Skellerup (SKL) Fundamentals [Archive] - Page 5

Sideshow Bob

19-08-2021, 08:43 AM

Revenue and operating gains drive record Skellerup NPAT - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/377524)

Revenue and operating gains drive record Skellerup NPAT

19/8/2021, 8:30 amFLLYRSkellerup today announced record audited net profit after tax of $40.2 million for the year ended 30 June 2021, a 38% increase over the previous record result.

Highlights for the year ending 30 June 2021
· Strategy and business model continuing to deliver substantial growth in earnings and returns to shareholders.
· Revenue of $279.5 million, up 11% on prior comparative period (pcp).
· Earnings before interest and tax (EBIT) of $56.4 million, up 33% on pcp.
o Industrial Division EBIT of $32.7 million, up 57% on pcp.
o Agri Division EBIT of $30.5 million, up 20% on pcp.
· Net profit after tax (NPAT) of $40.2 million, up 38% on pcp.
· Operating cash flow of $58.8 million, up 22% on pcp.
· Net debt of $8.7 million, down $19.8 million on pcp.
· Final dividend of 10.5 cps (50% imputed) bringing the total FY21 dividend to 17.0 cps (50% imputed) for the full year, up 31% on pcp.

Skellerup CEO, David Mair said the overall growth in earnings was the outcome of continuing to focus on working closely with key customers to provide engineered products used in a range of critical applications people interface with every day. “Skellerup’s products are critical to the supply of safe potable (drinkable) water; the production of milk and milk products; the performance of appliances in homes and workplaces; health and hygiene in hospitals, shops and homes; the safety and comfort of sporting and leisure equipment; and the integrity of roofing systems on homes and workplaces.”

Mair highlighted that Skellerup was focused on delivering growing and sustainable financial returns. “We invest in our people to develop better and more efficient ways of designing and manufacturing products. We design products and review processes to reduce waste and increase the efficiency of materials and energy used. We are proud to support the communities where we operate. The ongoing Covid-19 pandemic has created significant challenges and changes for our teams around the world. They have embraced these opportunities and delivered improved financial returns, better environmental outcomes including reduced water consumption and packaging waste and more efficient energy usage while keeping our workplaces safe.”

Industrial Division EBIT was $32.7 million, a record result and up 57% on pcp. Revenue was $177.3 million up 12% on pcp. Mair said revenue growth was broad based across the Division’s product range and markets.

“During FY21 we achieved growth in our largest US and Australian markets. Our capability to change our product formulations to meet increasingly demanding standards and combine materials to deliver valuable solutions to our key customers has been – and will remain – key to our ongoing growth. Most notably in FY21 roofing and construction products and U-DEK marine foam achieved
significant growth and stronger demand for potable water products was apparent in the second half of the year.”

Agri Division EBIT was $30.5 million, a record result and up 20% on pcp. Revenue was $102.2 million up 9% on pcp. Mair said the result again underscored the importance of the essential dairy consumables products that Skellerup design, manufacture and sell globally.

“Skellerup is the second largest manufacturer of food grade dairy rubberware in the world. The US and NZ remain our largest markets, but Europe and Asia were the fastest growing in FY21. We were able to meet the increased demand by improving our business processes and productivity with limited capital investment. FY21 also included a full year contribution from Silclear (acquired in November 2019) compared to the eight-month contribution in the pcp. Footwear sales were also up lead by the Red Band gumboot; the quality and durability of this product is synonymous with NZ farming and sales continue to grow in urban markets.”

Chair Liz Coutts noted that NPAT was a key financial measure, but equally operating cash flow was a critical performance measure to ensure the firm had the capacity to continue to fund growth.

“In FY21, we achieved a record operating cash flow of $58.8 million – up 22 per cent on the prior record achieved in FY20. This enabled us to fund our capital expenditure requirements, reduce debt and substantially lift our final dividend. We have a robust Balance Sheet with very low debt providing the platform and opportunity for continued investment in growth.”

Coutts advised that the final dividend would increase from 7.5 to 10.5 cents per share (50% imputed as in the pcp) to be paid to shareholders on 15 October 2021 with record date of 01 October 2021. This will bring the total dividend pay-out for the financial year ended 30 June 2021 to 17.0 cents per share up 31% on pcp.

“We are very pleased to reward shareholders in Skellerup. Over the past 10 years the pay-out has almost trebled. This demonstrates Skellerup’s strong cash flow and the Board’s practice of paying out a consistently high proportion of earnings,” Coutts said.

Coutts said the Group has started strongly in FY22 and she looked forward to updating shareholders further at the Annual Meeting on 27 October 2021.

For further information please contact:

Ggcc

19-08-2021, 08:45 AM

Revenue and operating gains drive record Skellerup NPAT - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/377524)

Revenue and operating gains drive record Skellerup NPAT

19/8/2021, 8:30 amFLLYRSkellerup today announced record audited net profit after tax of $40.2 million for the year ended 30 June 2021, a 38% increase over the previous record result.

Highlights for the year ending 30 June 2021

· Strategy and business model continuing to deliver substantial growth in earnings and returns to shareholders.
· Revenue of $279.5 million, up 11% on prior comparative period (pcp).
· Earnings before interest and tax (EBIT) of $56.4 million, up 33% on pcp.
o Industrial Division EBIT of $32.7 million, up 57% on pcp.
o Agri Division EBIT of $30.5 million, up 20% on pcp.
· Net profit after tax (NPAT) of $40.2 million, up 38% on pcp.
· Operating cash flow of $58.8 million, up 22% on pcp.
· Net debt of $8.7 million, down $19.8 million on pcp.
· Final dividend of 10.5 cps (50% imputed) bringing the total FY21 dividend to 17.0 cps (50% imputed) for the full year, up 31% on pcp.

Skellerup CEO, David Mair said the overall growth in earnings was the outcome of continuing to focus on working closely with key customers to provide engineered products used in a range of critical applications people interface with every day. “Skellerup’s products are critical to the supply of safe potable (drinkable) water; the production of milk and milk products; the performance of appliances in homes and workplaces; health and hygiene in hospitals, shops and homes; the safety and comfort of sporting and leisure equipment; and the integrity of roofing systems on homes and workplaces.”

Mair highlighted that Skellerup was focused on delivering growing and sustainable financial returns. “We invest in our people to develop better and more efficient ways of designing and manufacturing products. We design products and review processes to reduce waste and increase the efficiency of materials and energy used. We are proud to support the communities where we operate. The ongoing Covid-19 pandemic has created significant challenges and changes for our teams around the world. They have embraced these opportunities and delivered improved financial returns, better environmental outcomes including reduced water consumption and packaging waste and more efficient energy usage while keeping our workplaces safe.”

Industrial Division EBIT was $32.7 million, a record result and up 57% on pcp. Revenue was $177.3 million up 12% on pcp. Mair said revenue growth was broad based across the Division’s product range and markets.

“During FY21 we achieved growth in our largest US and Australian markets. Our capability to change our product formulations to meet increasingly demanding standards and combine materials to deliver valuable solutions to our key customers has been – and will remain – key to our ongoing growth. Most notably in FY21 roofing and construction products and U-DEK marine foam achieved
significant growth and stronger demand for potable water products was apparent in the second half of the year.”

Agri Division EBIT was $30.5 million, a record result and up 20% on pcp. Revenue was $102.2 million up 9% on pcp. Mair said the result again underscored the importance of the essential dairy consumables products that Skellerup design, manufacture and sell globally.

“Skellerup is the second largest manufacturer of food grade dairy rubberware in the world. The US and NZ remain our largest markets, but Europe and Asia were the fastest growing in FY21. We were able to meet the increased demand by improving our business processes and productivity with limited capital investment. FY21 also included a full year contribution from Silclear (acquired in November 2019) compared to the eight-month contribution in the pcp. Footwear sales were also up lead by the Red Band gumboot; the quality and durability of this product is synonymous with NZ farming and sales continue to grow in urban markets.”

Chair Liz Coutts noted that NPAT was a key financial measure, but equally operating cash flow was a critical performance measure to ensure the firm had the capacity to continue to fund growth.

“In FY21, we achieved a record operating cash flow of $58.8 million – up 22 per cent on the prior record achieved in FY20. This enabled us to fund our capital expenditure requirements, reduce debt and substantially lift our final dividend. We have a robust Balance Sheet with very low debt providing the platform and opportunity for continued investment in growth.”

Coutts advised that the final dividend would increase from 7.5 to 10.5 cents per share (50% imputed as in the pcp) to be paid to shareholders on 15 October 2021 with record date of 01 October 2021. This will bring the total dividend pay-out for the financial year ended 30 June 2021 to 17.0 cents per share up 31% on pcp.
“We are very pleased to reward shareholders in Skellerup. Over the past 10 years the pay-out has almost trebled. This demonstrates Skellerup’s strong cash flow and the Board’s practice of paying out a consistently high proportion of earnings,” Coutts said.

Coutts said the Group has started strongly in FY22 and she looked forward to updating shareholders further at the Annual Meeting on 27 October 2021.
For further information please contact:

Better than most could have hoped for

Biscuit

19-08-2021, 08:49 AM

Better than most could have hoped for

Jeez, smashing result. Currently my second biggest holding after MFT. Outlook positive good too! Nice.

RTM

19-08-2021, 08:52 AM

Better than most could have hoped for

Yes. I doubled down on these @182 in 2020. Now my second biggest holding and we have been well rewarded.
Great to see a New Zealand company that actually makes stuff doing so well.
Really pleased to see their progress.

Leftfield

19-08-2021, 08:58 AM

Well done holders. Great result.

Biscuit

19-08-2021, 08:58 AM

Yes. I doubled down on these @182 in 2020. Now my second biggest holding and we have been well rewarded.
Great to see a New Zealand company that actually makes stuff doing so well.
Really pleased to see their progress.

They've really turned it around these last few years. Used to be a bit hit and miss, year to year. Now they just go from strength to strength.

traineeinvestor

19-08-2021, 10:59 AM

Another very happy shareholder.

Assuming the continue to pay down debt, SKL should have (or be close to) net cash by the time the current half year finishes. Assuming they don't spend it on acquisitions, I would not be surprised to see some form of capital management initiative.

Snow Leopard

19-08-2021, 11:20 AM

Nice result. I like it. :)

macduffy

19-08-2021, 11:49 AM

Excellent! SKL results get better and better!
:)

BlackPeter

19-08-2021, 12:30 PM

Yep, quite nice result and very healthy financial indicators. RoE of 20.5% in combination with a quite low liabilities to asset ratio (31.1%) is certainly something to be proud of.

Clearly - currently running full power with all the industries they are selling into going full speed. They used to be however a quite cyclical business, will be interesting to see, whether this is something which changed long term.

Still remember times when dairy as well as the building industry did a lot of stuttering ... and the SKL share was on sale for something like 47 cents (I think).

Biscuit

19-08-2021, 12:35 PM

...... They used to be however a quite cyclical business, will be interesting to see, whether this is something which changed long term.
.....

That's my thought too. They certainly have hit their stride but I'd be a bit wary what happens to them in an economic pull back.

winner69

19-08-2021, 01:54 PM

Yep, quite nice result and very healthy financial indicators. RoE of 20.5% ...........

Return on Invested Capital (which includes borrowing) was 18.3% - way above whatever cost of capital you want to use, 7% to 10%

True (and consistent) creator of economic wealth

Deserves to have a Market Value Added of $4.41 (Market Cap less Equity)

Not that many NZX companies performing like this

Soolaimon

19-08-2021, 01:56 PM

Excellent result, again. One looks back at a considerable top up at 47cents to the shares that I have held for many years and the returns are considerable. Probably the best long term hold I have held. I remember Nuplex, another successful manufacturing company performing in a similar fashion back then and they were eventually taken over by a big international player. I just hope that does not happen here ??

winner69

19-08-2021, 02:28 PM

Whilst there has been growth per se the majority of the added value has come from greater productivity (ie margin etc)

Biscuit

19-08-2021, 02:41 PM

macduffy

19-08-2021, 03:48 PM

Nuplex came close to going belly up in the GFC though, as I recall.

Yes, as a result of a combination of USD borrowings and subsequent NZD weakness!

No relevance to SKL.

nztx

19-08-2021, 03:59 PM

let's just follow the smart money .. bound to be opportunity to share a small bit of their pavlova .. ;)

Ggcc

20-08-2021, 08:32 AM

https://www.nzx.com/announcements/377599

They keep going full steam ahead

nztx

20-08-2021, 01:49 PM

Not a lot to not like about SKL .. the quiet consistent performer, getting on with business
& doing it well through the thick & thin too :)

Ggcc

20-08-2021, 05:06 PM

$9.5 million in turnover. Quite high even for this share

Muse

22-08-2021, 08:12 PM

Sensational performance. If I wasn't so focused on staying on capital account might be tempted to take some off the table. I see the current SP is nearly 70c above Craigs TP (who forecast for mid 3% net dividend yields hereafter) while jarden a bit more bullish with a TP slightly higher than the current SP (with net yields forecast to increase into +4% by FY23). Other than knowing its a great company probably need to do more research to find out how sustainable its growth is before making a call.

Pocket_Eights

02-09-2021, 11:17 PM

Share price hasn't moved much since the 5% or so increase after their FY21 announcement. wonder if they can sustain their growth. With current lockdowns, all construction is stopped.

Ggcc

03-09-2021, 07:13 AM

Share price hasn't moved much since the 5% or so increase after their FY21 announcement. wonder if they can sustain their growth. With current lockdowns, all construction is stopped.
They operate worldwide, not just in New Zealand. They proved that they did well after the first lockdown and we’re providing essential stuff. I’m thinking they will be ok. We will find out later on the 27th October

Soolaimon

23-09-2021, 04:20 PM

Share price really going for it today, all time high by some margin. Anyone know why?

macduffy

23-09-2021, 04:23 PM

Share price really going for it today, all time high by some margin. Anyone know why?

A well-performing company being sought after by a generally firm market - today.

Waltzing

23-09-2021, 05:38 PM

best looking chart possible... now MR P high lighted that several years ago....next crash buy the farm that and the freights.

nztx

23-09-2021, 07:03 PM

A well-performing company being sought after by a generally firm market - today.

X Div 30 Sep .. quite nice a run - amazing chart

Ricky-bobby

23-09-2021, 07:47 PM

A bit of defence stock maybe?.. sought after with China debacle going on…

traineeinvestor

23-09-2021, 08:18 PM

Doesn't hurt that Jarden upgraded SKL to Buy with an increased price target this week.

Disclosure: held

Muse

23-09-2021, 08:29 PM

Share price really going for it today, all time high by some margin. Anyone know why?

Jarden released a 40 page deep dive research report and markedly increased the TP. Quite a good report lots of work into its ROIC and evolving business models and how it lines up to its other comparables

RTM

24-09-2021, 08:36 AM

Doesn't hurt that Jarden upgraded SKL to Buy with an increased price target this week.

Disclosure: held

Jarden released a 40 page deep dive research report and markedly increased the TP. Quite a good report lots of work into its ROIC and evolving business models and how it lines up to its other comparables

Thanks for this information TI and FM, I'm up > 260% on this one, its my third biggest holding and had been wondering about reducing a bit as I am pretty unsure what is driving this increase. Will probably just continue to hold I think ....at this stage.

percy

24-09-2021, 08:39 AM

Thanks for this information TI and FM, I'm up > 260% on this one, its my third biggest holding and had been wondering about reducing a bit as I am pretty unsure what is driving this increase. Will probably just continue to hold I think ....at this stage.

An incredible run.
Enjoy it.
Well done.

ps.I note The Chair is Liz Coutts.She also chairs EBO and OCA.

Waltzing

24-09-2021, 09:05 AM

MR P picked this stock several years ago.

One thing is that an investor can always find a reason to buy and to sell. Every good company is rewarded or like a good athlete or race horse they will always have conditions in which they out perform the field.

RTM

24-09-2021, 05:42 PM

Jarden released a 40 page deep dive research report and markedly increased the TP. Quite a good report lots of work into its ROIC and evolving business models and how it lines up to its other comparables

Another solid gain today, volume not exceptional one way or another.
Wonder if this is driven by Jarden topping up their clients portfolio ?

nztx

24-09-2021, 10:12 PM

Always worth following the smart money to turn pennies into pounds - Yes Sir :)

they're not resident on the share register for no reason ;)

blackie

24-09-2021, 11:02 PM

Thanks for this information TI and FM, I'm up > 260% on this one, its my third biggest holding and had been wondering about reducing a bit as I am pretty unsure what is driving this increase. Will probably just continue to hold I think ....at this stage.

very impressive isn't it.

November 2016 NZX announcement
"Skellerup Chairman Sir Selwyn Cushing, speaking ahead of the opening of the $60 million, 19,000 square metre facility, Sir Selwyn said the move to a purpose-built, integrated site would help Skellerup cement its reputation as the world’s leading designer and manufacturer of food grade rubberware for the global dairy industry, and to further expand into new markets and new industries."

since the opening of this new Wigram facility the share price hasn't looked back.
only briefly interrupted by the covid outbreak feb 2020.

not the only contributing factor i'm sure. but significant.

BlackPeter

25-09-2021, 10:55 AM

Always worth following the smart money to turn pennies into pounds - Yes Sir :)

they're not resident on the share register for no reason ;)

Didn't they hold (still branded NZ First Capital) as well tons of CBL before they crashed?

While I don't want to imply that SKL will follow CBL, relying on any broker's investing other peoples money is as reliable than throwing darts while blind folded. Sometimes they hit and sometimes they miss - and hey, money is never smart - it is just cheap plastic which people agreed to value.

nztx

25-09-2021, 12:37 PM

Didn't they hold (still branded NZ First Capital) as well tons of CBL before they crashed?

While I don't want to imply that SKL will follow CBL, relying on any broker's investing other peoples money is as reliable than throwing darts while blind folded. Sometimes they hit and sometimes they miss - and hey, money is never smart - it is just cheap plastic which people agreed to value.

Heck BP .. I dont know who you're following, but it doesn't seem to be who I am watching ;)

BlackPeter

25-09-2021, 03:59 PM

Heck BP .. I dont know who you're following, but it doesn't seem to be who I am watching ;)

That's ok with me.

