is a net return per year. The equivalent gross return is 3.01%/0.72 = 4.18%. While this kind of return looks attractive, compared with term deposit interest rates under 2%, I don't believe it is sufficient for Warren to be interested in buying into Skellerup. What we have here is a very good company, but one that is what I would term 'fully priced'. The fact that I am predicting the share price in ten years time ($2.84) to be slightly lower than the share price today ($2.95), despite solid incremental operational growth says it all.

What Skellerup share price (P) would Warren need to buy at to get his much touted 15% compounding return per year?

P(1+0.15)^10 = (2.84+1.13) => P= 98.1c



Market movements in the SKL share price over the last few months demand another look at modelled returns for SKL shareholders.

With FY2031 Buffett modelled projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price on 09/01/2020 of $3.80, the expected compounding annual return 'i' can be calculated from the following equation.

$3.80(1+i)^10 = (2.84 +1.13) => i=0.44%

That is not a misprint. I am projecting an annual compounding return of less than one half of one percent per year over a ten year period. This is extraordinary. With major banks now offering a 'measly' 0.9% over a five year term, what my modelling is saying is that such a term deposit investment will be roughly twice as good as investing in Skellerup shares bought today! Could those bankers be 'good guys' after all?

Such a result has caused me to look deeper into the relevance of such 'Buffett modelling'. There are two areas where my model is diverging significantly from what is happening today.

1/ Return On Equity

The first point I note is that my modelled earnings per share for FY2021 of 14.2cps is a long way south of my incrementally modelled 'eps' prediction of 16.9cps (my post 920). In fact my 'Buffett modelled earnings' don't exceed my 'incrementally modelled forecast' figure until FY2029. What has caused this disparity? It is the return on equity figure of 15% that I have used in the Buffett model. If my incrementally modelled earnings come to fruition, and they are in line with Skellerup's own forecasts, then we are talking about a NPAT of $32.856m for FY2021. Based on EOFY2020 shareholder equity, this gives a projected ROE for FY2021 of:

$32.856m / $184.563m = 17.8%

The difference between 15% and 17.8% may not sound a lot. But compounded over ten years, that difference on, say $1000 of compounding equity, can be significant:

$1,000 x 1.15^10 = $4,046

$1,000 x 1.178^10 = $5.146

A 20% gain is significant. But we have to remember this is being accumulated over ten years. The incremental gain we are looking at for one year on a '20% in a decade' gain is:

(1+r)^10= 1.2 => r= 0.18 => an incremental return rate of 1.8 percentage points per year.

2/ Price to Earnings Ratio

If my incrementally modelled earnings come to fruition, then based on Friday's closing share price of $3.80, this means SKL is trading on a forecast PE ratio of:

$3.80 / $0.189 = 20

That doesn't sound too excessive for a well run company with earnings growing at 16.9/ 14.8 = 14% this year. But a PE of 20 will require similar earnings growth in FY2022. That may happen. But Mr Market is pricing in that it has already happened. A PE of 20 is a long way north of the 15.6 historical average. Perhaps such a re-rating is justified? Because so many of Skellerup's products fall under the 'essential ' moniker, they hardly experienced a Covid-19 downturn. So maybe an anti-shock PE premium lift to 20 is fair?

Summary

What we have here is a very good company, but one that is what I would term 'more than fully priced'. Of course that won't stop the share price going even higher in the short term. The fact that my Buffett modelling is predicting the share price in ten years time ($2.84) to be almost a dollar lower than the share price today ($3.80), despite solid incremental operational growth, says something. We are going to have to regard today's earnings as 'busting the historical norm pattern' and 'being permanently more efficient' to make an investment in Skellerup today make sense. We are also going to need that PE ratio of 20 to not reduce going forwards. I have to convince myself that 'things really are different this time' for my re-rating assumptions to be enduringly valid. And I know from past experience this is a dangerous investment track to go down.

Nevertheless Skellerup remains today as one of the few traditional NZX listed shares with genuine global growth opportunities. I have decided to keep my full holding for now, but keep a hawk's eye on any developments.

SNOOPY

[nztx]

Market movements in the SKL share price over the last few months demand another look at modelled returns for SKL shareholders.

With FY2031 Buffett modelled projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price on 09/01/2020 of $3.80, the expected compounding annual return 'i' can be calculated from the following equation.

$3.80(1+i)^10 = (2.84 +1.13) => i=0.44%

That is not a misprint. I am projecting an annual compounding return of less than one half of one percent per year over a ten year period. This is extraordinary. With major banks now offering a 'measly' 0.9% over a five year term, what my modelling is saying is that such a term deposit investment will be roughly twice as good as investing in Skellerup shares bought today! Could those bankers be 'good guys' after all?

Such a result has caused me to look deeper into the relevance of such 'Buffett modelling'. There are two areas where my model is diverging significantly from what is happening today.

1/ Return On Equity

The first point I note is that my modelled earnings per share for FY2021 of 14.2cps is a long way south of my incrementally modelled 'eps' prediction of 16.9cps (my post 920). In fact my 'Buffett modelled earnings' don't exceed my 'incrementally modelled forecast' figure until FY2029. What has caused this disparity? It is the return on equity figure of 15% that I have used in the Buffett model. If my incrementally modelled earnings come to fruition, and they are in line with Skellerup's own forecasts, then we are talking about a NPAT of $32.856m for FY2021. Based on EOFY2020 shareholder equity, this gives a projected ROE for FY2021 of:

$32.856m / $184.563m = 17.8%

The difference between 15% and 17.8% may not sound a lot. But compounded over ten years, that difference on, say $1000 of compounding equity, can be significant:

$1,000 x 1.15^10 = $4,046

$1,000 x 1.178^10 = $5.146

A 20% gain is significant. But we have to remember this is being accumulated over ten years. The incremental gain we are looking at for one year on a '20% in a decade' gain is:

(1+r)^10= 1.2 => r= 0.18 => an incremental return rate of 1.8 percentage points per year.

2/ Price to Earnings Ratio

If my incrementally modelled earnings come to fruition, then based on Friday's closing share price of $3.80, this means SKL is trading on a forecast PE ratio of:

$3.80 / $0.189 = 20

That doesn't sound too excessive for a well run company with earnings growing at 16.9/ 14.8 = 14% this year. But a PE of 20 will require similar earnings growth in FY2022. That may happen. But Mr Market is pricing in that it has already happened. A PE of 20 is a long way north of the 15.6 historical average. Perhaps such a re-rating is justified? Because so many of Skellerup's products fall under the 'essential ' moniker, they hardly experienced a Covid-19 downturn. So maybe an anti-shock PE premium lift to 20 is fair?

Summary

What we have here is a very good company, but one that is what I would term 'more than fully priced'. Of course that won't stop the share price going even higher in the short term. The fact that my Buffett modelling is predicting the share price in ten years time ($2.84) to be almost a dollar lower than the share price today ($3.80), despite solid incremental operational growth, says something. We are going to have to regard today's earnings as 'busting the historical norm pattern' and 'being permanently more efficient' to make an investment in Skellerup today make sense. We are also going to need that PE ratio of 20 to not reduce going forwards. I have to convince myself that 'things really are different this time' for my re-rating assumptions to be enduringly valid. And I know from past experience this is a dangerous investment track to go down.

Nevertheless Skellerup remains today as one of the few traditional NZX listed shares with genuine global growth opportunities. I have decided to keep my full holding for now, but keep a hawk's eye on any developments.

SNOOPY

I'm watching you

Thanks for the updates snoops .. ;)

[Ggcc]

$4.14 now. Where will it stop?

[Biscuit]

$4.14 now. Where will it stop?

Won't stop til it's over-priced .... which possibly it is already.

[BeeBop]

I think it isn't overpriced based on the brands and their future potential. Looking backwards, it is overpriced but I am suspecting that they may be coming into 'their time'.

[Scrunch]

I think it isn't overpriced based on the brands and their future potential. Looking backwards, it is overpriced but I am suspecting that they may be coming into 'their time'.

For all the current holders I hope they come in near, or above the top of the guidance range of $30-$35m. I think they are going to need to do that for the share price not to fall back on the upcoming result.

The downside possibility is that the result hits the bottom end of the guidance. This could be achieved if the 2nd half shows the same 9% growth that the 1st half did over the prior comparative period. However if SKL is now "only" about 9% more profitable than a year ago, is it really worth 60% more? If they are at the bottom end of the range stated a 10-20% fall is entirely possible.

Disc recently sold out at $3.90 as I think there's just a bit too much hype built into the current price. Still a good company but not at any price.

[Waltzing]

Detective Inspector SNOP on the job.

We are hoping for a bit of a miss. Previously held but its a pandemic stock and really far more defensive than one could have imagined.

Next time there is a crash this is one we want.

Sort out your crash stocks now. Crashes show you the best stocks for defensive positions.

[Biscuit]

Sort out your crash stocks now. Crashes show you the best stocks for defensive positions.


Inspector Jabberwocky, that's not a bad strategy. Some crashes are different to others though.

[Getty]

I used to think like that too,
But, if a rising tide lifts all boats, what does a falling one do??

[Biscuit]

I used to think like that too,
But, if a rising tide lifts all boats, what does a falling one do??

When I was a boy we all knew to set sail on the ebbing tide as that would provide the push to set you on your way.

[Getty]

When I was a boy, playing on the shiny slides, and the slippery slopes, I learnt it was difficult to stop, many times ending in a crash landing.

Kids playing on computers and cellphones, a la Sharsies, may have not learnt that...

[Ggcc]

When I was a boy, playing on the shiny slides, and the slippery slopes, I learnt it was difficult to stop, many times ending in a crash landing.

Kids playing on computers and cellphones, a la Sharsies, may have not learnt that...
I have reduced. Also as I am buying another house and need the cash. Still find this share a solid A+ in regards with how COVID affects all businesses. SKL seem to keep doing well..

[Ggcc]

What are the chances of SKL being a takeover target? Someone is keen to sell, but someone looks seriously like they want to buy. The price keeps going up. Until the results come out I’m only guessing.

[Waltzing]

Market darling ... regretting we sold... MR P may also be rethinking... prehaps another global crisis in 10 years.... mark it down as a possible pandemic performer..

[Ggcc]

https://www.nzx.com/announcements/367757

Wow just wow. Up and away we go

[winner69]

https://www.nzx.com/announcements/367757

Wow just wow. Up and away we go

Can’t do much better than that eh

[percy]

https://www.nzx.com/announcements/367757

Wow just wow. Up and away we go

An outstanding result.
Wish I still held...lol.

[bull....]

great result , glad i brought after last result

[Lion_graf]

Shouldnt have sold half my holding yesterday. Ah well. Great result for skl

[RTM]

An outstanding result.
Wish I still held...lol.

You can't win them all Percy.
Pleased I doubled up at $1.82. Nearly 6% of my portfolio.
Good to see a company making stuff doing well...especially a NZ Company.

Over the moon with the result !