Most people are not able to learn from history ... this is one of the reasons it looks as it does :p ;

nztx

25-09-2021, 06:00 PM

That's ok with me.

Most people are not able to learn from history ... this is one of the reasons it looks as it does :p ;

but NZX history in some spheres should in itself provide a different set of reasons & learnings ...
all but forgotten too .. but those were from past different times & crashes after rises :)

Should that be sending fresh warning signals now ? ;)

If it did then unpopular lowly trading bank accounts spitting out a very small fraction of 1% pa
before the taxman takes another swipe out of it may be more popular than they are now .. :)

Just goes to show - many economies are in effect run like ponzi schemes .. just remember to be among the
first out .. I guess ;)

Ggcc

27-09-2021, 10:12 AM

$6.06 open...... Something is else seems to be going on here, other than analyst upgrades. What would be a takeover price??

macduffy

28-09-2021, 11:52 AM

$6.06 open...... Something is else seems to be going on here, other than analyst upgrades. What would be a takeover price??

Start with asking who would be interested in buying SKL? Probably some foreign outfit IMO - but I reckon shareprice strength is just recognition of a well-run company that makes quality products.

Ggcc

28-09-2021, 12:10 PM

Start with asking who would be interested in buying SKL? Probably some foreign outfit IMO - but I reckon shareprice strength is just recognition of a well-run company that makes quality products.
I agree a very well run company with analysts valuing it at an average of $6.50 and as much as $7…..

I am not selling, plus we will get an update in October as to how the year is progressing so far. I would not be buying at these levels, but I feel it is a safe investment for now as they manufacture important stuff.

Up over 150% within a year is astounding
Holding tightly

RTM

28-09-2021, 12:48 PM

https://www.skellerupholdings.com/Reports/Skellerup_Annual_Report_FY21.pdf

Well worth while flicking through this if you interested in what the company does and where. Easy read.
Diverse products: Industrial $177mil, Agri $102mil
Diverse range of customers
Diverse geography they operate in.

Yes Blackie, maybe the new facility they are in is helping a lot.

Lot to like. I'm not selling either....although monitoring closely as they are a big % of portfolio...now 7.3%
Hoping its not a takeover and simply market reacting to Jarden's recent upgrade.

There is a lot to like.

Soolaimon

28-09-2021, 01:15 PM

I won't be selling either. One reason I invested many years ago as the fact that they produced quality products of which most of them eventually wear out and have to be replaced. The new factory in Christchurch was a great investment and is performing well. I would not like to see a take over and am looking forward to enjoying even greater returns in the future.
..

winner69

28-09-2021, 01:31 PM

I reckon SKL has got too expensive to be an acquisition target

Paying say a 20% premium would cost an acquirer $1.44 billion and in return they get cash flows of say $70 million ….20 times cash flow makes a real expensive acquisition

You never know

winner69

27-10-2021, 01:07 PM

Liz said “Skellerup’s global businesses have continued to outperform our already high expectations of them. We expect our NPAT for the first half of FY22 to be in excess of 10% above the prior comparative period. Demand is strong across the greater part of our businesses, and we expect this to continue,” ended Mrs Coutts.

F21 1st half NPAT was a record as well

Can’t do much better than that

Ggcc

27-10-2021, 01:56 PM

Ggcc

02-11-2021, 02:31 PM

Waltzing

02-11-2021, 09:29 PM

dibble

03-11-2021, 12:25 PM

yes perfect chart and to think it was sold by our software because the stupid ALGO did not see enough rise in profit...

oh i forgot we actually set the formula...

NEVER set and FORGET!!!

think what will happen when your car is hacked and the air bags are turned off by a terror plot...:scared:

Honestly, what do you smoke?

That aside, I was rather surprised how uninspiring the much vaunted Liz Couts was as a speaker, she laboured through her slides as if she was concurrently having an amputation. It even included the clanger about the employees "we cant speak highly of them".

Happy holder but after SEK AGM I bought more shares, after SKL I quietly went outside and beat myself with a kipper. Guess the market is rightly focusing on the content rather than delivery.

Snow Leopard

03-11-2021, 12:38 PM

....after SKL I quietly went outside and beat myself with a kipper....

I would have eaten the kipper.

https://www.manxkippers.com/

pierre

03-11-2021, 02:47 PM

....after SKL I quietly went outside and beat myself with a kipper. Guess the market is rightly focusing on the content rather than delivery.

Maybe influenced by this? fish slapping dance - Google Search (https://www.google.co.nz/search?q=fish+slapping+dance&sxsrf=AOaemvKpxZHGJr8vf5il-jTGbuMNCYKzPA%3A1635903947622&source=hp&ei=y-mBYZrqI7iP9u8P5q-hqAg&iflsig=ALs-wAMAAAAAYYH32_M77JcZbrekyOJIU9Q4C48arRWR&oq=fish+slapping+&gs_lcp=Cgdnd3Mtd2l6EAEYADIFCAAQgAQyBQgAEIAEMgUIABC ABDIFCAAQgAQyBQgAEIAEMgUIABCABDIFCAAQgAQyBQgAEIAEM gUIABCABDIFCAAQgAQ6BAgjECc6BQgAEJECOhEILhCABBCxAxC DARDHARDRAzoOCC4QgAQQsQMQxwEQowI6CAgAEIAEELEDOggIA BCxAxCDAToICAAQgAQQyQM6BQgAEJIDOhEILhCABBCxAxCDARD HARCvAToOCC4QgAQQsQMQxwEQ0QM6CAguEIAEELEDOgsILhCAB BDHARCvAToOCC4QgAQQxwEQrwEQkwI6BQguEIAEUNQJWKsbYNs vaABwAHgAgAHLA4gB2xmSAQkwLjYuNy4wLjGYAQCgAQE&sclient=gws-wiz)

Waltzing

03-11-2021, 03:52 PM

"Honestly, what do you smoke?"

smoking is very bad for your health and wont help you when doing those hills repeats on your bike. Dont smoke while biking in sweden else you will miss out on all those wonderful lakes. You will have to take the train as you will to be unfit to enjoy the bike rides.

Security software is just maths tracking patterns. The number of lines of code in a modern car is ever increasing and the security of the cars computer systems will become more important as the cars become just computers on wheels or in the AIR!

Anyway back this wonderful stock does it not have the perfect chart?

surely looks like it.

Yes Liz maybe getting to the point where many directors get at that age.

Snoopy

19-11-2021, 08:24 AM

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 = 14.8cps

Notes:

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.

IFRS16 on leases has thrown a spanner in the works of 'comparative metrics'. Over the lifetime of a lease, the IFRS16 standard doesn't change the numbers. However the transformation of what used to be termed 'rent' into a 'depreciation of a right to occupy asset' and an associated 'interest on capitalised lease' charge, change the way the former 'rent' expense is dealt with on a year to year basis. IFRS16 is a relatively recent development. So my preference is to adjust current results back to what they would have been in a pre-IFRS16 environment, to provide better comparative results with previous years. SKL have reported their results in a way that makes such an exercise relatively straightforward. Here is the detailed calculation on how the $0.400m IFRS16 adjustment, in the FY2020 adjusted quoted above result, was made.

Post IFRS16

$5.227mLease amortisation & impairment(Ref AR2020 Note 9 'Property, Plant & Equipment')

plus $0.938mFinancing Costs wrt Lease Payments(Ref AR2020 Note 16 'Finance Costs')

equals $6.165m(Total)

Pre IFRS16

as listed $5.609mLease Payments(Ref AR2020 Note 14 'Lease Liabilities')

=> FY2020 Expense Difference 'New - Old' = $6.165m - $5.609m = $0.556m

So under the IFRS16 reporting convention, 'rent' is higher which means 'profits' as reported will be lower. The adjustment to profits -after tax (assuming a tax rate of 28%) - back to what they would have been under the old reporting regime is therefore to add to reported FY2020 profit an amount of:

0.72 x $0.556m = $0.400m

SNOOPY

daveypnz

22-11-2021, 06:33 PM

Took a beating today; hopefully reclaims the 50ma as it usually does.

Snoopy

24-11-2021, 11:48 AM

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'.

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

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
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2017 $2.507m, FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2017 adjusts for removing the one off $25,000 earthquake relocation expenses (AR2017 p39) respectively, by adding back the effect of a hypothetical situation where these losses were not incurred. The $9.300m tax figure used for FY2017 respectively has 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.

c/ FY2020/FY2021 results adds back an after tax $0.400m/$0.319m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
d/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

SNOOPY

Snoopy

24-11-2021, 01:22 PM

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

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

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%
2021: $40.243m/$196.140m= 20.5%

Conclusion: 'Pass Test'

SNOOPY

Snoopy

24-11-2021, 01:34 PM

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

Net Profit Margin = Normalised Net Profit / Revenue

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= 11.4%
2021: $40.243m/$279.613m= 14.4%

I see a good margin lift from FY2017 to FY2021 with just a small dip on the year Covid-19 hit.

Conclusion: Pass test

SNOOPY

Snoopy

24-11-2021, 02:07 PM

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.

I skipped the BT1/ test because Skellerup is just as powerful in its chosen target markets as it was last year, but incrementally better. So the 'Pass Test' result for 'Buffett Test 1' is carried over from FY2020.

https://www.sharetrader.co.nz/showthread.php?4091-Skellerup-(SKL)-Fundamentals&p=843610&viewfull=1#post843610

Very impressive result on all four Buffett tests over FY2021. As per my equivalent FY2020 round up, the fact that Skellerup is a great company is no secret. But almost everyone involved in the markets knows this. This is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021. So it is very important potential investors bear in mind the value equation

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

Can the historical PE ratio has continue to expand even further? The share price has doubled over a year. The dividend is up by around 30% over the same period. Investors can see from this that most of the share price gain over the year has been due to 'multiple expansion'. I would be very surprised to see the share price double again in the coming year.

But what is the investment case for new investors from here? This is the next task for me to investigate.

SNOOPY

Snoopy

24-11-2021, 03:38 PM

'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.

'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

FY2017[/u][/TD]
FY2018
FY2019
FY2020
FY2021

Bolt on Acquisitions
New Wigram factory opens

Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)
Projects Vanilla & Tika IT upgrades

Cash & Cash Equivalents: {A}
$6.022m
$9.681m
$9.639m
$13.617m
$15.673m

Non Current Borrowings:
$41.777m
$40.400m
$46.215m
$41.300m
$24.000m

add Current Borrowings:
$0.0m
$0.0m
$0.0m
$0.830m
$0.409m

equals Total Borrowings: {B}
$41.777m
$40.400m
$46.215m
$42.130m
$24.409m

Total Net Borrowings: {B} - {A}
$35.755m
$30.719m
$36.576m
$28.513m
$8.734m

Net profit declared {C}
$22.110m
$27.277m
$29.063m
$29.064m
$40.175m

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

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. 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 useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. 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

Snoopy

24-11-2021, 07:04 PM

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.

For the FY2021 edition of the Buffett growth model, I have recalculated these parameters as below.

FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
Average

Return on Shareholder Equity
14.7%
12.3%
15.2%
16.4%
15.7%
20.0%
15.7%

Dividend Payout Ratio
92%
88%
71%
83%
87%
68%
82%

PE Ratio at 30th September
11.5
16.6
15.7
15.2
19.9
29.1
18.0

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. 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."

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

SNOOPY

Snoopy

24-11-2021, 08:31 PM

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(0.187)

(*) 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 - $0.187 = $1.146 (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 +1.15) => i=3.07%

This projected 3.01% return is a net return per year. The equivalent gross return is 3.07%/0.72 = 4.26%. 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+1.15) => P= 98.6c

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 15.7% (the actual average of the last 6 years) AND
b/ a dividend payout ratio of 82% (the actual dividend payout ratio of the last 6 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 column in my table (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

SOFY

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

2020 (historical)
0.916
0.150
0.011
(0.130)
0.031
(0.018)

2021 (historical)0.942
0.205
(0.01)
(0.140)0.055(0.020)

20220.9970.157

(0.128)0.029(0.018)

][
20231.0260.161
(0.132)0.029(0.018)

20241.0550.166
(0.136)0.030(0.019)

20251.0850.170
(0.140)0.030(0.020)

20261.1150.175
(0.144)0.031(0.020)

20271.1460.180
(0.148)0.032(0.021)

20281.1780.185
(0.152)0.033(0.021)

20291.2110.190
(0.156)0.034(0.022)

20301.2450.195
(0.160)0.035(0.022)

20311.2800.201
(0.165)0.036(0.023)

20321.3160.207

Ten Year Total
(1.461)(0.204)

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

With FY2032 projected earnings of 20.7cps, and using a PE ratio of 18.0 (actual average over the last 6 years), the expected share price for Skellerup in ten years time is:

18.0x 0.207 = $3.73

The net dividend return for shareholders over that time is $1.461 - $0.204 = $1.257 (as per above table)

Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year. Is this a joke? How can such a projected return every year for ten years - no less - be correct?

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2032 are 20.7cps, verses actual earnings for FY2021 of 20.5cps. IOW I am modelling earnings to be virtually flat after ten years, with years of lesser earnings in between! Is that a plausible scenario? From where we shareholders sit today, such a result would be extremely disappointing to be sure. Yet if we use the actual historic return on equity, averaged over 6 years, and the actual dividend payout ratio, then these are the kind of earnings we shareholders might expect.

This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong.

The second modelling assumption that is well out of whack with today's market (PE of 29) is that I am assuming a PE ratio of 18 in 2032. I did not pull that figure of 18 out of thin air. It is the actual historical average over six sample dates. Shareholders coming on board over the last couple of years (eps has grown 37% since FY2019) might like to reflect that most of their share price gains (SP +160% over the same period) have been due to 'valuation multiple expansion'. Growth in earnings has occurred. But the share price growth has way outstripped earnings growth. IMO the 'multiple expansion' that has driven so much of shareholder returns over the year or two in particular has now become a real risk factor that could sting shareholders if that PE valuation metric deflates. If that is a somewhat sombre note on which to end this analysis, then so be it. Don't e-mail Warren Buffett and ask what he thinks, as I don't think there is any chance he will be on the Skellerup share register!

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

P(1+0.15)^10 = (3.73+1.26) => P= $1.23c

SNOOPY

discl: shareholder, with an average entry price of $1.33

Biscuit

24-11-2021, 08:49 PM

.......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), ......

My bad, I paid nearly $6 to pick some up today

Muse

24-11-2021, 09:20 PM

My bad, I paid nearly $6 to pick some up today

Haha, whoops. Snoop dawg thinks you’ve been had.

Snoopy

25-11-2021, 10:05 AM

My bad, I paid nearly $6 to pick some up today

You were a little quick off the mark with your reply Biscuit. I have since raised my ten year price target for SKL from $2.84 to $3.73. So you are only going to lose $2.27 per share over the next ten years, not $3.16 ;-P

Seriously though, a PE of 29 is a high valuation. Yahoo finance shows two analysts following SKL

https://finance.yahoo.com/quote/SKL.NZ/analysis?p=SKL.NZ

One is forecasting eps of 23cps for FY2022. The other 24cps. Both are looking forward to FY2023 and an eps of 26c. At $6.05 this implies a forward PE for FY2022 between 25.2 to 26.3, and a forward PE for FY2022 of 23.3. Stack those numbers up against the six year historical average PE of 18.

Certainly the performance of SKL over the Covid-19 crisis period has been resilient and impressive. Do you regard SKL as now having moved on to a new level, that rather invalidates historical comparisons?

Historical gross dividend yield is:

Net dividend is: (6.5c+10.5c) = 17c (50% imputed)

=> Historical Gross Dividend = 8.5c + 8.5c/0.72 = 20.3c

=> Historical Gross Yield = 20.3c/605 = 3.4%

That yield is better than you can get at the bank for sure, but not that compelling. Does that not suggest there is quite a growth premium built into the share price already?

I have no reason to talk down SKL. It is my biggest NZX holding. But I am wondering what got you to push the buy button at 6 bucks?

SNOOPY

haewai

25-11-2021, 10:18 AM

Thank you for sharing your analysis Snoopy. I recall your work a few years ago, at your entry point I think, which has been proven correct.

Biscuit

25-11-2021, 10:24 AM

You were a little quick off the mark with your reply Biscuit. I have since raised my ten year price target for SKL from $2.84 to $3.73. So you are only going to lose $2.27 per share over the next ten years, not $3.16 ;-P

Seriously though, a PE of 29 is a high valuation. Yahoo finance shows two analysts following SKL

https://finance.yahoo.com/quote/SKL.NZ/analysis?p=SKL.NZ

One is forecasting eps of 23cps for FY2022. The other 24cps. Both are looking forward to FY2023 and an eps of 26c. At $6.05 this implies a forward PE for FY2022 between 25.2 to 26.3, and a forward PE for FY2022 of 23.3. Stack those numbers up against the six year historical average PE of 18.

Certainly the performance of SKL over the Covid-19 crisis period has been resilient and impressive. Do you regard SKL as now having moved on to a new level, that rather invalidates historical comparisons?

Historical gross dividend yield is:

Net dividend is: (6.5c+10.5c) = 17c (50% imputed)

=> Historical Gross Dividend = 8.5c + 8.5c/0.72 = 20.3c

=> Historical Gross Yield = 20.3c/605 = 3.4%

That yield is better than you can get at the bank for sure, but not that compelling. Does that not suggest there is quite a growth premium built into the share price already?

I have no reason to talk down SKL. It is my biggest NZX holding. But I am wondering what got you to push the buy button at 6 bucks?

SNOOPY

I think the business is transformed from what it once was but also think the price is quite ripe. I did buy some the other day at 595. Its a bit complicated, but I'm not actually adding to my long term holding at the moment. I'm bizarrely transferring holding from one entity to another and rather than do an off market transfer I thought I'd use the short term dip to buy on the one account and am currently waiting for it to go up a bit more to sell on the other account.

Muse

25-11-2021, 10:57 AM

I think the business is transformed from what it once was but also think the price is quite ripe. I did buy some the other day at 595. Its a bit complicated, but I'm not actually adding to my long term holding at the moment. I'm bizarrely transferring holding from one entity to another and rather than do an off market transfer I thought I'd use the short term dip to buy on the one account and am currently waiting for it to go up a bit more to sell on the other account.

You are dead right Biscuit - this business has changed dramatically over the last 10 years and even again over the last 5 years. While the work snoopdog has put into his analysis is impressive, the execution of it is on the bizarre side and even that aside the underlying assumptions flawed. Like everyone I see SKL as fully priced and could see some fluctuations, but there are a lot of reasons why this share has been re-rated higher.

Lets take a step back. Over the last decade skl has dramatically changed its business model with its financial profile rapidly changing each year over the last 3-4 years. Skellerup has wrapped its business model around blue chip OEMs with long term macros driving their own growth. In the past SKL was more akin to a contract manufacturer prone to price & competitive pressures in less attractive more cyclical sectors. SKL has had extraordinary success in pushing up the value chain through its engineering capabilities to where it can offer whole of life technical solutions allowing it to better cross sell & upsell higher margin products & services. SKL has executed well at new product development getting it in the door and then capturing aftermarket sales with secondary products and services. SKLs customers are all undergoing lifting standards (over 50% of SKL revenues are from water or food products) growing faster than their ability to drive down prices. The segment also has higher switching costs as SKL products are critical technical components that the OEM cannot do without - particularly when SKL has gotten established providing secondary product sales and services.

Snoopy relies on past averages despite the business making dramatic incremental gains each year. Case in point: underlying EBIT in FY17 was about 15.6% of sales, which has increased every year to 20.7% in FY21A and that likely to be exceeded in this coming FY22 financial year. Its return on invested capital (pre tax) were ~16.8% in FY17A which lifted to 28.2% in FY21A and that is expected to increase to the lower to mid 30% range in the next 5 years or so. In line with that, net working capital intensity has likewise reduced as a % of sales from 30% to 25%. Higher margins, lower capital intensity has seen cashflow skyrocket, net debt reduce and dividend payout maximised.

Is the lift in ROIC sustainable or just a blip? Its most direct comparables suggest it is with SKL's measure sitting within the median even after it has improved each year. ROICs are also well correlated to their forward EBIT multiple with SKL sitting within the line of best fit. Comps include Datwler, Enpro, Hexpol, Illinois Tools, IMI, Nolato, and so on.

OEM customers have some strong long term tailwinds. Potable & waste water underinvestment is a theme globally and particularly in the united states, AU and NZ. Same with plumbing products. The agri infrastructure in the united states is in deficit so that should continue to grow alongside with global milk volumes (the OECD FAO outlook suggests volumes should increase at a 1.6% annual compound rate to 2029).

SKL has a good recent track record of undertaking immediately accretive acquisitions as well.

So personally I wouldn't be surprised to see EPS grow more that 50% from FY21A by FY24 to over 30 cps. Cheap? No. But good things rarely are. But snoopy's 10 year forecast share price of $3.73 is - for lack of better words - just silly.

Rawz

25-11-2021, 11:32 AM

Thanks for your post FM. Appreciate you taking the time. Sorry cannot give you a rep, computer says no. Must share rep around first

Muse

25-11-2021, 11:50 AM

Thanks for your post FM. Appreciate you taking the time. Sorry cannot give you a rep, computer says no. Must share rep around first

you are a splendid one to behold Rawz

Snoopy

25-11-2021, 03:27 PM

While the work snoopdog has put into his analysis is impressive, the execution of it is on the bizarre side and even that aside the underlying assumptions flawed. Like everyone I see SKL as fully priced and could see some fluctuations, but there are a lot of reasons why this share has been re-rated higher.

Snoopy relies on past averages despite the business making dramatic incremental gains each year.

Well FM, the analysis method comes straight out of 'The Buffettology Workbook' by Mary Buffett (daughter in law of Warren) and is reputedly along the lines that Warren Buffett thinks. I don't wish to judge the method except to say 'it is what it is' and all assumptions are disclosed.

Whether the assumptions made, and as a consequence the results obtained, are flawed is a legitimate judgement call. My preference is to use input figures (assumptions) that are calculated rather than estimated, and make the judgement call on the result - not the input. That way, all the judgement comes at the end of the process. I avoid adjusting the input figures to obtain a result I deem reasonable (which would be a 'confirmation bias' analysis approach).

If a business substantially reinvents itself, then that historical information that I rely on may end up being outdated and inappropriate. There is always a trade off between using more years of business cycle history (good) and the fact that older information may be less relevant to the future (bad). And, separately, I am always wary of futuristic investment planning logic that goes "Ah, but things will be different this time."

In this instance I am happy with the trade offs I have made in assembling the input information, even though I find it awkward to believe the end result. Nevertheless, and in recognition of the fact that the future can take many paths, I must say I felt a lot better with keeping my SKL holding 'as it is' after I had read your 'counter view' (post 1079) FM!

SNOOPY

Biscuit

25-11-2021, 07:01 PM

You were a little quick off the mark with your reply Biscuit. I have since raised my ten year price target for SKL from $2.84 to $3.73. So you are only going to lose $2.27 per share over the next ten years, not $3.16 .....
SNOOPY

All good, in the end I made about 10c per share after brokerage in two days and I have no real idea what they are really worth today, let alone in 10 years :).

Snoopy

25-11-2021, 07:47 PM

All good, in the end I made about 10c per share after brokerage in two days and I have no real idea what they are really worth today, let alone in 10 years :).

Glad you made on the trade ;-).

It is kind of counter intuitive and if you go to one of our esteemed learning institutions they won't teach you 'Buffett Think'. But the basic idea is that businesses go through cycles that are not entirely predictable. Supply is affected by drought or trade wars (as examples). Demand can be affected by unusual weather seasons, fashion trends or, dare I say it, even pandemics! The Buffett theory is that if you have a strong intellectual property, or a well established position in any market, you are almost certain to be able to ride out such ups and downs. Thus while it might be difficult to predict exactly where the business cycle will place a business in say, two years time, it is much more of a sure bet that your target business will still be hitting the right business notes in ten years time. Thus forecasting on a ten year basis, for particular selected well functioning businesses, is likely to be more accurate and easier than just looking two years down the track, (because you are looking through market noise).

In the case of Skellerup, I am much more comfortable telling you where they will be at EOFY2032, than at EOFY2023.

SNOOPY

Biscuit

25-11-2021, 08:09 PM

Glad you made on the trade ;-).

It is kind of counter intuitive and if you go to one of our esteemed learning institutions they won't teach you 'Buffett Think'. But the basic idea is that businesses go through cycles that are not entirely predictable. Supply is affected by drought or trade wars (as examples). Demand can be affected by unusual weather seasons, fashion trends or, dare I say it, even pandemics! The Buffett theory is that if you have a strong intellectual property, or a well established position in any market, you are almost certain to be able to ride out such ups and downs. Thus while it might be difficult to predict exactly where the business cycle will place a business in say, two years time, it is much more of a sure bet that your target business will still be hitting the right business notes in ten years time. Thus forecasting on a ten year basis, for particular selected well functioning businesses, is likely to be more accurate and easier than just looking two years down the track, (because you are looking through market noise).

In the case of Skellerup, I am much more comfortable telling you where they will be at EOFY2032, than at EOFY2023.

SNOOPY

I admire your determination to analyze in detail and there is value in doing that. Certainly hasn't done Warren B any harm. However, it is not something I could/would do. Too much detail for me, I like the big picture, a bit of detail, and then I'll manage the risk knowing I am often wrong. Your way may be better but it wouldn't work for me.

Snoopy

25-11-2021, 09:22 PM

I admire your determination to analyze in detail and there is value in doing that. Certainly hasn't done Warren B any harm. However, it is not something I could/would do. Too much detail for me, I like the big picture, a bit of detail, and then I'll manage the risk knowing I am often wrong. Your way may be better but it wouldn't work for me.

Fair enough. I replied to your post in detail because I was suddenly reminded the way I analyse companies is not 'mainstream' and laying out where I believe a company will be in ten years time might seem a bit crazy to the mainstreamer. It has been a while since I posted about the Buffett investment strategy in general. So my answer was aimed at showing general readers what I was doing, rather than trying to convert someone else to my way of thinking. My methods aren't always appropriate. They don't suit new fast growing companies in an establishment phase for example. So I am happy to leave those opportunities to others. I think as long as we are both pursuing investment strategies that 'work for us', it doesn't matter if we follow different paths. The only problem with 'following your own nose' is that for those that only have experience of investing in a bull market then every market movement is seen as confirmation that your own investment strategy is spot on. As Warren Buffett would say, it is only when the tide goes out you find out who is swimming naked.

SNOOPY

Muse

25-11-2021, 10:12 PM

Fair enough. I replied to your post in detail because I was suddenly reminded the way I analyse companies is not 'mainstream' and laying out where I believe a company will be in ten years time might seem a bit crazy to the mainstreamer. It has been a while since I posted about the Buffett investment strategy in general. So my answer was aimed at showing general readers what I was doing, rather than trying to convert someone else to my way of thinking. My methods aren't always appropriate. They don't suit new fast growing companies in an establishment phase for example. So I am happy to leave those opportunities to others. I think as long as we are both pursuing investment strategies that 'work for us', it doesn't matter if we follow different paths. The only problem with 'following your own nose' is that for those that only have experience of investing in a bull market then every market movement is seen as confirmation that your own investment strategy is spot on. As Warren Buffett would say, it is only when the tide goes out you find out who is swimming naked.

SNOOPY

do what you do snoop dawg you certainly have a good eye for numbers and financial frameworks. also admire the use of reversion to mean as many analysts just see life as a hockey stick after a base year, without considering if the base year was ever maintainable. and as if recessions never happen!

Snoopy

26-11-2021, 10:36 PM

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

I have had a quiet look at the FY2021 annual report. I have done a Buffett style evaluation and found the company very fully valued. So for a different perspective, what does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

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

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) + 6.5c (50% I) 8.96c + 7.76c16.72c

FY202210.5c (50% I) + ?c (50% I) 12.54c + ?c 12.54c

Total78.61c

Averaged over 5 years, the dividend works out at 78.61/5 = 15.7c (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. Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, i ma reducing my sought gross yield from 7.5% to 7%.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

15.7 / (0.07) = $2.25

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: $2.25 x 1.2 = $2.70
Bottom of Business Cycle Valuation: $2.25 x 0.8 = $1.80

My target accumulation price is 10% below 'fair value', and that equates to $2.03.

SKL shares are trading at $6.06 as I write this (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.03 and a 'growth premium' of $6.06 - $2.03 = $4.03 (which is quite a bit).

SNOOPY

discl: hold SKL

BlackPeter

27-11-2021, 10:18 AM

...

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

15.7 / (0.07) = $2.25

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: $2.25 x 1.2 = $2.70
Bottom of Business Cycle Valuation: $2.25 x 0.8 = $1.80

My target accumulation price is 10% below 'fair value', and that equates to $2.03.

SKL shares are trading at $6.06 as I write this (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.03 and a 'growth premium' of $6.06 - $2.03 = $4.03 (which is quite a bit).

SNOOPY

discl: hold SKL

Hi Snoopy, I do appreciate all the effort you put into assessing and evaluating companies and sharing the results with us - this is one of the things still making this forum a worthwhile read! ... and while nobody is able to predict which hoops and bumps the share price is going to jump through ... as a measure of earning value, it makes a lot of sense to look at the earnings potential of companies - and then it is just the question of waiting for the market to turn from a voting machine into a weighing machine.

For what it is worth - DCF value (courtesy to ShareClarity) is $3.46 per share ... if I use 10 times average EPS, it would be $1.40 per share and if I use the unmodified Graham formula I would come up with $6.31 per share, but this would require SKL earnings to keep growing with nearly 10% forever - and, how likely is this for a company operating in a quite cyclical environment with all its industries quite close to the peak?

Whatever it is - I think there is a good case to make that SKL is currently overpriced, and this is what your analysis says as well. What I don't quite understand is - why are you still holding after you went through this exercise - don't you trust the Buffett methodology?

discl: not holding :):

Ricky-bobby

27-11-2021, 11:01 AM

Muse

27-11-2021, 11:25 AM

There are a lot of shares currently over priced! I’m holding this one because they are releasing consistent results and think they will continue to do so. I Kinda look at them like Delegat’s, give it a couple of years and they will be in mid teens dollar share value if they keep on this path.

I think SKL have benefitted a lot from robust dairy prices. One worry (for SKL) is the ongoing rise in carbon prices and how it could impact the medium/long term sector, both here and overseas if they get roped into having to take on more liability. And also people switching away from dairy to alternative products. but milk prices looking great for short term activity.

Also note your comment re delegats. Great company one of the few to make proper money out of wine! Good vertically integrated company - own their own vineyards, production, brand and distribution. has been and will continue to be in my portfolio.

Snoopy

27-11-2021, 12:30 PM

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.

We Skellerup shareholders have certainly had a good year. But 'good' is a word that must always have context. I find it useful to have a 'measuring stick'. Scott Technology is such a stick. Different in that it sells complete packages and not components. But the same in that both companies rely on Intellectual Property and trusted staff that can turn that knowledge into profits.

SkellerupScott Technology

Operational SectorManufacturingManufacturing

Total Employees813622

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

Share Price 27-11-2021$6.06$3.37

Market Capitalisation 27-11-2019$1,183m$267m

Capitalised Dividend Valuation per share (2017.5 to 2021.5)$2.25$1.27

Declared earnings (FY2021)$40.175m$9.527m

Normalised earnings (FY2021)$40.243m$11.146m

Normalised eps (FY2021)20.5c14.2c

Normalised eps growth over 5 year period (FY2016 to FY2021)+72.3%+18.3%

Historical PE (FY2021)29.523.7

dps (paid during FY2021)7c+6.5c0c+2c

Earnings Payout Ratio (excluding DRP)68%14%

Gross dps (paid during FY2019)8.96c+7.76c0c+2c

Historical Gross Dividend Yield (using Share Price 27-11-2021)2.76%0.59%

Shareholder Equity (based on equity at EOFY2021)$196.149m$98.195m

ROE (based on equity at EOFY2021)20.5%11.4%

Sales (FY2021)$279.615m$216.234m

Net Profit Margin (FY2021)14.4%5.2%

Total Bank Debt (last balance date EOFY2021)$24.409m$10.920m

MDRT (Based on bank debt at balance date EOFY2021)0.61 years1.0 years

A 72.3% growth rate at SKL over a five year period equates to an averaged annual growth rate of:

1.723^0.2 = 1.115, or 11.5% per year.

Perform the same exercise on SCT and you get

1.183^0.2 = 1.034, or 3.42% per year.

This goes some way to explaining why SKL is sitting on a PE of 29.5 verses 23.7 for Scotts.

Some more observations:

a/ If you compare my quoted reference exercise from the FY2019 perspective, both companies have reduced their bank debt to something that is almost insignificant.
b/ ROE at SKL remains about double that at SCT, although both have improved.
c/ SKL coped with the initial Covid-19 hit better than SCT, because SKL mainly supplied essential components whereas SCT 'capital projects' were deferred. But SCT took the opportunity to 'right size' the business, losing around 200 staff compared to the FY2019 pcp.
d/ Net profit margin at SKL remains around triple that of SCT (c.f. pcp), although both have improved.

Another comparison of note is to see by how much the market price exceeds the 'capitalised dividend valuation' price. This difference is one measure of the 'growth premium' accorded to each company by the market.

SKL: Growth Premium = $6.06 - $2.25 = $3.81 => Growth Premium is 63% of share price
SCT: Growth Premium = $3.37- $1.27 = $2.10 => Growth Premium is 62% of share price

Depending on how you see the outlook for both companies, you might interpret these figures as showing both companies being equally overvalued ;-P

The one difference that does not show in these figures is the effect of the 'change of direction' for Scotts, under their new CEO. This is steering the company towards more standardised products, away from one off builds. It will take a couple of years for this change to flow through to margins, bar no more shock Covid-19 interruptions (gulp!)

Concluding the Comparison

Both companies are conservatively financed, which is always good in a world where business opportunities are uncertain. Scott's cut their dividend payout drastically to achieve this, but Skellerup did not have to. I see Skellerup as the more resilient earner. The growth story at Skellerup is around incremental improvement and bolt on acquisitions. Whereas at Scotts, growth is more around 'executing the Scott 2025 vision plan' (more repeat sales of modularised products). I see the Skellerup path as more certain (they have a great knack of retaining customers as development partners), whereas Scotts are being more affected by macro-economic events. But I think if Scott's can co-ordinate the growth in their diverse international 'centres of excellence', then it is Scott's that have the most growth potential over the next two to three years. Looking beyond that time frame though, it is hard to imagine that Skellerup will be bettered on the long term growth path. If Skellerup are overvalued, there is a case to be made that they are not significantly more overvalued than Scott's are. The bonus for Scott shareholders is that they are always on the verge of cashing in a figurative 'mega lottery ticket'. If Scott's automated beef boning room project can be nailed, then there are a good decade of highly profitable installation projects lined up in Australia and the USA to follow up. So far, the 'mega lottery ticket application' (of which the automated beef boning room is simply the current one) has not kicked in for Scott shareholders. But we always live in hope! Being a 'glass half full' person, I am calling Scotts as the better value investment on the market today. Yet as a long term holder, I would feel more comfortable with Skellerup in my portfolio. Yes the price is dear, for both. But good things tend not to come cheap!

SNOOPY

discl: hold SCT and SKL

winner69

27-11-2021, 01:04 PM

The re-rating of SKL over the past few years has been stupendous

For many years prior to 2019 its PE averaged 14 - it is now about 30 - that's some re-rating.(see chart)

Staggering how much market value added has been added (market cap less shareholder equity)

AT June 2017 shareholder equity was $159m and is now $196m (no much increase as a large proportion of earnings are paid as dividends) but market cap has increased from $328m to $1,183m today -- and increase of $855m taking SKL market value added to just under $1 billion.