[Ggcc]

You can't win them all Percy.
Pleased I doubled up at $1.82. Nearly 6% of my portfolio.
Good to see a company making stuff doing well...especially a NZ Company.

Over the moon with the result !

I sold half of my holding at around $3.89-$4, as I am buying a house. Still have a good % in my portfolio

[macduffy]

Yes, an outstanding result. I hold. Sometimes it's better just to sit on one's hands, ignore the noise, and await results!

:cool:

[BeeBop]

While I was cautious about the result, for me SKL has been a screaming buy for two years based on a forwards look. Their product portfolio, positioning, debt, and technology is really good. Fortunately for me, they have been under the radar, I wonder if that will continue?

[Biscuit]

Yes, an outstanding result. I hold. Sometimes it's better just to sit on one's hands, ignore the noise, and await results!

:cool:

Yes, that is often the best strategy. I have held SKL for many years. In the past, they've almost looked like they were getting traction at times only to fall back. But they do seem to have got themselves sorted out in recent years and found a way to consistency.

[IAK]

Well done Skellerup! Good t see the increase in interim dividend payout.

[Jim]

I held this since it was from Brierley Investment and was called Skellmax. Thanks God at long last it has made some real money

[traineeinvestor]

One of the many things I liked about the result was the reduction in debt. They now have a huge amount of balance sheet flexibility to do acquisitions, pay a special dividend or do a buy back later in the year if they wish.

As a side note, balance sheet discipline following the Christchurch earthquake was one of the reasons I made my first purchase at around that time.

Disclosure: still holding

[Ggcc]

Up in leaps and bounds today

[RTM]

Up in leaps and bounds today

Sure is...yahoo...whats going on ?

[Soolaimon]

Up in leaps and bounds today

Sure is, enough to get me into the bottom drawer and sell a few. Held for many years.

[Biscuit]

Up in leaps and bounds today

It's been going gangbusters. Has snuck up past MFT to become my largest NZX holding - I did not expect that! Probably is time to re-balance. I like the company but not sure it is my absolute favourite!

[nztx]

Really good recent SP advances -- thanks to all who posted the heads up 5-6 months ago here .. good pointers :)

[Greekwatchdog]

Info from NZ Herald https://www.nzherald.co.nz/business/market-close-strong-nz-dollar-and-mixed-results-weigh-down-sharemarket/6YB3WZHOGZVLBX35WFTW4Z4LQ4/ Paywall - Cancer diagnostic firm Pacific Edge and Skellerup Holdings will soon be added to the FTSE Global Small Cap Index. Skellerup surged 35c or 8.33 per cent to $4.55, and Pacific Edge climbed 7c or 6.93 per cent to $1.08.

[Ggcc]

Info from NZ Herald https://www.nzherald.co.nz/business/market-close-strong-nz-dollar-and-mixed-results-weigh-down-sharemarket/6YB3WZHOGZVLBX35WFTW4Z4LQ4/ Paywall - Cancer diagnostic firm Pacific Edge and Skellerup Holdings will soon be added to the FTSE Global Small Cap Index. Skellerup surged 35c or 8.33 per cent to $4.55, and Pacific Edge climbed 7c or 6.93 per cent to $1.08.
That sounds truly lovely

[Waltzing]

yes well im going to have a lot to answer for to the team on this one... Ill point out to them that a crystal ball wasnt available and that even MR P sold out...Down as a major defensive for next time... history repeats so im told.

dont forget the freights ..whatch the baltic dry.

[BeeBop]

yes well im going to have a lot to answer for to the team on this one... Ill point out to them that a crystal ball wasnt available and that even MR P sold out...Down as a major defensive for next time... history repeats so im told.

dont forget the freights ..whatch the baltic dry.

Most people missed this because they looked backwards and did not look forwards with serious consideration of their products/brands...it did look fairly priced (backwards) but under valued forwards....they can bolt on many OEMs.

[Waltzing]

we made money on it but did not hold after it returned to profit for us... big mistake. a much underrated company which we now have huge respect for.

[Snow Leopard]

Down 6% - Bit of a drop over the day:

https://images.squarespace-cdn.com/content/v1/50c36ec2e4b0866f8b114692/1586545235437-TUSAEXA6XYDHGUSTZJST/ke17ZwdGBToddI8pDm48kML2NBqZuPb-8PdC_49OiRx7gQa3H78H3Y0txjaiv_0fDoOvxcdMmMKkDsyUqM SsMWxHk725yiiHCCLfrh8O1z5QPOohDIaIeljMHgDF5CVlOqpe NLcJ80NK65_fV7S1Ue-k0XmLCo1_VNdpVUBpFUIM_M8vkbnZt-QqCU8a92-DV1D9ytEOYPF5EokCoVRdEg/AN6V1747-2-Snow-Leopard.jpg?format=640w

[Jerry]

Super pussy-cat pic; but why did SKL drop like that? Price $4.28 and VWAP at $4.23. No market announcement... ex-div 4th March.. not that.

[BlackPeter]

Super pussy-cat pic; but why did SKL drop like that? Price $4.28 and VWAP at $4.23. No market announcement... ex-div 4th March.. not that.

12389

Well, it well might be just normal SP jitter - so far it just went slightly under the MA30 of this uptrend as it did before without harm ...

On the other hand - the recent rise looks somewhat unsustainable and this well might be the start of a healthy retraction :): - SP just looks a bit top heavy -

and just for the pessimists under us - this could well be an emerging head and shoulders scenario with a bit rugged head just shaping up ...

Just take your pick :p - I am sure one of them will be right ...

[Jerry]

Why, thank you kindly BP. That covers most bases, y'all!