Question is can this continue - if the market remains in love with them no reason why it shouldn't

BlackPeter

27-11-2021, 01:07 PM

winner69

27-11-2021, 03:44 PM

Re-rating surely boosts shareholder returns

Say bought SKL 1/7/19 for $2.37 one has made $4.06 total shareholder returns (172% over just over 2 years)

The total return of $4.06 is made up of-

$0.88 from increased earnings or 22% of returns
$2.80 from being re-rated (higher PE ratio) or 69% of returns
$0.38% from dividends or 9% of total returns

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (reward for finally achieving some consistent results)

Classic case of what value investors look for ....... and eventually such investors have to decide when enough is enough from a value perspective and cash up

Muse

27-11-2021, 03:51 PM

Re-rating surely boosts shareholder returns

Say bought SKL 1/7/19 for $2.37 one has made $4.06 total shareholder returns (172% over just over 2 years)

The total return of $4.06 is made up of-

$0.88 from increased earnings or 22% of returns
$2.80 from being re-rated (higher PE ratio) or 69% of returns
$0.38% from dividends or 9% of total returns

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (eward for finally achieving some consistent results)

Classic case of what value investors look for ....... and eventually such investors have to decide when enough is enough from a value perspective and cash up

I bet you could do a mean bridge graph for us winner - dividends, earnings growth, & uplift in multiple…

Snoopy

27-11-2021, 06:37 PM

It makes a lot of sense to look at the earnings potential of companies - and then it is just the question of waiting for the market to turn from a voting machine into a weighing machine.

For what it is worth - DCF value (courtesy to ShareClarity) is $3.46 per share ... if I use 10 times average EPS, it would be $1.40 per share and if I use the unmodified Graham formula I would come up with $6.31 per share, but this would require SKL earnings to keep growing with nearly 10% forever - and, how likely is this for a company operating in a quite cyclical environment with all its industries quite close to the peak?

Whatever it is - I think there is a good case to make that SKL is currently overpriced,

discl: not holding :):

Good question BP. The general answer is that in these times of impossibly low interest rates, I am looking to invest in shares which have a good dividend yield, but nevertheless have the ability to grow earnings. That way, as interest rates rise, I stand a good chance of the shares I own retaining their capital value. SKL shares are a good fit for this scenario in my view. Of course if this was my only investment criterion, then I could buy SKL shares at any price and my investment goal woudl be satisfied! Clearly there must be a price that. despite the favourable outlook for SKL shares, is too much to pay. So what price is that? Going through your valuations one by one.

a/ Shareclarity @ $3.46 I dived into the Shareclarity website to check out the assumptions behind this. It is based on a weighted average cost of capital of 9.2%. I know there are datafeeds and formulas that have produced this figure (all historical out of necessity). But if this is an assessment of future risk, then I disagree with that figure. I have used 7% in my 'capitalised dividend value' calculations as a yield, and I would tend to see that as an appropriate discount factor as well. The long run growth rate looks a little low to me too, at just 2.8%.

Reducing that discount factor, assuming earnings two years out constitutes a representative correction, would increase the valuation by:

(9.2 x 9.2) / (7 x 7) = 1.73

That increases the DCF valuation to $3.46 x 1.73 = $5.98. Of course, the discounted cashflow bit of the valuation typically only amounts to 30-40% of the total, so that $5.98 would also include a higher residual growth rate, which I think is likely. Suddenly SKL at $6.06 looks 'in the ballpark'.

b/ 10 x average eps at 14cps = $1.40. That figure looks to biased towards historical earnings averages. I think we have 'stepped up' over the last year to a norm closer to 20c. A PE multiple of 10 sounds a bit miserable as well. Plus this valuation technique gives no allowance for growth.

c/ Security Analysis - Benjamin Graham formula original version

V = EPS x (8.5 + 2g)

where:

i/ V is the intrinsic value,
ii/ EPS is the trailing 12 month EPS,
iii/ 8.5 is the PE ratio of a stock with 0% growth and
iv/ g being the growth rate for the next 7-10 years.

I don't know what growth rate you were assuming BP. But working backwards from the numbers you gave me, I get:

631 = 20.5 x (8.5 + 2g) => g= 11.1%

That growth rate is not too far away from what SKL has actually achieved over the last 5 years.

Taking account of valuations a/ and c/, I think an SKL share price of 6 bucks is looking 'in the ball park'. Mr Market getting it right?

SNOOPY

Snoopy

27-11-2021, 07:20 PM

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (eward for finally achieving some consistent results)

The thing I love about Winner's contributions to this forum, apart from his encyclopedic knowledge of NZ corporate history, are the accounting tech terms he occasionally throws in, to educate we 'investment gatecrashers' newer to the investment party game than him. This one I had to look up.

'eward': "A reward gained through electronic, internet or computer reported means, for which the recipient needs to make little or no effort."

Love it! I will take any 'ewards' I can get in my investing future!

SNOOPY

Snoopy

27-11-2021, 07:53 PM

Whatever it is - I think there is a good case to make that SKL is currently overpriced, and this is what your analysis says as well. What I don't quite understand is - why are you still holding after you went through this exercise - don't you trust the Buffett methodology?

discl: not holding :):

Like I have said before, the 'Buffett Methodology' is a mechanical process feeding in numbers generated largely without human input operator judgement. It is then up to you to make sense of what comes out at the end. Refer back to my post 1073:

https://www.sharetrader.co.nz/showthread.php?4091-Skellerup-(SKL)-Fundamentals&p=927468&viewfull=1#post927468

I see actual earnings in FY2021 of 20.5cps, 'rising all the way' (sic) to modelled earnings of 20.7cps in 2032. How does that look to you (virtually zero growth for ten years)? No, I don't believe it either.

This modelling works on historical averages. The main factor that has produced such modest growth is the historical ROE average that I have used of 15.7%. Over FY2021 actual ROE was 20%. If I had used this figure then the compounding growth over ten years would have produced a much higher valuation. There is something to be said for using historical averages, because we know such figures have been achieved in the past. There is no 'wish factor' in using those figures for future forecasts. However, in this instance, the average is a substantial drop from the recent past. How realistic is that? Like all forecasts, believing the numbers does come down to a judgement call in the end. If I was a betting mutt, I would pick some 'reversion to the mean', because I know ROE numbers won't go up forever. But my gut feeling is that ROE won't reduce back to 15.7%.

So to answer your question, yes I do trust the Buffett Methodology in process. But I think in this instance, the ROE input factor in particular, has a question mark over it. If everything does 'revert to the mean' though, the Buffett Methodology as presented is a future prediction of what will happen.

SNOOPY

winner69

28-11-2021, 08:39 AM

The thing I love about Winner's contributions to this forum, apart from his encyclopedic knowledge of NZ corporate history, are the accounting tech terms he occasionally throws in, to educate we 'investment gatecrashers' newer to the investment party game than him. This one I had to look up.

'eward': "A reward gained through electronic, internet or computer reported means, for which the recipient needs to make little or no effort."

Love it! I will take any 'ewards' I can get in my investing future!

SNOOPY

Better still oopy ....you can convert these ewards in to Fly Buys ....cool eh

winner69

28-11-2021, 08:47 AM

...............

Taking account of valuations a/ and c/, I think an SKL share price of 6 bucks is looking 'in the ball park'. Mr Market getting it right?

SNOOPY

Don't forget most of the 6 bucks has come from the market re-rating SKL to the extent it has (rather than SKL actual performance)

Invariably Phaedrus's sage advice come true --- teh market giveth but the market also taketh away

We can revisit that when SKL share price is 8 bucks :eek2:

Biscuit

28-11-2021, 09:26 AM

Like I have said before, the 'Buffett Methodology' is a mechanical process feeding in numbers generated largely without human input operator judgement. It is then up to you to make sense of what comes out at the end. Refer back to my post 1073:

https://www.sharetrader.co.nz/showthread.php?4091-Skellerup-(SKL)-Fundamentals&p=927468&viewfull=1#post927468

I see actual earnings in FY2021 of 20.5cps, 'rising all the way' (sic) to modelled earnings of 20.7cps in 2032. How does that look to you (virtually zero growth for ten years)? No, I don't believe it either.

This modelling works on historical averages. The main factor that has produced such modest growth is the historical ROE average that I have used of 15.7%. Over FY2021 actual ROE was 20%. If I had used this figure then the compounding growth over ten years would have produced a much higher valuation. There is something to be said for using historical averages, because we know such figures have been achieved in the past. There is no 'wish factor' in using those figures for future forecasts. However, in this instance, the average is a substantial drop from the recent past. How realistic is that? Like all forecasts, believing the numbers does come down to a judgement call in the end. If I was a betting mutt, I would pick some 'reversion to the mean', because I know ROE numbers won't go up forever. But my gut feeling is that ROE won't reduce back to 15.7%.

So to answer your question, yes I do trust the Buffett Methodology in process. But I think in this instance, the ROE input factor in particular, has a question mark over it. If everything does 'revert to the mean' though, the Buffett Methodology as presented is a future prediction of what will happen.

SNOOPY

I think the short version is that extrapolation is questionable for companies that have undergone some kind of transformation and particularly dangerous where a company is facing adverse changes, leading to over-valuation. Haven't you just proven that your model isn't valid, that perhaps we can't mathematically determine the value of a company?

Snoopy

28-11-2021, 11:59 AM

I think the short version is that extrapolation is questionable for companies that have undergone some kind of transformation and particularly dangerous where a company is facing adverse changes, leading to over-valuation. Haven't you just proven that your model isn't valid, that perhaps we can't mathematically determine the value of a company?

A few points to respond to here.

a/ The Buffetology Valuation Method is not extrapolation. It is using real data, from reported results the company has actually achieved. The company has 'done the numbers' already, so there is no 'whistling in the wind' plucking out fancy forecasts on dubious assumptions. Buffettology type forecasts are the result of the continuation of existing behaviour, already documented and known.

b/ If a company has undergone some sort of 'transformation', then you are right. Existing performance metrics become historical and are of little relevance. I wouldn't say that has happened at Skellerup though. As Winner's post 1095 shows, 69% of returns over the last two years have come from a change in market sentiment. Just 22% from a change in earnings.

To rephrase that in Winnerspeak, 69% percent of shareholder 'rewards' have come from 'ewards'. That means investors sitting back in their computer chairs pushing buy buttons, and letting the share price rise go their heads. Or as Dire Straits might put it, "Money for nothing".

Rather than seeing 'money for nothing' as a transformation, I see it as an increasing risk of 'share price reversion to the mean'.

c/ On the subject of 'adverse events', these can of course make or break a company. But that is the point of the Buffett screening tests that I do: BT1/, BT2. BT3/ and BT4/. Those tests are there to check that if an adverse event were to occur, it will be very likely to cause a blip in company reporting, not be the start of a terminal decline. IOW those Buffett tests are to measure company resilience in the wake of an adverse event. Another measure of resilience relates to how aggressively or conservatively a company is financed, which is where the MDRT statistic comes in. I regard an 'adverse event', in an investment context, as an opportunity to purchase a quality share at a bargain price - not a risk. Alternatively if the market did not react to long term 'adverse changes', that might be a signal to 'lighten up' your shareholding.

d/ I am not suggesting that a company valuation should be done entirely by mathematical means. Any mathematical model is subject to falling into a GIGO rabbit hole. GIGO means 'Garbage In', 'Garbage Out'. IOW a mathematical model is only as good as the information you feed it. So after your mathematical model spits out a valuation you should stand back and think, does in make sense? Or put another way, are those inputs really representative of what is happening? You may not be able to definitively answer those questions. You might seek solace from looking at alternative valuation techniques as highlighted by BP (post 1089). Looking at the same problem from different angles can provide useful insights.

Summary Answer

If your mathematical model doesn't provide the answers you want, that doesn't mean you should throw it away.

SNOOPY

Biscuit

28-11-2021, 12:31 PM

A few points to respond to here.

a/ .... Buffettology type forecasts are the result of the continuation of existing behaviour....

aka extrapolation

b/ ..... Or as Dire Straits might put it, "Money for nothing".

Mark Knofler, best musician of all time, ever.

Rather than seeing 'money for nothing' as a transformation, I see it as an increasing risk of 'share price reversion to the mean'.

I think reversion to the mean is perhaps the central thesis of the model and the assumption is that neither the market nor the company will ever substantially change in any "permanent" way. But companies and markets can transform and ideally the assumption of the model would be tested before applying it. SKL ROE is (almost) statistically higher now than it was a few years ago. That might be the business cycle or it might be an underlying change, but which is it?

c/ On the subject of 'adverse events', these can of course make or break a company. But that is the point of the Buffett screening tests that I do: BT1/, BT2. BT3/ and BT4/. Those tests are there to check that if an adverse event were to occur, it will be very likely to cause a blip in company reporting, not be the start of a terminal decline. IOW those Buffett tests are to measure company resilience in the wake of an adverse event. Another measure of resilience relates to how aggressively or conservatively a company is financed, which is where the MDRT statistic comes in. In this context I regard an 'adverse event' as an opportunity to purchase a quality share at a bargain price - not a risk. Alternatively if the market did not react to long term 'adverse changes', that might be a signal to 'lighten up' your shareholding.

d/ I am not suggesting that a company valuation should be done entirely by mathematical means. Any mathematical model is subject to falling into a GIGO rabbit hole. GIGO means 'Garbage In', 'Garbage Out'. IOW a mathematical model is only as good as the information you feed it. So after your mathematical model spits out a valuation you should stand back and think, does in make sense? Or put another way, are those inputs really representative of what is happening? You may not be able to definitively answer those questions. You might seek solace from looking at alternative valuation techniques as highlighted by BP. Looking at the same problem from different angles can provide useful insights.

I don't necessarily disagree. To me though, the calculation seems to provide a precise answer without any information about its accuracy so you are always left with a subjective assessment anyway. My subjective assessment of SKL is overall positive so I've bought into it over many years and have a substantial holding. The extent of my mathematical analysis is that the PE seems a bit high these days so I probably won't add any more now.

Summary Answer

If your mathematical model doesn't provide the answers you want, that doesn't mean you should throw it away.

SNOOPY

As I used to tell my students: there is no answer that you want, there is just the answer.

winner69

28-11-2021, 04:36 PM

Snoopy

28-11-2021, 08:39 PM

A few points to respond to here.

a/ .... Buffettology type forecasts are the result of the continuation of existing behaviour....

aka extrapolation

Only in the sense that if you have a time period between A and B, then all forecasts outside of that time period have been extrapolated. But by that definition all forecasts of the future are extrapolation by definition, even if no trends in data are identified or implied. Saying a forecast is 'extrapolation' in this sense is just a meaningless piece of tautology. It adds nothing to the debate.

The extrapolation I was talking to, in an opposite sense. was to look at (say) sales going up by 10% per year over the last five years, and then assume sales will go up by 10% per year over the next five years as well. IOW extrapolation being the continuation of a mathematical pattern. The Buffettology workbook method is not doing that kind of extrapolation. The Buffettology workbook method instead uses historical constants in the modelling mechanics, with no inputs from the future needed to be forecast.

I think reversion to the mean is perhaps the central thesis of the model and the assumption is that neither the market nor the company will ever substantially change in any "permanent" way.

You are dead right. That is a verbally expressive description of what taking five years of data, taking some averages of different metrics from that data, and then using those derived averages in a forecasting model, looks like.

But companies and markets can transform and ideally the assumption of the model would be tested before applying it.

If a company is obviously 'transforming' as you put it, then you cannot use the Buffettology modelling technique. That is correct. But I don't see any transformation of that kind at Skellerup. The business model was and remains:

a/ Get alongside the customer at the design stage to optimise the form and material of a solution.
b/ Once optimised, keep manufacturing that solution.
c/ Incrementally acquire businesses so you can better carry out roles a/ and b/.

I would argue that FY2021 could mark an optimisation of the execution of the business plan. But a transformation? Not in the sense of making the Buffetology methodology irrelevant.

SKL ROE is (almost) statistically higher now than it was a few years ago. That might be the business cycle, or it might be an underlying change, but which is it?

Worked out from your statistical sample of one year you mean? The ROE jump from around 15-16% of the previous three years, to 20%? I don't know whether that improvement is 'business cycle related' or 'underlying change'. But I do know you should model it as a business cycle effect. Because if you start modelling things by changing inputs, because you believe there has been an underlying step change, then what you are doing is changing the inputs to get the result you want to see. And if you start feeding your mathematical model information like that, you will soon find that you can 'prove' any future business scenario that you care to dream up.

To me though, the calculation seems to provide a precise answer without any information about its accuracy so you are always left with a subjective assessment anyway.

Well any answer is only as good as the information you put in to feeding that answer. But the whole purpose is to highlight the investment opportunity available - not necessarily be ultimately accurate. What that Buffettology modelling is telling me is that IF the Return on Equity continues at 15.7% and IF 68% of earnings are retained each year and IF the PE ratio is re-rated down to an historical norm, then we investors will likely be poorer in ten years time. These are three pretty big 'IFs' and right now that is not how I see things playing out. Maybe I am just star struck by the FY2021 result?
Maybe you are star struck by the FY2021 result? Alternative valuation techniques have shown that if the company continues to grow profits at 10% per year for five years, a share price of just over $6 today could be 'fair value'.

My subjective assessment of SKL is overall positive so I've bought into it over many years and have a substantial holding. The extent of my mathematical analysis is that the PE seems a bit high these days so I probably won't add any more now.

Summary Answer

If your mathematical model doesn't provide the answers you want, that doesn't mean you should throw it away.

As I used to tell my students: there is no answer that you want, there is just the answer.

On the contrary, that may be how it works in pure mathematics, but it isn't how things work in business analysis. Give me the answer you want, and I will adjust the input information to provide it!