[winner69]

Another earnings upgrade

Seems everything going good for SKL

[waikare]

Another earnings upgrade

Seems everything going good for SKL

Part of David's statement, looking good.

19/4/2021, 8:30 am MKTUPDTE
Stronger than expected Q3 sales and earnings has caused Skellerup to increase its forecast full year FY21 net profit after tax (NPAT) to a range of $37 to $39 million. This compares to FY20 NPAT of $29.1 million.

CEO David Mair said all businesses have continued to perform well.

[Waltzing]

What a wonderful defensive business.

As more variants of the virus turn up that evade the vaccines, this pandemic looks to get worse not better.

This stock is proving to be a very underrated business.

[Biscuit]

Another earnings upgrade

Seems everything going good for SKL


Only a couple of months since the last upgrade, they are on fire.

[Snow Leopard]

Cool

And still plenty of time for another couple of upgrades before the end of the financial year.

:t_up:

[traineeinvestor]

Another positive announcement from a company that has consistently delivered for shareholders.

I note the word of caution on the potential for international shipping delays to affect SKL's business. They've done well to deal with it so far but it is a caveat over future results.

Disclosure: happy holder since 2016

[winner69]

Another positive announcement from a company that has consistently delivered for shareholders.

I note the word of caution on the potential for international shipping delays to affect SKL's business. They've done well to deal with it so far but it is a caveat over future results.

Disclosure: happy holder


Another positive announcement from a company that has recently consistently delivered for shareholders.

I added the recently for you

But no worries about the past - the future brighter than ever

[BlackPeter]

Another positive announcement from a company that has recently consistently delivered for shareholders.

I added the recently for you

But no worries about the past - the future brighter than ever

You did beat me to it ... Anybody remembering the GFC? - SKL shareholders didn't look that happy during that time :):

[winner69]

You did beat me to it ... Anybody remembering the GFC? - SKL shareholders didn't look that happy during that time :):

....and many years after the GFC ....but heck let bygones be bygones

Skellerup is now a star performer

[traineeinvestor]

Another positive announcement from a company that has recently consistently delivered for shareholders.

I added the recently for you

But no worries about the past - the future brighter than ever

Fair comment. I've edited my post ... :eek2:

[Soolaimon]

You did beat me to it ... Anybody remembering the GFC? - SKL shareholders didn't look that happy during that time :):

Yes I remember it well... I bought more then and I bought more today.
Happy holder for many years.

[Biscuit]

And yet its down on the day, go figure

[nztx]

Just a few words -- follow the old smart money (Cushing & Co )

when they jump ship, time to sit up & look around.. ;)

they're on the board with this one & a few others too .. The No Moa now Co. too .. ;)

[Snoopy]

Just a few words -- follow the old smart money (Cushing & Co )

when they jump ship, time to sit up & look around.. ;)


Does Liz Coutts count as 'old money'? I think she was mentored by dear old Sir Selwyn in the early days. A couple of hundred thousand SKL shares cashed out on 23rd April. $869,800 / 200,000 = $4.35 per share for our Liz as announced to the stock exchange today. Mind you still 720,000 shares of skin in the game so hardly 'jumping ship'. A balmy winter forecast for Auckland means that 'new deck' beckons?

SNOOPY

[blackie]

in yahoo news may 2nd
https://nz.news.yahoo.com/why-20-return-capital-skellerup-163231642.html

[Getty]

Does Liz Coutts count as 'old money'? I think she was mentored by dear old Sir Selwyn in the early days. A couple of hundred thousand SKL shares cashed out on 23rd April. $869,800 / 200,000 = $4.35 per share for our Liz as announced to the stock exchange today. Mind you still 720,000 shares of skin in the game so hardly 'jumping ship'. A balmy winter forecast for Auckland means that 'new deck' beckons?

SNOOPY

Dear old Sir Selwyn?

Wasn't he the one that cheap old Sir Bob Jones mentioned in one of his books, that he was only suitable for doing the local plumbers accounts?

[Snoopy]

Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.9cps

Notes:

a/ Results have had foreign exchange currency gains removed (FY2020 $0.685m)

d/ FY2020 result adds back an after tax $0.400m 'before IFRS16' adjustment to allow a like with like comparison of NPAT with previous years.
e/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )




Return on Equity = Net Profit After Tax / Shareholder Funds at End of Financial Year

2016: $22.849m /$155.855m= 14.7%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%

14.7% rounds up to 15% in whole number terms.



in yahoo news may 2nd
https://nz.news.yahoo.com/why-20-return-capital-skellerup-163231642.html


Thanks for the 'Simply Wall Street' reference Blackie. That was quite a bullish review on a company that I know well. A large factor in the bullishness was the touted 20% 'ROCE'. ROCE (Return on Capital Employed) is similar measure to the ROE (Return on Equity) that I have calculated above for the preceding five years. The difference being:

ROCE = (Earnings Before Interest and Tax) / (Total Assets - Current Liabilities)

ROE = (Net Profit After Tax) / (Total Assets - Total Liabilities)

If I take the unadjusted earnings from FY2020 I calculate ROCE as follows:

($39.631m + $2.582m) / ($283.642m - $36.550m) = 17.1%

The 'Simply Wall Street' guys used slightly different numbers to get an ROCE of 20%. I cannot explain where SWS get their slightly different numbers from. But both 17.1% and 20% are good figures, and the difference is not material to the broader discussion. The article suggests that an ROCE of 20% should be used to project earnings going forwards. Given the average ROCE over the previous five years would have been significantly below this figure, I believe that would be a rather too aggressive assumption.

I don't use ROCE to evaluate companies myself. That is because companies:

1/ do have to pay interest AND
2 do have to pay income tax, AND

that 'money out' is money that cannot be reinvested for future growth. ROCE ignores interest and tax and that IMO gives a less accurate picture of the future capital that the company can internally generate.

My post 882 suggests an earnings per share growth rate of some 3% per year, verses the SWS figure of 8.45% per year. The justification for that 8.45% is that earnings have grown even faster than that over the previous five years (10.3% per year). My adjusted calculations (post 857) show a five year 'eps' growth rate of:

11.1(1+g)^5 - 14.8 => g = 5.9%, or much lower than SWS is telling us happened.

So based on historical record reality, I think the SWS projected growth rate is too high. It would be great if I was wrong and SWS turned out to be right. But I like to do my calculations based on earnings growth that can be demonstrated to have happened in the past, and I can't replicate the SWS calculations on growth.

With SKL trading at $4.50 on the day SWS published their analysis suggestion is that this price is only 43,2% of 'fair value':

$4.50 / 0.432 = $10.42 (SWS fair value for SKL)

Good luck with that.

'Warning sign 1' highlighted by SWS was the insider share sell down by chairman Liz Coutts (my post 977) that I do not consider an issue.
An unstable dividend track record' is the other point of concern. However, this statement appears to be just plain incorrect as the dividend has been increasing every year for the last few years. Skellerup even continued to pay dividends through the initial Covid-19 scare.

A problem I see is that the share price has grown by 100% purely as a result of PE expansion. I am always suspicious as to the sustainability of this, even though an historical adjusted PE of 30 (15 is more the historical average for SKL) doesn't look out of line with some other well performed shares in the market today. In the meantime I think I will continue to hold my SKL shares until they reach that SWS target of $10.42 ;-). Nevertheless I feel that may be a considerable number of years into the future!

SNOOPY

discl: hold SKL and not increasing my holding at today's prices.

[blackie]

cheers Snoop
thanks for the clarification ROCE Vs ROE.
I always enjoy and learn a lot from your detailed posts :t_up:

[winner69]

My mate Snoops says he prefers ROE over ROCE because ROCE leaves out interest and taxes (which are real cash). Fair enough

I prefer to use an equivalent thing called ROIC (Return on Invested Capital) which measures the returns from what shareholders and lenders have invested in the business. Formula is (EBIT * (1 - Tax Rate) / (Equity + Borrowings)

You can see it counts tax so gives tax paid returns to investors (both shareholders and lenders) - shareholders gets divies and lenders get interest and some may be reinvested in the business.

I think its a better measure of how a company uses capital than ROE because it expresses returns on total capital used rather than just what shareholders have put in.

One always wants to see ROIC higher than the company's cost of capital - otherwise it is destroying economic value

In SKLs case ROIC is currently 13.4% which is pretty good. I reckon their cost of capital is about 7% (PWC reckon 4.5%) so SKL are making pretty good excessive profits (over the cost of capital employed)

Those excessive profits are about $14,5m (some call this EVA which is Economic Value Added)

There's another thing called MVA which is Market Value Added - this being the difference between the market cap of the company and shareholders equity. In SKL case the market is valuing SKL equity of $184m at $882m so MVA is just under $700m - cool eh

This MVA of $700m is in reality the present value of all the SKL excessive profits (over its cost of capital) in the future.

Working backwards it sort of implies that these are growing to grow at about 5% pa

Summary - SKL a value creating company that has been rewarded to the tune of $700m (today) for being so ...cool eh

Well, that occupied me with the rain coming down outside but facing up to taking the dog out in the rain




This is essentially where SWS was coming from. Much better than PE ratios etc which are in esence a cheats way of doing DCFs without realising it

[Snoopy]

cheers Snoop
thanks for the clarification ROCE Vs ROE.
I always enjoy and learn a lot from your detailed posts :t_up:


Yes, and if I might offer a few more thoughts on the distinction.

ROCE = (Earnings Before Interest and Tax) / (Total Assets - Current Liabilities)

ROE = (Net Profit After Tax) / (Total Assets - Total Liabilities)

I think which of the two metrics you regard as 'better' depends on the angle at which you are approaching the company.

If you are looking at taking over the company for example, the ROCE is probably the better measure of how good the 'underlying bones' of any company is. This is because the divisor principally(*) using 'total assets', takes the amount of long term borrowing the company has 'out of the equation'. If you are taking over a company the amount of long term borrowing can be changed, simply by increasing or decreasing the amount of shareholder capital that any new owner wants to leave in there. As a new owner, I would be more interested in how good the 'underlying bones' are of what I want to buy, not the capital position that the previous owner put the company into.

By contrast as an investor, I am very interested in the amount of interest and tax that a company is paying today, because through my proportional ownership as a shareholder and our imputation credit system, it is I that is paying those interest bills and paying that tax. For me as an investor, that makes ROE the hands down winner of the two.

(*) I am not sure why 'current liabilities' are subtracted out. If what are normally part of a company's 'long term liabilities' happen to be maturing in the current year, this statistic will be functionally distorted by doing so. I guess most companies either have staggered debt maturities or reset their banking arrangements before the year those banking arrangement expiry dates fall due. So in practice this isn't a big issue. The other part of 'current liabilities' relates to how quickly you as a company pay your bills. If you decide not to pay your creditors, for example, then your 'current liabilities' will increase and so will your ROCE. Taking 'current liabilities' out of the denominator means that management that do not pay their bills on time are 'rewarded' with a higher ROCE rating. Is this statistic saying that business owners who keep their suppliers squashed down with late payments to the supplier begging bowl are better business people?