SNOOPY

Muse

28-11-2021, 10:00 PM

The Buffettology workbook method is not doing that kind of extrapolation. The Buffettology workbook method instead uses historical constants in the modelling mechanics....Not in the sense of making the Buffetology methodology irrelevant.....if you start feeding your mathematical model information like that, you will soon find that you can 'prove' any future business scenario that you care to dream up....What that Buffettology modelling is telling me is ....that may be how it works in pure mathmatics
SNOOPY

There's a lot going on in your posts Snoppy. I think everyone here agrees with you that the company is highly valued and potentially overvalued. I think more or less we all agree that when assessing a company or its financial profile you need to consider the maintainability of it (it's revenue, it's margins, industry conditions, its valuation multiple)...you do so using historical averages, others will do so in other situations by making qualative & quantative assessments on (say) if there was a blip in demand, a price spike driving up margins or raw materials driving down margins, one off events - and often looking to history as a guide or making bespoke calculations or assumptions. I think both are routed in the same intent and are both subjective assumptions, despite the mathmatical piousness you refer to. Anything about the future is inheriantly an assumption, it will always be subjective, it will always be off, and the best path is for the individual forecaster to use the best tools they have to make the highest quality assumptions they can with the available factset at hand. And if the Buffetology Workbook is that to you then all the power to you. Many will just use their gut based on how they feel about the business and its characteristics, how rational the industry is and how it is evolving, how they perceive value, etc.

I think we are getting a bit off track from Skellerup now as you seemed very smitten with The Buffetology Workbook and keen to impress upon us its stature as a mathmatical model and your knowledge of it use. I know you will realise the author is Mary Buffett - the divorced former daugher in law of Warren's son Peter, which she maintains reflects Warren's financial process. Does that not seem a little sniffy to you? That Mary, an individual without any particular financial background or experience, as a daughter in law would be able to get so close & spend so much time with Warren to be able to fully understand it herself and then transcribe it in a way may that made sense to the rest of us mortals? So I'll just call it as I see it - Mary openly trades on the Buffett name. She kept it after the divorce, she runs the Buffett Online School, wrote this book, is a motivational speaker and career adviser, and blogger and wannabe TV expert. I'm sure she had plenty of help from her side author and ghost writer expertise, and was able to glean lots of sage investment anecdotes and get them in the book in the same way we all love to read his annual letters etc. I'm sure the help she had in getting the financial framework probably has a good dose of his general investment phillosphy and her helpers used their experience in forming the useful financial frameworks. I'll place Mary's The Buffet Online School above Trump University, but in the same category.

Just because it uses some 5 year averages and a couple formulas with basic addition, multiplication, the odd compounding, certainly doesn't make it some advanced mathmatical model that suddenly it is beyond reproach (its a few worksheets), and same goes with breathly repearting that it is the Buffetology Workbook (should be the Mary Buffet Workbook) as if it cements its position as the holy grail of corporate finance theory.

Finally, on the SKL relevant point of your post:
"The business model was and remains:

a/ Get alongside the customer at the design stage to optimise the form and material of a solution.
b/ Once optimised, keep manufacturing that solution.
c/ Incrementally acquire businesses so you can better carry out roles a/ and b/."

That is factually incorrect as I referred to in my post on the evoluation of SKL's business model. Skellerup with a bloody contract manufacturer not that long ago and its business is dramatically different now. That has filtered through its financial profile like a waterfall each year for the last 5 or 6 years. That's the problem with spreadsheets - people get some fixated on them that they think through sheer spreadsheeting will they will arive at some devine answer and lose their commercial nouse. Financials are just numerical outputs from what happen in the real world, where sometimes the status quo prevails and other times come years after strategic decisions are made that fundamentally change a business model. For some of us more than others (I am including myself in this) it' important to get your head out of the spreadsheets and ask yourself if you have a good commercial understanding of what it is happening in a business and its industry, before you try to put it in a spreadsheet.

Snoopy

28-11-2021, 10:48 PM

F21 financially was indeed a stellar year ….significantly higher NPBT growth than normal, big changes in R0E and ROIC etc etc..

If the new level of performance is the new ‘norm’ then SKL deserve to be rerated even further …..maybe to levels that FPH are achieving (some ratios that good)

If F21 was a ‘onc off’ and the the ‘norm’ is more like F19/F20 then this thing called reversion to the mean might play out.

Last update said F22 going well …..but I note share price is back to where it was just before that announcement …..the enthusiasm that pushed it up to about 6.50 has waned.

I see things like this.

We have all done well out of our Skellerup shares, maybe too well. We are all figuratively sitting at the top table with exquisite crystal glasses drinking 'Chateau de Chateau'. We are all one button away from 'cashing up'. But we know we are onto a winner (not you Winner!), so the instinct is to let our winner ride. We have that little bit of nervousness creeping in, in an 'edgy' way. We are looking sideways imagining what could go wrong.

The problem is I quite like sitting at the top table drinking 'Chateau de Chateau'. Sitting here those other tables don't look so attractive. If I cash out, where do I move to?

I don't buy the idea of Skellerup being re-rated even further. A trading range of $5.50 to $6.50 over the next twelve months is where I see things moving. I think we are at a sweet spot with dairy farmers riding high, and demand for high end boats (and Skellerup's associated rubberised decking) near a peak. But I think we have learned through Covid-19 that we are not only on to a good thing with SKL shares, but a resilient thing. So when things do turn down, they may not turn down that much - for us.

Liz did take some money off the table, 200,000 shares to be exact to build that new deck in April (at $4.35!). But she still has 720,000 shares left. So it was hardly an 'abandon ship' event. I am thinking that if somewhere around 6 bucks is fair value( in a 'toppy' way) and albeit with some of those ducks continuing to line up, then $6.50 might be a good price at which to rebalance. Yet conversely at $5.50, I would think twice about buying more shares, because I don't think the 'reversion to the mean' scenario is a total fantasy.

Right now I think I will continue to sit at the top table, sipping 'Chateau de Chateau', and will await and observe -with interest (pun intended, gross divie yield 3.3% still better than the bank)- the behaviour of those shareholder reef fish when the storm-water tanks open on Monday morning.

SNOOPY

Snoopy

29-11-2021, 09:40 AM

I think we are getting a bit off track from Skellerup now as you seemed very smitten with The Buffetology Workbook and keen to impress upon us its stature as a mathmatical model and your knowledge of it use. I know you will realise the author is Mary Buffett - the divorced former daugher in law of Warren's son Peter, which she maintains reflects Warren's financial process. Does that not seem a little sniffy to you? That Mary, an individual without any particular financial background or experience, as a daughter in law would be able to get so close & spend so much time with Warren to be able to fully understand it herself and then transcribe it in a way may that made sense to the rest of us mortals? So I'll just call it as I see it - Mary openly trades on the Buffett name. She kept it after the divorce, she runs the Buffett Online School, wrote this book, is a motivational speaker and career adviser, and blogger and wannabe TV expert. I'm sure she had plenty of help from her side author and ghost writer expertise, and was able to glean lots of sage investment anecdotes and get them in the book in the same way we all love to read his annual letters etc. I'm sure the help she had in getting the financial framework probably has a good dose of his general investment phillosphy and her helpers used their experience in forming the useful financial frameworks. I'll place Mary's The Buffet Online School above Trump University, but in the same category.

I think you are masquerading under a misapprehension that the techniques of Buffett are esoteric and difficult for a mere mortal to understand. The basic principle is actually very simple. Buffett identifies a good business with good 'bones', including a sustainable competitive advantage and one that can be bought at a reasonable price. Buffett then allows that business to continually reinvest in itself through the power of retained earnings. Shareholders benefit by the compounding effect of those retained earnings that spit out higher and higher returns as that reinvested capital compounds. I think that if I can explain the principles of investing like Buffett in one paragraph, it really isn't that difficult a concept to grasp, even for the likes of an unqualified undereducated drongo like Mary Buffett ;-P.

For the record, another author I follow, Brian McNiven, wrote to Buffett asking whether he did actually use the spreadsheet type approach of Mary Buffett and others claiming to follow the Buffett approach. Buffett replied that

"he had never used the specific valuation formulas attributed to him."

Nevertheless, that does not mean the methods of Mary Buffett are a crock. Mary's method is one direct mathematical representation of the ideas of Buffett. I would imagine Warren Buffett follows a similar thought pattern without sitting down at the spreadsheet and grinding through the numbers, because he can in effect get the same result as these Mary Buffett calculations give, in his head. Plus Warren gets to meet the people involved in his businesses in person, whereas we plebs have to make do with a mug shot in an annual report or, at best a quick chat at an AGM.

The original version of Mary's method, published in the book titled simple 'Buffettology' contained an error, something to do with counting dividends twice IIRC. However this was corrected in "The Buffettology Workbook" which came later, and this is why I specifically referred to that book. I then further tweaked that method myself, to take into account the different way dividends are treated in NZ for tax purposes as compared to the USA.

In summary, I am very satisfied that Mary Buffett's methods reflect Warren's principles, even if the methods do not represent a carbon copy of how Warren himself sorts out potential investments. But like all modelling, the quality of the result is only as good as the quality of the input, and there is judgement involved at some point in the process. However, when all is said and done, this is only one modelling technique, which does not invalidate other methods for determining the value of a business. So it should not be followed slavishly. I hope you can see that by not acting on the result of Mary Buffetts calculations right now (I have not sold my 'overvalued' SKL shares) that I am not slavishly following the 'Mary Buffett Formula'.

SNOOPY

Snoopy

29-11-2021, 05:11 PM

Lets take a step back. Over the last decade skl has dramatically changed its business model with its financial profile rapidly changing each year over the last 3-4 years. Skellerup has wrapped its business model around blue chip OEMs with long term macros driving their own growth. In the past SKL was more akin to a contract manufacturer prone to price & competitive pressures in less attractive more cyclical sectors. SKL has had extraordinary success in pushing up the value chain through its engineering capabilities to where it can offer whole of life technical solutions allowing it to better cross sell & upsell higher margin products & services. SKL has executed well at new product development getting it in the door and then capturing aftermarket sales with secondary products and services. SKLs customers are all undergoing lifting standards (over 50% of SKL revenues are from water or food products) growing faster than their ability to drive down prices. The segment also has higher switching costs as SKL products are critical technical components that the OEM cannot do without - particularly when SKL has gotten established providing secondary product sales and services.

Finally, on the SKL relevant point of your post:
"The business model was and remains:

a/ Get alongside the customer at the design stage to optimise the form and material of a solution.
b/ Once optimised, keep manufacturing that solution.
c/ Incrementally acquire businesses so you can better carry out roles a/ and b/."

That is factually incorrect as I referred to in my post on the evoluation of SKL's business model. Skellerup with a bloody contract manufacturer not that long ago and its business is dramatically different now. That has filtered through its financial profile like a waterfall each year for the last 5 or 6 years.

Financials are just numerical outputs from what happen in the real world, where sometimes the status quo prevails and other times come years after strategic decisions are made that fundamentally change a business model. For some of us more than others (I am including myself in this) it' important to get your head out of the spreadsheets and ask yourself if you have a good commercial understanding of what it is happening in a business and its industry, before you try to put it in a spreadsheet.

Here are some quotes from the annual report p6

"Skellerup has focussed on identifying markets that offer us the best potential for growth, and on putting in place the people and the structures to capitalise on that potential in a cost-effective and strategic way."

"Identifying where to allocate our resources in order to achieve the best results for the business and for our shareholders involves continually reviewing our operations across both our Industrial and Agri divisions and assessing individual markets to see where the best margins and most sustainable growth prospects can be found. We do that by working closely with our existing customers so that we understand their businesses and how they work and also through very capable people who are focussed on seeking out new opportunities and gaps in the market we can fill."

"Over recent years we have invested a great deal of time and energy in developing capability in the US and in executing a growth strategy in our Masport, Gulf Rubber, Deks and Ultralon businesses. Also we have proven our strategy is working , an example of this being selected as Partner of the Year to Moen, the number one tapware brand in North America and one of the most demanding customers."

"Our facility in Christchurch remains very important to us. It is where key people involved in our research manufacturing and sales teams for our Agni-business are housed. Having these key people on one site provides us with our most effective competitive advantage. We can react swiftly to changes in customer requirements , thereby ensuring customer product development is customer driven. While we emphasis innovation and quality, we also devote considerable time and attention both to continuous process improvement and careful investment in capital equipment."

This is all very positive stuff, showing Skellerup's changing face from the "contract manufacturer" of old to "wrapping its business model around blue chip OEMs with long term macros driving their own growth." - except - all of those quotes are from the FY2015 annual report six years ago!

Basically I am calling BS on your claim (or maybe your parroted cut and paste from the Jarden report) that Skellerup has really transformed themselves over the last five or six years. They are good today and they were good back then, through executing the a/, b/ c/ strategy that I have previously described, (but which you labelled as 'factually incorrect').

Re-rating surely boosts shareholder returns

Say bought SKL 1/7/19 for $2.37 one has made $4.06 total shareholder returns (172% over just over 2 years)

The total return of $4.06 is made up of-

$0.88 from increased earnings or 22% of returns
$2.80 from being re-rated (higher PE ratio) or 69% of returns
$0.38% from dividends or 9% of total returns

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (reward for finally achieving some consistent results)

Classic case of what value investors look for ....... and eventually such investors have to decide when enough is enough from a value perspective and cash up

As Winner has calculated, the most important element of shareholder returns (69%) over the last couple of years was hype (a re-rated PE ratio). Business execution has been good, but that is not where the bulk of the return for shareholders has come from. Thus I am very wary of the 'this time it is different' transformation thesis for investing in Skellerup.

SNOOPY

Muse

29-11-2021, 08:28 PM

Here are some quotes from the annual report p6

"Skellerup has focussed on identifying markets that offer us the best potential for growth, and on putting in place the people and the structures to capitalise on that potential in a cost-effective and strategic way."

"Identifying where to allocate our resources in order to achieve the best results for the business and for our shareholders involves continually reviewing our operations across both our Industrial and Agri divisions and assessing individual markets to see where the best margins and most sustainable growth prospects can be found. We do that by working closely with our existing customers so that we understand their businesses and how they work and also through very capable people who are focussed on seeking out new opportunities and gaps in the market we can fill."

"Over recent years we have invested a great deal of time and energy in developing capability in the US and in executing a growth strategy in our Masport, Gulf Rubber, Deks and Ultralon businesses. Also we have proven our strategy is working , an example of this being selected as Partner of the Year to Moen, the number one tapware brand in North America and one of the most demanding customers."

"Our facility in Christchurch remains very important to us. It is where key people involved in our research manufacturing and sales teams for our Agni-business are housed. Having these key people on one site provides us with our most effective competitive advantage. We can react swiftly to changes in customer requirements , thereby ensuring customer product development is customer driven. While we emphasis innovation and quality, we also devote considerable time and attention both to continuous process improvement and careful investment in capital equipment."

This is all very positive stuff, showing Skellerup's changing face from the "contract manufacturer" of old to "wrapping its business model around blue chip OEMs with long term macros driving their own growth." - except - all of those quotes are from the FY2015 annual report six years ago!

Basically I am calling BS on your claim (or maybe your parroted cut and paste from the Jarden report) that Skellerup has really transformed themselves over the last five or six years. They are good today and they were good back then, through executing the a/, b/ c/ strategy that I have previously described, (but which you labelled as 'factually incorrect').

As Winner has calculated, the most important element of shareholder returns (69%) over the last couple of years was hype (a re-rated PE ratio). Business execution has been good, but that is not where the bulk of the return for shareholders has come from. Thus I am very wary of the 'this time it is different' transformation thesis for investing in Skellerup.

SNOOPY

Mate this is getting exhausting & I'm one of the central participants I can't imagine how others following the thread are feeling. NO ONE is making a "this time is different transformation thesis for investing into Skellerup" at these levels - you are creating a boogeyman to argue with. I'm pretty sure I've said it looks expensive and potentially overvalued, noted the tailwinds from the run up in milk prices, and a need to be mindful of the maintainability of recent developments (echoing some but not all of your sentiment).

I talked to the business being transformed over both the last 10 years and again over the last 5. The strategy to pivot from being more or less a contract manufacturer to a provider of bespoke OEM components did occur over the previous 5-10 year period but what I highlighted was the financial flow through of that pivot has taken time, and you can literally see it occur over the last 5 years where the company improved in nearly all its financial metrics in every consecutive year. It takes time to phase out legacy lower margin products, which has occurred over the last 5 years, new products get in the door, incrementally higher margin secondary products and services (which both require less capital and upfront investment than the initial sales) take time to take hold after that, so the financial profitability and ROIC naturally lifts in the many years post the strategic pivot. It doesn't occur immediately and sort of waterfalls down after that. So my point was I just dont see it as appropriate to just take an average as you had advocated and challenged the piousness & superiority you had claimed it warranted given it was a "mathematical model" representing "the buffetology workbook" .

Finally yes multiples have changed. Skellerup historically warranted quite a low multiple given its past. The horrendous historic leveraged buyout and subsequent receivership, the low margin boring manufacturing operation they had. It wasn't particularly well regarded, treated as a dividend trap, and was priced as such. I think the business fundamentally changed over time, which resulted in stronger dividends being paid & increasing the yield - suddenly interest rates keep dropping so people got quite interested in high yielding stocks bidding up price. But then as their margins and returns on capital and cashflow lifted investors realised this was actually quite a strong business and priced it up even more. Its my view reratings (lifting PE, EV/EBITDA, whatever) can occur for a number of reasons: interest rates dropping, bit of fomo, but also the financial profile of a business improving. A business that grows faster while requiring less capital than before ought to trade on a higher multiple than before. You can test that in a DCF by running two similar sets of numbers holding everything else constant and the DCF implied EV/EBITDA or PE will be quite different between the two. So while I think there is some scope for SKL multiple comes down as interest rates rise and the dividend yield attraction wanes I certainly don't see it reverting to long term averages. I also looked at what other comparable OEM manufacturers trade at and noted the correlation between their EBIT multiple and ROIC and Skellerup fit within the line of best fit, which is comforting to me as a holder.

Apologies if you have taken offense at me calling out your repeated used of the "Buffetology Workbook Mathematical Model" - which I regard as written by a hack trading off her divorced husbands name and has the same credibility of Trump University - but I only did so after trying to find middle ground and debate the points until you displayed an awful lot of superiority because you were operating "a mathematical model" and others weren't, that it was more pure, and repeated name dropping buffet to shut down the debate - which all seemed very ironic to me. Talk down to other members and telling people their recent purchases were going to cost them x dollars (which lacked a lot of awareness), that the share price would be worth a fraction of its current price in 10 years, etc. Hence I called it out and argued my corner that I think you do have to evaluate why things changed before just dumping on the business like you did, and even still I dont know why try to point out the common ground despite philosophical differences, which you reject out of apparent desire to impress everyone with how much you know about "mathematical models"

Sorry everyone else will be my last post on this particular subject.