SNOOPY

[winner69]

The reward for being a wealth creator (ie increasing returns on invested capital) has been amazing over the last 5 years

Where as shareholder funds per share have increased from $0.81 in 2016 to about $0.97 Skellerups MVA per share has increased from $0,45 to $3.55

So since 2016 share price up $3.27 - of which $3.10 has come as that reward for doing so well

Truly staggering

One does have to think that maybe such 'market rewards' wont be as much over the next five years

[Snoopy]

ROCE = (Earnings Before Interest and Tax) / (Total Assets - Current Liabilities)

If I take the unadjusted earnings from FY2020 I calculate ROCE as follows:

($39.631m + $2.582m) / ($283.642m - $36.550m) = 17.1%

The 'Simply Wall Street' guys used slightly different numbers to get an ROCE of 20%. I cannot explain where SWS get their slightly different numbers from.


Sometimes I get so used to doing certain calculations 'my way' I forget that 'real analysts' do things differently. When you are doing a calculation over an 'asset base' it is more usual to try and represent that 'asset base' as an average value over the entire year. I just take the end of year figure as representative. If we take the start of the year and the end of the year as representative measuring points of the asset base over the year, the calculation of ROCE changes to this:

($39.631m + $2.582m) / 0.5[($283.642m - $36.550m) + ($257.059m - $28.913m)] = 17.8%

That still doesn't get us to the SWS figure of 20%. But I can do one better. We also have the half year balance sheet figures as found in the half year annual report. So we can create a 'triangulated' picture of assets that will give us a better annual view picture. Incorporate that picture and the ROCE calculation changes again to this:

($39.631m + $2.582m) / 0.333333[($283.642m - $36.550m) + ($275.347m - $29.906m) +($257.059m - $28.913m)] = 17.6%

We are still not close to that 20% figure and this is as detailed as I can make my calculation from the information that is in the public domain.

At this point I should mention that the reason I do not do this more extensive view of the asset base picture normally is that it is all historical information anyway. As an investor I am interested in future indicators. Generally the best 'future indicator' is the most recent information and that is the last published balance sheet. Finally I should add that not doing the asset averaging that I have done in this example is so much easier! If I can save work and make the calculation more relevant at the same time, why not do it?

SNOOPY

[Snoopy]

My mate Snoops says he prefers ROE over ROCE because ROCE leaves out interest and taxes (which are real cash). Fair enough

I prefer to use an equivalent thing called ROIC (Return on Invested Capital) which measures the returns from what shareholders and lenders have invested in the business. Formula is

(EBIT * (1 - Tax Rate) / (Equity + Borrowings)

You can see it counts tax so gives tax paid returns to investors (both shareholders and lenders) - shareholders gets divies and lenders get interest and some may be reinvested in the business.

I think its a better measure of how a company uses capital than ROE because it expresses returns on total capital used rather than just what shareholders have put in.


There is one other reason why I calculate ROE. I need that figure as part of my compounding earnings spreadsheet calculation for those companies that pass the 'Buffett Test'. But your post got me thinking Winner.......

I had considered that as a shareholder I owned the company equity (or a share of it at least) while the banks owned the debt. I was much more interested in the bit of the company that I owned and less interested in what the banks owned. Thus I was more interested in ROE (based on my equity) rather than ROIC (because that includes the banks money in the business that I have no claim to). But that thinking is not quite right is it?

As a part company owner, I have a contract with the bank to repay any money they lend to me. So although the bank loan money is not my money, I am still responsible for it, in the sense that my business is using it. That means that for each share I own, I own a portion of the company equity plus a share of the company responsibility in looking after and using any bank loans the company has. Thus ROIC ( EBIT * (1 - Tax Rate) / (Equity + Borrowings) ) is an entirely personal measure of return for shareholders and not a hybrid measure of return for shareholders and bankers as I had previously thought. (My incorrect logic in assuming ROIC was a hybrid measure of return is the reason I had not paid much attention to it up until now).

I don't know why I haven't figured all this out before now. I guess I am a bit slow at times :-( ........

To some extent though Winner, I think you have fallen into the same trap as I did. You say:

"ROIC (Return on Invested Capital) which measures the returns from what shareholders and lenders have invested in the business."

In fact ROIC is all about 'shareholder returns' only, because the shareholders dictate what capital the lenders put into the business. ROIC does not measure the returns on what lenders have invested in the business, as your sentence above implies. Lenders capital returns are the interest they are paid on their loan capital lent to the company are they not? - nothing directly to do with ROIC!

SNOOPY

[Snoopy]

My post 882 suggests an earnings per share growth rate of some 3% per year, verses the SWS figure of 8.45% per year. The justification for that 8.45% is that earnings have grown even faster than that over the previous five years (10.3% per year). My adjusted calculations (post 857) show a five year 'eps' growth rate of:

11.1(1+g)^5 - 14.8 => g = 5.9%, or much lower than SWS is telling us happened.

So based on historical record reality, I think the SWS projected growth rate is too high. It would be great if I was wrong and SWS turned out to be right. But I like to do my calculations based on earnings growth that can be demonstrated to have happened in the past, and I can't replicate the SWS calculations on growth.




There's another thing called MVA which is Market Value Added - this being the difference between the market cap of the company and shareholders equity. In SKL case the market is valuing SKL equity of $184m at $882m so MVA is just under $700m - cool eh

This MVA of $700m is in reality the present value of all the SKL excessive profits (over its cost of capital) in the future.

Working backwards it sort of implies that these are growing to grow at about 5% pa


I am going to have one last crack at sorting out these earnings growth figures. Projected earnings growth figures make an enormous difference to the value of a company. It bothers me intensely that a firm like Simply Wall Street (SWS) can have such a wildly different view of earnings growth than the views of Winner (on future growth) and myself (on historical growth).

My first thought is that perhaps SWS are talking about EBIT growth and not NPAT growth. After all ROCE is based on EBIT and not NPAT. We are looking the the five year period book ended by the end of FY2015 and the end of FY2020.

EBIT for FY2015 was $31.119m. Per share this amounts to: $31.119m / 192.806m = 16.1cps

EBIT for FY2020 was $42.486m. Per share this amounts to: $42.486m / 194.753m = 21.8cps

To calculate the five year growth rate 'g':

16.1c (1+g)^5 = 21.8c => g= 6.2%

That is a little higher than the 5.9% I previously calculated for NPAT eps growth. But still nowhere near the SWS figure. of 10.3%

My next thought is that Simply Wall Street is USA based, So maybe they are calculating their returns on a USD basis? The exchange rates on the relevant dates are as follows:

30-06-2020: NZD1 = USD0.6451

30-06-2015: NZD1 = USD0.6781

The NPAT growth in USD terms over five years is therefore:

(11.1/0.6451)(1+g)^5 = (14.8/0.6781) => g = 4.9%.

The USD growth is less than the NZD growth! I remain baffled as to how SWS calculate historical earnings growth over five years of 10.3% compounding.

SNOOPY

[forest]

But still nowhere near the SWS figure. of 10.3%.

I think the discrepancy might be that SWS has made an adjustment for the dividend SKL has paid over that period.

[winner69]

Snoops - equity or debt or owns or is responsible for either is interesting discussion but isn't it a bit meaningless.

ROE and ROCE (and as I prefer ROIC I talk about that) are essentially measures of how a company uses the capital it has.

That capital has a cost - cost of equity (can be a bit subjective) and cost of debt are real things and of course the aim should be to recover your 'costs' - otherwise one is not creating economic wealth. If cost of capital is x% you'd hope the company would make a greater return than x% on that capital eh.

As I said earlier I prefer ROIC as it measures returns on all capital used (and not just equity). A company can sometimes have an acceptable looking ROE but can actually not covering its costs of capital.

From a valuation perspective its often that the better the ROIC the higher multiples are given. Generating economic wealth is rewarded

[Snoopy]

But still nowhere near the SWS figure. of 10.3%.

I think the discrepancy might be that SWS has made an adjustment for the dividend SKL has paid over that period.


Excellent thought! I had been assuming all along that SWS were talking about company earnings. But perhaps they were talking about 'shareholder earnings' i.e. dividends?

Over FY2015, the dividend declared was 3.5c (interim) and 5.5c (final) for a total of 9.0cps.

Over FY2020, the dividend declared was 5.5c (interim) and 7.5c (final) for a total of 13.0cps,

This implies a five year growth rate of:

9.0c(1+g)^5=13.0c => g = 7.6%

That is greater than the 5.9% based on eps growth, but still short of 10.3%. There is the minor matter of there being full imputation credits attached to the FY2015 dividends and FY2020 dividends being only 50% imputed. But since I believe it is very likely the collection of SWS data is automated, I doubt they have taken into account such subtleties. And imputation credits are only useful to NZ shareholders anyway. If they had taken imputation credits into account the 'g' factor would have been lower than 7.6%

The other interpretation of your post is that SWS has made an adjustment for dividends received that has been added to earnings growth. That sounds like double counting though, as the dividends are a merely the cash manifestation of earnings in shareholder hands.

SNOOPY

[winner69]

Whers's this 10.3% mentioned in the article

They did mention trailing 12 months to Dec 20 - maybe H220 + H121 (last 2 half years)

[Snoopy]

Where's this 10.3% mentioned in the article


It isn't directly. There is a link in the article to the underlying 'Simply Wall Street' research on SKL. The 10.3% is mentioned in the executive summary of that research which you can find a direct link to here:

https://simplywall.st/stocks/nz/capital-goods/nzx-skl/skellerup-holdings-shares

"Earnings have grown 10.3% per year over the last five years"

SNOOPY

[Ggcc]

It isn't directly. There is a link in the article to the underlying 'Simply Wall Street' research on SKL. The 10.3% is mentioned in the executive summary of that research which you can find a direct link to here:

https://simplywall.st/stocks/nz/capital-goods/nzx-skl/skellerup-holdings-shares

"Earnings have grown 10.3% per year over the last five years"

SNOOPY
Either way we are up, up and away

[Snoopy]

Either way we are up, up and away


At the half year Skellerup were forecasting a profit of $33m to $37m, up 15-29% from my normalised FY2020 result of $28.763m.

Based on 194.763m shares being on issue, this implies FY2021 eps of 16.9cps to 19.0cps.

With the share price closing tonight at $4.68,this implies a forward PE for FY2021 of 25 to 28. To justify a share price of $4.68, you would have to think that significant growth is priced in for FY2022 as well. How much growth will actually occur in FY2022 is unknown at this point. Up up and away? I get the feeling that this bird is in full flight already!

SNOOPY

....who nevertheless has a very full holding of SKL, so doesn't need to accumulate more.

[Ggcc]

At the half year Skellerup were forecasting a profit of $33m to $37m, up 15-29% from my normalised FY2020 result of $28.763m.

Based on 194.763m shares being on issue, this implies FY2021 eps of 16.9cps to 19.0cps.