Snoopy

29-11-2021, 10:26 PM

The following is an evaluation (post 216 on this thread) that I did on Skellerup using the 'Buffettology Workbook' method nearly seven years ago. This analysis was what convinced me to join the share register around that time.

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.

SNOOPY

PS The reason I like this method of analysis is that all the data used to generate it comes from Skellerup itself. I haven't assumed a return on equity rate, nor have a assumed the market value multiple of Skellerup will be anything to different to how 'Mr Market' has valued Skellerup in the past.

This evaluation was predicting a share price of $3.24 in 2024. Bah, humbug you might say. We are already at a level almost double that. But wait a minute. A key factor in that prediction was a PE ratio of 12.6. A PE ratio cannot be controlled by a company. Only a market can determine that. So what happens if I put in today's market PE ratio of 29.1 into the share price valuation equation?

29.1 x 0.257 = $7.48

O.K. we have three years to go. But if current earning trends continue, and the PE remains at what I consider an 'elevated' level of 29.1, I think that share price prediction from 2014 is tracking pretty well.

The prediction for FY2021 earnings was 19.8cps. Actual result 20.5cps. Not far away is it, for a forecast from seven years ago.

Apologies if you have taken offense at me calling out your repeated used of the "Buffetology Workbook Mathematical Model" - which I regard as written by a hack trading off her divorced husbands name and has the same credibility of Trump University - but I only did so after trying to find middle ground and debate the points until you displayed an awful lot of superiority because you were operating "a mathematical model" and others weren't, that it was more pure, and repeated name dropping buffet to shut down the debate.

Your remarks seem to me shaped by the conclusion you want to find, reinterpreting what others wrote according to what you think they said.

You call Mary Buffett a 'hack' trading off her divorced husband's name. Yet it appears the methods of this 'hack' can be used a forecast earnings and a share price 7-10 years down the track. Could any of the alternative forecasting methods have done that?

The 'name dropping' you refer to is because the method I was referring to was drawn up by Mary Buffett, along the lines of how father in law Warren thought through his investments. The method was drawn up by one Buffett, on the methods of another Buffett from a book on Buffettology. The 'name dropping' is simply an accurate description of where the information comes from.

I described the Buffettology evaluation method as a 'mathematical model' because that is what it is. Whether it is superior or not is for every individual to decide. But I never claimed any superiority because it was mathematical, as you claim I did. In fact, I pointed out the limitations of the mathematical model

When Biscuit wrote
"As I used to tell my students: there is no answer that you want, there is just the answer."

then I wrote in reply

On the contrary, that may be how it works in pure mathematics, but it isn't how things work in business analysis. Give me the answer you want, and I will adjust the input information to provide it!

If you start modelling things by changing inputs, because you believe there has been an underlying step change, then what you are doing is changing the inputs to get the result you want to see. And if you start feeding your mathematical model information like that, you will soon find that you can 'prove' any future business scenario that you care to dream up.

You then re-edited the above two posts into the contracted quote below

The Buffettology workbook method instead uses historical constants in the modelling mechanics....Not in the sense of making the Buffetology methodology irrelevant.....if you start feeding your mathematical model information like that, you will soon find that you can 'prove' any future business scenario that you care to dream up....What that Buffettology modelling is telling me is ....that may be how it works in pure mathematics

to make it look like I was saying that pure mathematics was the key to Buffettology modelling. In fact if you go over the original material that you cut down, you will see what I actually said was the exact opposite. Namely, It was the following of the pure mathematical rules that, in the FY2021 Buffettology calculation, derailed the answer.

SNOOPY

Biscuit

30-11-2021, 06:35 AM

.......

Worked out from your statistical sample of one year you mean? The ROE jump from around 15-16% of the previous three years, to 20%? I don't know whether that improvement is 'business cycle related' or 'underlying change'. But I do know you should model it as a business cycle effect. Because if you start modelling things by changing inputs, because you believe there has been an underlying step change, then what you are doing is changing the inputs to get the result you want to see. And if you start feeding your mathematical model information like that, you will soon find that you can 'prove' any future business scenario that you care to dream up....

SNOOPY

Being naturally lazy, I used the ROE data you provided for the last 6 years and compared the latter three years with the first three using a (possibly inappropriate) t-test. The p value, from memory, was about 0.05 so close enough to statistical significance to allow the conclusion that there may be a significant change in ROE for the business. If (as is possible) the change (if there is one) in ROE is just due to the business cycle, then we should quietly put down the wine and leave the table.

Rawz

30-11-2021, 07:21 AM

This thread has been a good read of late. Thanks to all posters!

Snoopy

30-11-2021, 08:21 AM

I used the ROE data you provided for the last 6 years and compared the latter three years with the first three using a (possibly inappropriate) t-test. The p value, from memory, was about 0.05 so close enough to statistical significance to allow the conclusion that there may be a significant change in ROE for the business. If (as is possible) the change (if there is one) in ROE is just due to the business cycle, then we should quietly put down the wine and leave the table.

Interesting, although I don't think there is any disagreement that the ROE of the present is higher than the ROE of the recent past. The real question is 'why is this so?' ('significant change in business' or 'business cycle effect' as you allude to). A numerical statistical test doesn't answer that question.

SNOOPY

P.S. I don't think the t-test is appropriate in this situation (as you hinted might be the case), because the two sets of data you are comparing are so small, the t curves in your tables are not representative. I think you would need to reformulate the problem as a binomial test

https://www.statisticshowto.com/binomial-test/

Biscuit

30-11-2021, 08:39 AM

Interesting, although I don't think there is any disagreement that the ROE of the present is higher than the ROE of the recent past. The real question is 'why is this so?' ('significant change in business' or 'business cycle effect' as you allude to). A numerical statistical test doesn't answer that question.

SNOOPY

P.S. I don't think the t-test is appropriate in this situation (as you hinted might be the case), because the two sets of data you are comparing are so small, the t curves in your tables are not representative. I think you would need to reformulate the problem as a binomial test

https://www.statisticshowto.com/binomial-test/

Also, as you point out in previous posts, the ROE has historically not been inconsistent with what it has been recently. You've actually done a reasonably good job of convincing me to reduce my holding!

Snoopy

05-12-2021, 06:38 PM

I don't think there is any disagreement that the ROE of the present is higher than the ROE of the recent past. The real question is 'why is this so?' ('significant change in business' or 'business cycle effect').

In an attempt to throw more light on this question (I had been leaning towards the 'business cycle effect' camp), I have re-read my SKL annual report collection since 'Our Liz' took over the chair, and selected a few quotes:

AR2017 p2 "(Our) success has been somewhat masked in prior years by navigating through international market conditions, especially in the dairy, mining and oil and gas sectors."

AR2017 p39
Snoopy Comment: I make the observation that $2.507m in foreign currency gains, compared to a $1.275m foreign currency loss in the previous year, boosted headline profit year on year by an unrepresentative: 0.72($2.547m - -$1.275m) = $2.737m year on year, or 12.4%

The above figures are of note, because it shows underlying profitability to be lower in FY2017, which makes the compounding growth rate for the four years to FY2021 higher (i.e. true underlying earnings have almost doubled).

AR2018 p10 (In the context of Gulf Rubber) "New product development typically takes anywhere from 18 months to 3 years from concept to market ready production."

AR2019 p21 (In context of Masport Vacuum Pumps) "Since the launch of the range of vacuum pump systems in 2016, sales have grown every year. We now have a strong foundation to enable us to become the supplier of choice for vacuum systems in the US."

Snoopy Comment:

FY2017 Revenue from Exploration & Mining: 0.06 x $131.2m = $7.9m,
FY2021 Revenue from Exploration & Mining: 0.08 x $177.4m = $14.2m ( +$6.3m)

Drilling operations require water on site, and Masport vacuum pumps are used in the supply of this. I note that Skellerup's 'Exploration & Mining' business unit includes Flexiflo chutes, which are used to enhance mine productivity. But the pre-2017 collapse in the iron ore price means Flexiflo is not currently a growth focus for Skellerup. Growth since FY2017 in Exploration & Mining products, I believe, has likely largely come from Masport Vacuum Pump products.

HYR2020 p3 (on the Covid-19 effect) "External factors can impact our ability to deliver and this was the case for the first half of 2020. Industrial division earnings were lower due to impacts of trade tariffs and slower demand for products we sell within the water infrastructure oil and gas industries."

AR2020 p7 (Agri division performance) "Growth in sales of essential dairy rubber-ware products into the USA, and a strong contribution from Silclear (the silicon rubber business) acquired on 01-11-2019 were the key contributions."

Snoopy Comment:

FY2017FY2018FY2019FY2020FY2021

Agri-Division Revenue Trend$79.233m$89.033m$88.750m$93.609m$102.201m

North American Revenue Trend$58.229m$68.364m$78.278m$81.111m$81.514m

The growth in the North American market, ties in with the growth of 'essential dairy rubber' sales (Agri division growth) and ''Masport Vacuum Pumps' that I have also commented on. The North American growth looks far from cyclical, which is shifting me towards the 'significant change' side of the argument. But over the last three years North American revenue looks to have stalled. This could be because the easy gains in the NA market are over, and we have reached a 'new sales plateau'.

AR2020 p25 (Retention of Customers) "At the end of FY2020, 17 of our top 20 customers when measured by revenue were also in our top 20 in FY2016."

HY2021 p2 (Coping with Covid-19) "Despite some project timelines extending because of Covid-19, we have successfully moved into production with new products and customers across the world, contributing to revenue growth of 11%"

HY2021 p5 "Extended shipping times and increased freight costs due to congestion and availability will have some impact in the near term. We have also seen some increases in raw materials and will be impacted by the recent strengthening of the $NZ"

Snoopy Comment: On p69 of AR2021 under "Financial Risk Management Objectives and Policies" we learn:

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

I find it difficult to reconcile that statement above with the previously stated effect of being 'impacted by the recent strengthening New Zealand Dollar'.

AR2021 p14 "We are focussed on growing the business, we are also disciplined in eliminating business that generates marginal returns and requires disproportionate resource to do so. During FY2021 we discontinued a small range of products used on roofing applications in the US. We managed to exit well and continue to work with the customer on new product developments."

Fuel for both sides of the debate in those excerpts I think.

I talked to the business being transformed over both the last 10 years and again over the last 5. The strategy to pivot from being more or less a contract manufacturer to a provider of bespoke OEM components did occur over the previous 5-10 year period but what I highlighted was the financial flow through of that pivot has taken time, and you can literally see it occur over the last 5 years where the company improved in nearly all its financial metrics in every consecutive year. It takes time to phase out legacy lower margin products, which has occurred over the last 5 years, new products get in the door, incrementally higher margin secondary products and services (which both require less capital and upfront investment than the initial sales) take time to take hold after that, so the financial profitability and ROIC naturally lifts in the many years post the strategic pivot. It doesn't occur immediately and sort of waterfalls down after that.

There is evidence of a step change in business operations. But 'Waterfalls down' sounds like a continuous process. I wonder how much 'water' is left at the top of the 'Skellerup falls' feeder lake?

SNOOPY

BlackPeter

05-12-2021, 07:28 PM

...

Good post and research ...

One other thing to consider might be their move into the new factory. They used to produce in a pretty filthy and rundown building - and sort of have been lucky to get the building earthquake damaged and various payments from the insurance.

I heard from people who have seen the previous (somewhat) underwhelming factory but understand that their new factory is top notch. Not quite sure when they moved exactly, but it must be something like 5 years ago.

A good factory makes a difference, but not sure I would expect their margins to grow every year ... i.e. I assume we have seen the step function - and from now it will be cyclical again (just on a higher level). Obviously - this is unless they change something else.

Snoopy

05-12-2021, 09:24 PM

Good post and research ...

One other thing to consider might be their move into the new factory. They used to produce in a pretty filthy and rundown building - and sort of have been lucky to get the building earthquake damaged and various payments from the insurance.

I heard from people who have seen the previous (somewhat) underwhelming factory but understand that their new factory is top notch. Not quite sure when they moved exactly, but it must be something like 5 years ago.

You are exactly right. First year operating out of the Wigram factory was FY2017

A good factory makes a difference, but not sure I would expect their margins to grow every year ... i.e. I assume we have seen the step function - and from now it will be cyclical again (just on a higher level). Obviously - this is unless they change something else.

Yes, that is why I feel it is appropriate to focus on the 'new' Skellerup from FY2017. Since then there have been add ons both locally and from overseas as well.

a/ 35% of Slimlim (USA) (FY2018) (Liquid silicon rubber products, 35% stake acquired for $US1.1,)
b/ Nexus Foams (NZ) (FY2019) (High tech design solutions using the latest foam compound technology, particularly in the healthcare and electronics sectors, acquired for $NZ6.5m)
c/ Silclear (UK) (FY2020) (makes food grade Silicon rubber products, acquired for GBP3.3m)
d/ Talbot Technologies (NZ) (FY2022) (makes plastic products for health and electronics OEM manufacturers, acquired for $10m)

For a business with a market capitalisation of around $NZ1.2billion, none of these acquisitions are truly game changing. But they are an example of the measured growth that is typical of Skellerup.

SNOOPY

forest

06-12-2021, 08:32 AM

I wonder how much 'water' is left at the top of the 'Skellerup falls' feeder lake?

SNOOPY

Great lot of post on SKL Snoopy, I find the detail very impressive.

The world is a big place therefore I think the feeder lake is likely to rise as long as SKL keeps making high quality products for a reasonable price.
Present CEO David Mair I think is a great manager of SKL, who has very clear ideas of how to monetize SKL products.
He often talks about improving margins and that shows in the results.

Muse

06-12-2021, 12:23 PM

....Fuel for both sides of the debate in those excerpts I think...

...There is evidence of a step change in business operations. But 'Waterfalls down' sounds like a continuous process. I wonder how much 'water' is left at the top of the 'Skellerup falls' feeder lake?

SNOOPY

Good balanced post snoopdog. I certainly don't believe an uplift in performance from either a rising business cycle or stemming from an improved business model with operational enhancements to be mutually exclusive. It would be difficult to find a company immune from macroeconomic factors or its share price unimpacted by interest rate sentiment.

But the joy in reading through Skellerup's management discussion & analysis is the focus and attention paid to operational performance and building a better business. It would be a worry if on the back of these improved results if all management had to say was how strong demand was, which outside of making a better & more entrenched product is often outside a company's control. FY21 saw a particularly large step up in financial performance - not just in absolute dollar terms but in a margin & return on capital & equity sense - and the MD&A was replete with solid business & operational enhancements that no doubt contributed to the solid result:

Industrial
* Increased marketshare in potable & waster water. Loved this (summarised) line from the AR: "water applications continue to be the largest slice of Industrial revenue. Our capability to change formulations to meet increasingly demanding standards has been & will remain key to ongoing growth"
* Phasing out legacy low margin products & replacing them with higher margin SKUs, particularly in the USA. New DEKS roof & sealing products released in Australia.
* "...understanding needs & designing products that perform a common thread across the industrial division. This approach helped drive significant growth for our roofing & marine foam products in FY21. This approach will generate significant growth for our vacuum systems business in FY22 as we launch two new key products to the market". Vacuums had until recently consisted of system sales but Skellerup had its first product fitment sale with OEMs in FY21.
* re overall Industrial performance: "growth in sales achieved without any overall increase in indirect costs

Agri
* "Throughout FY21 we continued to improve our processes to meet a 9% increase in demand without significant capital investment nor increase in operating costs. We have further plans to increase capacity for relatively low investment"
* "Process improvements generated gains that helped offset increased raw material & transport costs. Indirect costs were well managed."
* Re: dairy: "Operational process & efficiency gains through business process, operating levels, mechanisation, & system improvements.....Low capex investments increased production volumes & reduced lead times were implemented and more are planned"
* Europe & Asia fastest growing regions in FY21 - aided by the successful integration of Silcear acquired year prior...we expect to continue to grow this product range."
* Re footware: range standardisation & rationalisation resulting in efficiencies

Systems & Capabilities
* Over 700 new products were released in the last two financial years
* Expansion into new geographies most notably Europe
* 3 ERP system upgrades (below)
* Project Vanilla: upgrade of Wigram's platform - "simplifying and adopting a standarised business process and tools, enabling access to more insightful information, a more secure environment, and better business outcomes"
* Project Tika: information platform upgrade for two other industrial division businesses
* Wigram volume up 10% only requiring 2% increase in staffing. Vcauum systems up 38% with no increase in staffing, Jiangsu Footware up 14% with no increase in staffing.
* Re Jiangsu (china) - "during FY21 we made a series of process improvements...reducing generated discharge levels by 66%, installation of a water circulation & recycling system reducing water usage by 55%, and invested in systems to improve the collection & disposal of emissions generated from our manufacturing process"
* Re packing waste: "in FY21 eliminated cardboard packing of vacuum pumps by bolting pumps to pallets...not only improving environmental outcomes and reducing cost, improving productivity and translating through to improved economic benefits for shareholders"
* Corporate: costs up $3m. Half of this a one off expense relating to a provision made for the costs of defending against a warranty claim made against a business sold in 2008. I would have thought the ERP costs will have contributed to a good whack of the balance (but no specifics I saw provided), and otherwise balance of the increase were well deserved performance bonuses
* A 7.6% improvement in emissions intensity when measured in tonnes of output per $1m in revenue

This is a heck of a lot of underlying, fundamental business improvement for one year. While there were references to the state of demand in particular markets I was heartened to read and see more references to what management are actually doing to improve the business.

It's clear to me Skellerup is not a Barfoot & Thomson - with revenues & earnings rising on the back of growing volumes & rapidly rising prices, and then getting whacked on the way down and starting from square one. Skellerup has changed the nature of the widget they sell, improving its stickability and providing it with a moat, and concurrently done a hell of a lot of work on the business itself.

There's no doubt cylicality is and will always be at play. Within Industrial, its Deks business will be impacted, as well its vacuum systems (however they are making such inroads with new OEM sales that could grow faster than the underlying change in conditions). WIthin Agri it has an exposure to the dairy sector which would be my immediate concern, but the company strongly maintains that particular exposure is leveraged to volumes and not price. And within the replacement cycle for dairy I believe customers will have the ability to defer if dairy prices happen to be in the tank, which could see some year to year volatility, but hopefully a timing/catchup issue.

The thing I like about Skellerup is that it has such a diversified portfolio of exposures - a huge range of end market applications in diversified sectors, and diversified by geography. That gives me some comfort as the various sectors will thrive while the underlying economics in others are poor. What is common across them all is Skellerup seeking to provide OEMs with difficult to replace sticky technical products, offering aftermarket services and secondary sales. They've got a lot of ambition in how they've engaged with customers and proactively developed new products (700 in the last 2 years) so I have a lot of confidence they will grow marketshare in the future.

Bad analogy but what's happen with Skellerup over the years is sort of like how a sailboat interacts with the wind. The wind will always be temperamental, so they shifted the boat to where the wind is more consistent, streamlined the hull, and built a bigger sail.

As for the waterfall comment, I made that only in reference to how it takes time for the OEM focus to fully take hold and be reflected in the financial results. They were still phasing out legacy products in FY21 and getting new OEM sales. Lots of efficiency improvements and Wigram throughput gains, and probably still some to be hand in future years, but diminishing marginal gains from here I would have thought. But these to me suggest the companies margins and ROIC will structurally higher now and in the future compared to 5 years ago, even if they dip from time to time or do not improve at the same rate historically (or just plateau).

I feel optimistic - FY22 is lining up to be a sensational year, most likely topping the superlative 2021 financial year - with management guiding 1H NPAT to be well up on the 1H2021. New SKUs, new geographies, the new vacuum pumps, the health & medical division, the wastewater deficit, etc...there are a lot of reasons to suspect that Skellerup will be a larger and more profitable business in the medium and long term even if the growth there isn't linear. They aren't particularly large in a global sense and have a great core capability to expand into adjacent OEM targeted industries.

Snoopy

06-12-2021, 12:58 PM

The thing I like about Skellerup is that it has such a diversified portfolio of exposures - a huge range of end market applications in diversified sectors, and diversified by geography. That gives me some comfort as the various sectors will thrive while the underlying economics in others are poor. What is common across them all is Skellerup seeking to provide OEMs with difficult to replace sticky technical products, offering aftermarket services and secondary sales. They've got a lot of ambition in how they've engaged with customers and proactively developed new products (700 in the last 2 years) so I have a lot of confidence they will grow market share in the future.

My aim is to operate an investment portfolio where I don't have to worry too much about picking the ebbs and flows of different business cycles to stay on top of things. Skellerup, with their diversity of products and markets, certainly qualifies for its position in that kind of investment space.

The concept of working with customers to gain a competitive advantage that creates 'stickiness' in any sales deal is one I like. The 700 new products is quite startling and I see Skellerup have 813 staff. So that makes 813-700=113 staff who didn't come up with a new product over the last two years. With Skellerup's culture of constant improvement, and policy of trimming dead wood, I would certainly be looking over my shoulder if I were one of those people!

My 'problem', if you want to phrase it that way is that SKL has been such a successful investment for me I am a little overweight in SKL shares by value. But I have thought of a solution. I will regard Skellerup 'Agri' as one company and Skellerup 'Industrial' as another company, with the two segment branches 'joined at the top' to make a 'Skellerup Investment Fund'. So I really own two companies under a Skellerup umbrella, not just one :-)

SNOOPY

Muse

06-12-2021, 01:10 PM

My aim is to operate an investment portfolio where I don't have to worry too much about picking the ebbs and flows of different business cycles to stay on top of things. Skellerup, with their diversity of products and markets, certainly qualifies for its position in that kind of investment space.

The concept of working with customers to gain a competitive advantage that creates 'stickiness' in any sales deal is one I like. The 700 new products is quite startling and I see Skellerup have 813 staff. So that makes 813-700=113 staff who didn't come up with a new product over the last two years. With Skellerup's culture of constant improvement, and policy of trimming dead wood, I would certainly be looking over my shoulder if I were one of those people!

My 'problem', if you want to phrase it that way is that SKL has been such a successful investment for me I am a little overweight in SKL shares by value. But I have thought of a solution. I will regard Skellerup 'Agri' as one company and Skellerup 'Industrial' as another company, with the two segment branches 'joined at the top' to make a 'Skellerup Investment Fund'. So I really own two companies under a Skellerup umbrella, not just one :-)

SNOOPY

Thinking of it as two companies probably not a bad solution to a disciplined portfolio approach. I was too much of a wuss to buy shares on the way up as I didn't want to hurt my paper returns (an investment impediment of mine I am trying to address) but otherwise would prefer to hold twice as many shares that I have. Do me up an offmarket share transfer form at $5.50 we can solve both our portfolio issues at the same time :)

bull....

06-12-2021, 02:13 PM

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

sadly my holding is no longer. enjoy those who are still in.

Charlie

24-12-2021, 03:45 PM

Muse

24-12-2021, 08:01 PM

Im just a newbee, but in the last month , seems the lows are getting higher, after bein flat for 3 months and time for an up-rise push ???.
I can see this company making 20-30 % pa in SP rise . At least that is my hope.
Topped up a bit today just in case .

Skellerup a great company and has performed well but its share price ran really hard. Went ex div a bit ago and no news until its 1H FY22 result out. Earnings probably need to catch up for a bit to justify trading any higher than 6 bucks…not advice, just my 2 cents.

Charlie

25-12-2021, 12:57 PM

Skellerup a great company and has performed well but its share price ran really hard. Went ex div a bit ago and no news until its 1H FY22 result out. Earnings probably need to catch up for a bit to justify trading any higher than 6 bucks…not advice, just my 2 cents.
Noted , !
thanks, have a great day today.

winner69

03-02-2022, 08:37 AM

Said a while ago first half profit to be 'in excess of 10%' more than pcp ...... WOW, its going to be 18% more

RTM

03-02-2022, 08:38 AM

You beauty ! And to think I was considering taking some profits on this one. Let the good times roll.....

"Skellerup announced today an upgrade to its guidance for its net profit after
tax (NPAT) for first half of FY22.

Chair Liz Coutts said "At our AGM in late October 2021 we highlighted that
demand remained strong across the Group and we expected NPAT for the first
half of FY22 to be in excess of 10% above the prior comparative period (pcp).
This demand was sustained throughout the first half particularly for our
potable water, marine, roofing and construction products. As a result, we now
expect NPAT for the six months ended 31 December 2021 to be circa $23
million, up 18% on pcp." "

alokdhir

03-02-2022, 08:41 AM

Said a while ago first half profit to be 'in excess of 10%' more than pcp ...... WOW, its going to be 18% more

But I find it very surprising company choosing to report this in trading update so close to HY results date ...though I am excited as holder but still why not wait till the results date !!!

winner69

03-02-2022, 08:59 AM

But I find it very surprising company choosing to report this in trading update so close to HY results date ...though I am excited as holder but still why not wait till the results date !!!

Fair enough comment

Previous guidance implied about $21.5m .... this guidance $23m and a bit .... so not much in it eh ... about $1.5m ..... but they thought it was significant big enough increase to 'disclose'

Probably thought share price needed a bit of boost ...... or when the reports came through they were so excited they felt they had to tell to the world and get lots of headlines :)

Liz not that quick of the mark with Oceania is she

Rawz

03-02-2022, 09:01 AM

What sort of forward P/E is this bad boy trading on?

The falling dollar must be a big help?

Biscuit

03-02-2022, 09:01 AM

Ricky-bobby

03-02-2022, 09:09 AM

Stoked to see this announcement this morning! They have been consistent and now starting to over deliver.

winner69

03-02-2022, 09:18 AM

What sort of forward P/E is this bad boy trading on?

The falling dollar must be a big help?

PE est to be 24/25 on F22 earnings ..... bit it'll be a lot higher by end of the week eh :cool:

Seems about right

Muse

03-02-2022, 09:25 AM

No surprises here.
Fine company, this one.

Bjauck

03-02-2022, 11:14 AM

Stoked to see this announcement this morning! They have been consistent and now starting to over deliver.
It is great to see a NZ listed company with continuous disclosure.

Wow, SP now 2.7 times the price it was in January 2020, before The Covid effect. I am kicking myself I did not top up when I was contemplating doing so back them.

davflaws

03-02-2022, 12:19 PM

It is great to see a NZ listed company with continuous disclosure.

Wow, SP now 2.7 times the price it was in January 2020, before The Covid effect. I am kicking myself I did not top up when I was contemplating doing so back them.

Me too - but as the years have passed I have learned to kick myself more and more gently - just as effective and lots more pleasant.

winner69

03-02-2022, 03:59 PM

It is great to see a NZ listed company with continuous disclosure.

Wow, SP now 2.7 times the price it was in January 2020, before The Covid effect. I am kicking myself I did not top up when I was contemplating doing so back them.

End Jan 20 share price was $2.50 and SKL earnings were heading to $0.15 / share (FY20)

Today share price $6.40 and earnings heading to say $0.24 / share (FY22 guess)

So share price up $3.90 - pretty good eh

Earnings growth has driven $1.50 of that increase and the other $2.40 has been driven by PE expansion

So Skellerup itself performed pretty well (profits up 60%) but telling a good story and doing what they say they will do has endeared them to the market --- to the tune of $2.4 over 2 years --- that's the reward for being re-rated.

The market a great giver eh - over 60% of the gains over 2 years from positive market sentiment (and the desire of new shareholders to get aboard the train)

Muse

03-02-2022, 04:20 PM

End Jan 20 share price was $2.50 and SKL earnings were heading to $0.15 / share (FY20)

Today share price $6.40 and earnings heading to say $0.24 / share (FY22 guess)

So share price up $3.90 - pretty good eh

Earnings growth has driven $1.50 of that increase and the other $2.40 has been driven by PE expansion

So Skellerup itself performed pretty well (profits up 60%) but telling a good story and doing what they say they will do has endeared them to the market --- to the tune of $2.4 over 2 years --- that's the reward for being re-rated.

The market a great giver eh - over 60% of the gains over 2 years from positive market sentiment (and the desire of new shareholders to get aboard the train)

Aye my back of the envelope is 24c EPS as well (key assumption 15% growth on 2H FY21 NPAT of 20.675). That should produce ~21c DPS - after this mornings bump gives you 4.6% gross and 3.3% net yield (@6.34).
It's my strong assumption that all FY22 financial metrics (EBIT % of sales, returns on capital employed, returns on equity, working capital % sales, etc) will be showing continued improvement off FY21, which were an improvement off FY20, which year an improvement of FY19, and so on, and on, and on.
As far as the SP goes, can earnings continue to rise fast enough to offset rises in interest rate which influence its WACC and market sentiment to maintain a SP over 6 bucks. So far so good but a lifetime to go. I reckon OCR will be at 3.00% by early 2023.

as I stated months ago I start to get interested at purchasing at $5.50. Nearly got there but I guess that is off the cards for now. Happy holder I am.

Waltzing

03-02-2022, 07:50 PM

had these across more then one portfolio at 2.40... lost of us gently kicking... you cant win them all...but back when Mr P gave it the Punt i did not look like it was about to become a growth company. There you go sometimes the buffet approach wins after all...

Sometimes it pays to really put in the research and thats the problem, time tick tock....

Bjauck

03-02-2022, 10:27 PM

percy

04-02-2022, 08:26 AM

Aye my back of the envelope is 24c EPS as well (key assumption 15% growth on 2H FY21 NPAT of 20.675). That should produce ~21c DPS - after this mornings bump gives you 4.6% gross and 3.3% net yield (@6.34).
It's my strong assumption that all FY22 financial metrics (EBIT % of sales, returns on capital employed, returns on equity, working capital % sales, etc) will be showing continued improvement off FY21, which were an improvement off FY20, which year an improvement of FY19, and so on, and on, and on.
As far as the SP goes, can earnings continue to rise fast enough to offset rises in interest rate which influence its WACC and market sentiment to maintain a SP over 6 bucks. So far so good but a lifetime to go. I reckon OCR will be at 3.00% by early 2023.

as I stated months ago I start to get interested at purchasing at $5.50. Nearly got there but I guess that is off the cards for now. Happy holder I am.

Is the dividend still only partly imputed.?Used to be 50%,which brings the net yield down.
I see their future eps growth rate will be half their PE ratio,which means to me the share price looks fully priced.
ie a PEG ratio [PE divided by Growth] of 2 while a PEG of one or under is desirable.
Currently momentum appears to have over run fundamentals.

Muse

04-02-2022, 08:44 AM

Is the dividend still only partly imputed.?Used to be 50%,which brings the net yield down.
I see their future eps growth rate will be half their PE ratio,which means to me the share price looks fully priced.
Currently momentum appears to have over run fundamentals.
.

Yes partially imputed given offshore earnings - problem doing things on the fly

percy

04-02-2022, 08:55 AM

Yes partially imputed given offshore earnings - problem doing things on the fly

I see their future eps growth rate will be half their PE ratio,which means to me the share price looks fully priced.
ie a PEG ratio [PE divided by Growth] of 2 while a PEG of one or under is desirable.

I later added PEG ratio to my post.
I think this is often a good ratio to use.
Interesting to note we have seen some really great NZ companies trading with a PEG ratio of 3.,which sends warning bells to me.

winner69

04-02-2022, 03:45 PM

Skellerup MVA (Market Value Added ... being Market Cap less Shareholder Equity) is now about $1.05 - pretty impressive eh,the market values $200m of Equity at $1.250m

Anybody interested in corporate finance and the concept of EVA (Economic Vlue Added - being the residual income after allowing for the company's cost of capital) would know that MVA = NPV of future EVA

Boring **** eh but it does say that even at today's share price the market is only pricing growth at roughly 4.0% pa (forever that is). So if assume Skellerup manage to maintain margins etc it doesn't seem to be that overvalued.

winner69

17-02-2022, 08:46 AM

percy

17-02-2022, 08:53 AM

Record half year as expected
https://www.nzx.com/announcements/387395

Taking the mickey out if us with their full year guidance - lower end $44m implies no profit growth in H2 v pcp ...but top end $47m implies 15% (slower growth than H1).

Probably leaving the the $47m to $50m range for a few months --- sneaky eh

A great result.
Full year guidance does not make sense to me,taking in account their decision to mitigate logistics issues with their increase in stock holding.:
"Operating cash flow in the first half was down on pcp due to a planned increase in inventory to mitigate the impacts of Covid-19. Mair said “We increased raw materials and finished goods in transit to our distribution centres to ensure continuity of supply to our customers".

Muse

18-02-2022, 11:55 AM

There was quite a good article in the NBR yesterday on Skellerup. Paywalled but have summarised below

SKL working on a potentially large order for the healthcare sector that could represent a step change for the company
Of a size that if secured would need to be notified to the NZX. But no purchase order in hand (CEO Mair said "to me until I have the PO it hasn't happened yet")
Mair wouldn’t elaborate on who it was but NBR got the sense/implied with was FPH.
Mair noted by supply OEMs the customers pay for the upfront development – the tool and development work needed to create the product
Has led to a low cap model that even some analysts don’t get. SKL has shrunk its capex bill significantly and getting more from it did historically.
Forbar talked to the run SKL has had over the last 5 years and has required a shift in mindset among investors that it is still underway. Was previously seen as a down and dirty mnfr of simple products.

Mair must be confident of securing the contract if he spoke freely about it. The way I'm reading it is that given their is no PO for it it's not included within the 2h guidance so some (potentially) upside to guidance if they can secure it. Also great to see it growing stronger in healthcare could be quite a step change for the business to grow is area rather than in just agri and industrial

I see new SKL reports in overnight from Jarden and Craigs.

NPAT
NPAT

TP
FY22FY
FY23F

Jarden
6.40
47.2
53.9

Craigs
6.00
46.6
49.9

Ave
6.20
46.9
51.9

Jerry

27-02-2022, 06:29 PM

Can anyone explain why SKL took such a dive on the day Putin invaded Ukraine? Was that just a coincidence with some other bad news for them? By my calculations they lost over 8% whereas most of my portfolio dipped by far less.

audiav

28-02-2022, 06:43 PM

Price of oil? Basis of a bit of skellerup product

RTM

28-02-2022, 06:47 PM

winner69

08-03-2022, 06:28 PM

SKL one of the days big losers .... down to 541

Report in media says investors may have been spooked by sudden volatility in the NZD which went well above 69 cents at one time

some 17% off recent highs pretty ruthless

nztx

08-03-2022, 07:53 PM

Southern Lad

12-03-2022, 04:42 PM

David Mair has sold 700,000 shares over the last three days at an average price of $5.45.

https://www.nzx.com/announcements/388737

Still holds 4,802,248 shares, but hardly a sign of confidence in SKL's short term prospects. No one can blame him for cashing in his success and diversifying his investment portfolio, but curious point for me is why he didn't sell immediately post the half year announcement when the price was over $6. Has the outlook changed in the last couple of weeks?

As always, would be good to see some explanation on the background when the CEO sells down a significant shareholding.

Charlie

10-05-2022, 09:04 PM

One of the very few greens today in a sea of red

bull....

15-06-2022, 07:40 AM

sadly my holding is no longer. enjoy those who are still in.

having timed my exit from the stock nicely it just goes to show how macro events can change a company from a position of strenght to in a position of issues making life tough as explained in the articel below

The reality is it's still very difficult out there," says Skellerup chief executive David Mair, on the supply chain challenges facing his company and all Kiwi exporters.

https://www.nzherald.co.nz/business/continuous-disclosure-an-inside-look-at-the-supply-chain-shock/DNULNCOICL6EQJAOSRL3B4OHQE/

Snoopy

15-06-2022, 10:03 AM

Having timed my exit from the stock nicely it just goes to show how macro events can change a company from a position of strength to in a position of issues making life tough as explained in the article below

The reality is it's still very difficult out there," says Skellerup chief executive David Mair, on the supply chain challenges facing his company and all Kiwi exporters.

https://www.nzherald.co.nz/business/continuous-disclosure-an-inside-look-at-the-supply-chain-shock/DNULNCOICL6EQJAOSRL3B4OHQE/

The written article sells Mair a bit short in his replies. But I have listened to the complementary podcast

https://www.iheart.com/podcast/1049-continuous-disclosure-89308442/episode/david-mair-on-whats-happening-with-98308749/

to find out more.