With the share price closing tonight at $4.68,this implies a forward PE for FY2021 of 25 to 28. To justify a share price of $4.68, you would have to think that significant growth is priced in for FY2022 as well. How much growth will actually occur in FY2022 is unknown at this point. Up up and away? I get the feeling that this bird is in full flight already!

SNOOPY

....who nevertheless has a very full holding of SKL, so doesn't need to accumulate more.

I feel that we might be missing the fact that this business like few others defied the covid trend to date. Not sure if this will continue. Still a decent dividend in comparison to other companies out there and growing profits by the looks. Up up and away was the share price and I was getting excited. I am invested, but will not be topping up at these prices and have no intent to sell yet. Thanks for all your opinions and data on SKL

[nztx]

I feel that we might be missing the fact that this business like few others defied the covid trend to date. Not sure if this will continue. Still a decent dividend in comparison to other companies out there and growing profits by the looks. Up up and away was the share price and I was getting excited. I am invested, but will not be topping up at these prices and have no intent to sell yet. Thanks for all your opinions and data on SKL

Similar thoughts here too - but still a good portfolio addition if a bit expensive for it's resilience

but then many other candidates are also overpriced IMO

[Snoopy]

My mate Snoops says he prefers ROE over ROCE because ROCE leaves out interest and taxes (which are real cash). Fair enough

I prefer to use an equivalent thing called ROIC (Return on Invested Capital) which measures the returns from what shareholders and lenders have invested in the business. Formula is (EBIT * (1 - Tax Rate) / (Equity + Borrowings)

You can see it counts tax so gives tax paid returns to investors (both shareholders and lenders) - shareholders gets divies and lenders get interest and some may be reinvested in the business.

I think its a better measure of how a company uses capital than ROE because it expresses returns on total capital used rather than just what shareholders have put in.

One always wants to see ROIC higher than the company's cost of capital - otherwise it is destroying economic value

In SKLs case ROIC is currently 13.4% which is pretty good. I reckon their cost of capital is about 7% (PWC reckon 4.5%) so SKL are making pretty good excessive profits (over the cost of capital employed)

Those excessive profits are about $14,5m (some call this EVA which is Economic Value Added)


I have decided to go over to the 'Winner's Side' and roll out a few ROIC calculations. Since Winner has already done this one I will check his working ;-)

Numbers are taken from the Income Statement and Balance Sheet of AR2020 for SKL:

ROIC = EBIT(1-T) / (Equity + Borrowings)

= $42.486m(1-0.28) / ( $184,563m + ($0.830m + $41.300m) = 13.49%

So it looks like Winner is correct :-)

SNOOPY

P.S. Woke in the middle of the night and remembered I should have taken the cash balance off the current borrowings,

= $42.486m(1-0.28) / ( $184,563m + ($0.830m - $13.617m + $41.300m) = 14.36%

So it looks like Winner is (mostly) correct :-)

[Ggcc]

I have decided to go over to the 'Winner's Side' and roll out a few ROIC calculations. Since Winner has already done this one I will check his working ;-)

Numbers are taken from the Income Statement and Balance Sheet of AR2020 for SKL:

ROIC = EBIT(1-T) / (Equity + Borrowings)

= $42.486m(1-0.28) / ( $184,563m + ($0.830m + $41.300m) = 13.49%

So it looks like Winner is correct :-)

SNOOPY

P.S. Woke in the middle of the night and remembered I should have taken the cash balance off the current borrowings,

= $42.486m(1-0.28) / ( $184,563m + ($0.830m - $13.617m + $41.300m) = 14.36%

So it looks like Winner is (mostly) correct :-)
So a question here. What would a company pay to take skellerup off the market ie takeover What is a reasonable takeover target in your eyes.

[Snoopy]

So a question here. What would a company pay to take skellerup off the market ie takeover What is a reasonable takeover target in your eyes.


I hadn't thought about the 'takeover' question. Such deals are normally done on EBIT or EBITDA multiples. The only NZX takeover I can recall in recent times in a similar industry was JBS taking a stake in Scott Technology. In practice you would need to consider a series of real world takeovers, at least across Australia and New Zealand which these days generally produce a lower multiple that if such an analysis was done on NZ listed companies alone.

Taking an indicative multiple figure of 7.5 or 8:



LowHigh


Maintainable EBITDA$50.025m$55.028m


Valuation Multiple7.5x8.0x


Enterprise Value (000s)$375.188m$440.224m


less Net Debt (000s)$28.513m$28.513m


Aggregate Equity Value (000s)$346.675m$411.711m


No. shares on issue195.276m195.276m


Value Per Share$1.78$2.11



Notes

1/ Depreciation of right of use assets not considered for this comparison. Depreciation of PPE for FY2020 was $7.272m. Amortization was $0.267m. $42.486m was EBIT for FY2020.

=> EBITDA= $42.486m + $7.272m + $0.267m = $50.025m (FY2020)

Higher earning alternative scenario includes: NPAT rise if a more than 10% higher NPAT figure over for FY2021 occurs, as forecast at HY2021.

2/ 'Enterprise Value' = 'Maintainable EBITDA' x 'Earnings Multiple'

These valuations do not include a 'premium for control' which could be as high as 20%. This brings fair value for SKL shares up to $2.14 to $2.53. With SKL shares on the market trading at $4.58 today, I am not sure what this valuation analysis proves. Except that perhaps SKL is massively overvalued on the market today, given historical valuation precedents?

SNOOPY

[winner69]

Snoops .....I, along with other analysts) tend to leave Cash out of the equation unless it is a real significant amount. We see it as just working capital - like if they paid all the bills it’s all gone.

I know you’ll resort to this thing called Net Debt ....so be it.