I have done very well out of SKL too, although unlike you Bull, I remain on the share register. I also hold SCT which is in a similar market sector of exporting 'engineering solutions' globally and operates in the same geographic markets as Skellerup. Five years ago, Scott Technology had an opposing logistics strategy of having flexible manufacturing operations around the world so that transport of the finished goods, and any associated logistical headaches were minimised. But with a new CEO John Kippenberger on board, that strategy changed to 'manufacturing centres of excellence', something more akin to the way that Skellerup does things. Perhaps this indicates that Skellerup was on the right logistical track to start with?

Skellerup CEO David Mair's outlook in that article you have referenced, for transportation, is somewhat more upbeat that your single line quote suggests. The message I got from the article is that the 'green shoots' of improvement of shipping both intra-country and inter-country, are there to see. Mair also states he sees inflation as a bigger issue than shipping. Skellerup has used the practice of putting a freight surcharge on some of their products rather than just raising pricing, to give customers a clear idea of where the price pressures are coming from.

Mair sees inflation as a threat in New Zealand - taking cost levels to a higher plateau- , and he compares our inflation outlook unfavorably with what is going on in the rest of the world.

"The issue I have about that is that some countries are getting through that faster and easier than we are, so we may become less competitive."

Yet the principal reason for NZ manufacturing milking liner equipment in NZ (this is NZ's big role within Skellerup) is that there is a very strong 'home market' for this product, which minimises the transport challenges. The second largest market for this product line, the USA, would not be a cheaper alternative manufacturing site. Furthermore the globally distributed manufacturing that Skellerup already has in other Skellerup product areas surely minimises any unfavourable inflation effect that may come through in NZ, and into the company wide inflation picture.

Mair again:
"But what I'm concerned about - particularly for New Zealand - is there is an underlying inflationary element here of bureaucratic regulation that slows things down when we need to move very quickly."

I am not clear what Mair is talking about here. Perhaps opas threatening the borders faster so that people from overseas can come in more easily to fill highly sas threatkilled jobs? In the podcast, Mair goes on to say that bright young graduates are being seduced overseas to Australia where living costs are much cheaper and wages are higher. Mair is under the impression that many young people who leave on their OE will never come back, because of un-affordable housing in NZ, tied to excessive and inefficient building regulations. He also says that NZ has not invested enough in trades and trade certification. He also states that if you want to be paid really well in NZ, you should plug into an industry with lots of automation and be multi-skilled. Mair thinks that government should be concentrating its spending on fundamental infrastructure, be it broadband or fresh water.

The lock-downs in China, he says, are restricting Chinese goods being able to get to port, as different Chinese provinces have different regulations and controls around who can do what. Mair also complains about the strong stevedoreing unions in the USA, who have a lot (implying too much) power. But he doesn't state that centres of excellence and low cost Asian manufacturing operations must offset these disadvantages.

In the podcast, Mair has a very interesting insight into value added manufacturing. How do you carve out a value proposition in a new market and take your product up market? Mair says it can't be done. You have to understand the value your product brings to the market on day 1, enter at a high price point and defend that position. Mair highlights A2 milk as a successful example of this. Smarter manufacturing can drive the cost down, a way to improve future profits. But inevitability some of that cost saving has to be shared with the customer. Reinvention of profitability requires either new products or new materials to reformulate existing products.

SNOOPY

Biscuit

15-06-2022, 10:41 AM

....I have listened to the complimentary podcast

https://www.iheart.com/podcast/1049-continuous-disclosure-89308442/episode/david-mair-on-whats-happening-with-98308749/

......

Thanks for the link to the (complementary?) podcast Snoopy, look forward to listening to it when I have a free moment. I also am continuing to hold SKL. Haven't been following the share price but I guess they are tracking down as everyone adjusts to higher inflation/interest rates.

RTM

16-06-2022, 10:22 PM

The written article sells Mair a bit short in his replies. But I have listened to the complementary podcast

https://www.iheart.com/podcast/1049-continuous-disclosure-89308442/episode/david-mair-on-whats-happening-with-98308749/

to find out more.

I have done very well out of SKL too, although unlike you Bull, I remain on the share register. I also hold SCT which is in a similar

SNOOPY

Thanks Snoopy, appreciate the summary. I holding a few, unfortunately decreasing % of portfolio at the moment.

winner69

27-06-2022, 03:39 PM

Great graph. Looks like a hockey-stick.

Oops - what does science tell us about hockey stick graphs?

Never mind ... lets just presume science is outdated and history does not repeat ...

BP posted this back in November last year about my chart that showed SKL PE had hit 30 (share price about $6.40) and was starting to how signs of falling

Updated chart below ....Share price today about $5 and PE 21 (on forecast earnings)

So profits increasing .... PE shrinking ..... not good for shareholders

If he PE today was by some chance the average pre-2020 of 15 the share price would be $3.60

Rawz

27-06-2022, 04:42 PM

I dont know enough about SKL- what was the main reason for the P/E expansion?

1) Irrational exuberance?
2) Consistent growth and forecast growth?
3) Better margins?

or a combo of the above?

winner69

27-06-2022, 05:56 PM

I dont know enough about SKL- what was the main reason for the P/E expansion?

1) Irrational exuberance?
2) Consistent growth and forecast growth?
3) Better margins?

or a combo of the above?

Probably better margins along with sales growth lead to consistent growth ....all boosted by exuberance (maybe not irrational but the love was obvious) .... took the share price from 2 bucks to mid 6's in a couple of years

Snoopy

27-06-2022, 06:20 PM

BP posted this back in November last year about my chart that showed SKL PE had hit 30 (share price about $6.40) and was starting to how signs of falling

Updated chart below ....Share price today about $5 and PE 21 (on forecast earnings)

So profits increasing .... PE shrinking ..... not good for shareholders

If he PE today was by some chance the average pre-2020 of 15 the share price would be $3.60

Around 18 months ago I made similar musings on this thread Winner. We are pretty much at one with our highlighting the risks of 'reversion to the mean' of that PE ratio (see last paragraph of my quote below)

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?

Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year. Is this a joke? How can such a projected return every year for ten years - no less - be correct?

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2032 are 20.7cps, verses actual earnings for FY2021 of 20.5cps. IOW I am modelling earnings to be virtually flat after ten years, with years of lesser earnings in between! Is that a plausible scenario? From where we shareholders sit today, such a result would be extremely disappointing to be sure. Yet if we use the actual historic return on equity, averaged over 6 years, and the actual dividend payout ratio, then these are the kind of earnings we shareholders might expect.

This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong.

The second modelling assumption that is well out of whack with today's market (PE of 29) is that I am assuming a PE ratio of 18 in 2032. I did not pull that figure of 18 out of thin air. It is the actual historical average over six sample dates. Shareholders coming on board over the last couple of years (eps has grown 37% since FY2019) might like to reflect that most of their share price gains (SP +160% over the same period) have been due to 'valuation multiple expansion'. Growth in earnings has occurred. But the share price growth has way outstripped earnings growth. IMO the 'multiple expansion' that has driven so much of shareholder returns over the year or two in particular has now become a real risk factor that could sting shareholders if that PE valuation metric deflates. If that is a somewhat somber note on which to end this analysis, then so be it.

The key comment above from my above modelling is here:

"This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong."

Interesting comments by David Mair, Skellerup CEO, can be found in my post 1158. That feeds into the idea of whether a leopard can really change its spots.. Or are we Skellerup investors just in a dream before reversion to the mean? I wouldn't bet against David Mair for sharpening up the whole operational performance of Skellerup. You can't blame Mair for investors bidding up the share price to giddy heights. If you lose money on this one as a recent purchaser, I think you can only blame exuberant investors bidding up the share price - not Mair.

SNOOPY

winner69

27-06-2022, 06:24 PM

You were spot on eh snoopy .... so far

Reinforces what my signature is basically saying ..... or putting it another way 'pay top dollar and future returns will be disappointing'

Snow Leopard

27-06-2022, 07:05 PM

Can I have a little gloat here? :mellow:

I bought back into SKL in mid-2020 (near the bottom) and as part of a portfolio rebalance sold some last October (near the top).

Currently they are my #7 holding at 7.64% of the portfolio.

I am happy to agree that it is difficult to justify the current SP but I do believe that from a long term view point they are worth keeping.

Ggcc

27-06-2022, 07:10 PM

Wait till they get that alleged FPH contract near the end of this year. FY 23 will be and interesting increase again on NPAT and the SP. I feel that the view of the old skellerup is different to the new view hence the P.E ratio is quite high. They don’t just make gumboots (as of old) and in the health sector I am sure we will see many new contracts.

winner69

14-07-2022, 11:31 AM

Good move by Skellerup

Skellerup adopts ESG World Platform

Makes SKL an attractive investment for a broader range of investors who love this ESG stuff ..... possibly new ones

https://www.nzx.com/announcements/395329

Sideshow Bob

15-08-2022, 07:05 PM

Up 3.5% today....good price action ahead of Thursday's FY announcement??

Sideshow Bob

18-08-2022, 08:34 AM

Skellerup reports another record result - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/397133)

Skellerup today announced record audited net profit after tax of $47.8 million for the year ended 30 June 2022, a 19% increase over the previous record result.
Highlights for the year ending 30 June 2022
• Strategy continuing to deliver substantial growth in earnings and returns to shareholders.
• Revenue of $316.8 million, up 13% on prior comparative period (pcp).
• Earnings before interest and tax (EBIT) of $66.8 million, up 18% on pcp.
o Industrial Division EBIT of $39.1 million, up 20% on pcp.
o Agri Division EBIT of $33.6 million, up 10% on pcp.
• Net profit after tax (NPAT) of $47.8 million, up 19% on pcp.
• Operating cash flow of $43.3 million, down 26% on pcp.
• Net debt of $25.2 million, an increase of $16.5 million on pcp.
• Final dividend of 13.0 cps (50% imputed) bringing the total
FY22 dividend to 20.5 cps (50% imputed) for the full year, up 21% on pcp.

Ggcc

18-08-2022, 08:43 AM

percy

18-08-2022, 08:43 AM

Incredible result.

bull....

18-08-2022, 08:49 AM

no outlook statement ?

Sideshow Bob

18-08-2022, 09:00 AM

no outlook statement ?

I didn't C&P the whole announcement - here is the rest:

Skellerup CEO, David Mair repeated his message from the prior year, noting the growth in earnings was the outcome of Skellerup’s unwavering focus on working closely with key customers to provide engineered products used in a range of critical applications people interface with every day. “Our products are critical to the supply of safe potable (drinkable) water; the production of milk and milk products; the performance of appliances in homes and workplaces; health and hygiene in hospitals, shops and homes; the safety and comfort of sporting and leisure equipment; and the integrity of roofing systems on homes and workplaces.”

Mair highlighted Skellerup’s continuing investment in systems and people to deliver sustainable financial returns. “We regard investment in systems, process and people as critical to our future success. Key to this investment is improving our understanding at a very micro level of what makes us successful. This requires not only investing in systems but ensuring we carefully evaluate our performance, injecting new people into our businesses to challenge and improve what we do.”

Industrial Division EBIT was $39.1 million, a record result and up 20% on pcp. Revenue was $206.4 million up 16% on pcp. Mair said increased sales into potable water, wastewater and high-performance foam were the key drivers of FY22 growth.

“Our Industrial Division generates 85 per cent of its revenue from international markets. We work closely with customers to design and manufacture products that often combine multiple materials such as rubber, plastic and metals to perform in a wide range of critical and high-performance applications. In FY22 we increased sales of gaskets, seals and vacuum systems into potable water and wastewater applications (most notably in the USA) and increased sales of high-performance marine foam products (USA, NZ, Australia and Europe). We also had a ten-month contribution from Talbot Advanced Technologies (acquired on 31 August 2021).”
Agri Division EBIT was $33.6 million, a record result and up 10% on pcp. Revenue was $110.6 million up 8% on pcp. Mair said the result continues to underline the importance of the essential dairy consumable products that Skellerup design, manufacture and sell globally.

“Our Agri Division is a world leader in the design and manufacture of essential consumables for the global dairy industry and the design and manufacture of rubber footwear for farming and specialty applications including fire, forestry and electricity. We increased sales of dairy rubberware and footwear in the USA and New Zealand markets. Further productivity gains at our large NZ and China manufacturing facilities helped offset the significant impact of increased raw material prices and freight cost. We have also increased our technical resources and invested in additional capacity to provide the platform for further growth.”
Chair Liz Coutts heralded Skellerup’s excellent financial results and stressed the Group’s robust financial position.

“In FY22, we again achieved a record NPAT. Our strong financial position is a key element to our continued success. Over recent years we have made a number of very complimentary acquisitions. In FY22 we acquired Talbot Advanced Technologies which enhanced our capability and capacity to design and manufacture engineered plastic products. In FY22 we also prudently increased inventory to ensure we could overcome longer shipping timeframes, port congestion and raw material shortages and meet our customers’ requirements. Our financial position provides the Board and management with the opportunity to continue to grow returns for shareholders for which increasing dividends are a tangible measure.”

Coutts advised that the final dividend would increase from 10.5 to 13.0 cents per share (50% imputed as in the pcp) to be paid to shareholders on 14 October 2022 with record date of 30 September 2022. This will bring the total dividend pay-out for the financial year ended 30 June 2022 to 20.5 cents per share, up 21% on pcp.
Skellerup also announced that Liz Coutts would retire as Chair of Skellerup at its Annual Meeting on 26 October 2022 and will be succeeded by John Strowger. Coutts was a foundation director and Chair of the Audit Committee when Skellerup listed (as Skellmax) in 2002 and was elected Chair in January 2017. Strowger was appointed to the Board in 2015.

Coutts reflected on her time with Skellerup, “I have enjoyed my time immensely. We have successfully sharpened our focus on developing and manufacturing critical engineered products that meet demanding requirements and that generate value for customers and shareholders and opportunities for our people. The success of our strategy is evident in the growth in earnings and valuation of Skellerup. Over the past seven years NPAT and dividends paid to shareholders have more than doubled. I am delighted with the position the Group is in. Skellerup has a very strong Board to support John and an excellent team, well lead by David. I look forward to acknowledging our team and shareholders at the Annual Meeting in October.”

winner69

18-08-2022, 09:25 AM

Incredible result.

If PGW say their result was 'exceptional' then Skellerup result is more than 'exceptionally incredible'

See our Liz is retiring

Bjauck

18-08-2022, 10:36 AM

If PGW say their result was 'exceptional' then Skellerup result is more than 'exceptionally incredible'

See our Liz is retiring
Revenue, NPAT and Dividend have increased above the inflation rate & with a good forecast So we should see a price over 6.50 and above the high last year? Coutts leaving is a bit of dampener perhaps?

winner69

18-08-2022, 10:55 AM

For years the Skellerup share price languished in the 100-150 range - should always be worth more was the cry. In 2017 it became more popular and the share price managed to get to 200 odd in 2020.

All those years Skellerup wasn't really a dog (financially) - it was just they disappointed punters with lack of growth and things like that.

Skellerup has always had a pretty good ROE (like 14% to 16% through 2016 to 2020. More importantly they have for a long period of time covered their cost of capital - ie they have created economic value.

Since they really got things sorted big time over the last few years their ROE has improved to 23.5% this year and their ROIC (Return on Invested Capital) has improved nearly 20% (was 10%/11% 5 years ago)

Investors love a high ROIC company - like professional investment managers (not guru broker analyst types) often value a company on this basis - using a thing called Market Value Added (Difference between Market Cap and Equity) which essentially is the NPV of future excessive returns (where excessive returns are those in excess of its cost of capital)

I love chart below - it highlights how much Skellerup has been rewarded because of its growing ROIC.

Pretty incredible eh - like $1.08 of shareholder equity is now valued by the market at $5.82 - Market Value added of $4.74 (probably even more tomorrow)

Snow Leopard

18-08-2022, 12:09 PM

I kind of regret selling a few of these last year :(

Seems to be a good result and the immediate outlook looks rosy.

Definitely not selling any more.... yet.

mike2020

18-08-2022, 01:26 PM

If PGW say their result was 'exceptional' then Skellerup result is more than 'exceptionally incredible'

See our Liz is retiring
Not wanting to rain on the parade but PGW div 30 cents and SKL 20.5 not exactly a great comparison is it, especially given the sp difference.

alokdhir

19-08-2022, 07:18 AM

winner69

01-09-2022, 03:15 PM

Our Liz quitting as Director and he sell off of her shares starts .... another 520,000 to go

Hope she not doing this as she thought SKL can't do much better over the next few years .... like peak performance or something

Ggcc

14-10-2022, 05:51 PM

Dividend received today. Eager to see how they are doing currently and how the NZD is benefiting their bottom line as lots of growth in US and worldwide

Muse

26-10-2022, 12:43 PM

Skellerup starts well, predicts another record result
https://www.nzx.com/announcements/401169

Guidance $48-52m NPAT. Consensus is 51.9m.

winner69

26-10-2022, 01:11 PM

Skellerup starts well, predicts another record result
https://www.nzx.com/announcements/401169

Guidance $48-52m NPAT. Consensus is 51.9m.

Even if its $48.0m its more than last years $47.8m so is going to be a RECORD profit

After 38% profit growth in F21 and 19% in F22 0% to 8% is a bit anemic

We probably need to take this as a sign that the outlook for many companies in F23 is really that brilliant ....and doing about the same as F22 is going to be a good result

Snoopy

27-11-2022, 10:19 PM

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.

Skellerup designs and manufactures critical components for OEM manufactuers. All such critical components incorporate rubberized material or foam as constituent parts. These components are often required to meet stringent food, drinking water, hygiene and safety standards. Skellerup's competitive advantage is to leverage their expertise in engineering, chemistry and manufacturing to create rapid product prototypes to tight specifications, that can nevertheless be manufactured cost effectively.

For effective management Skellerup products are grouped under two broad divisions: 'Agri' and 'Industrial'. Further broken down the 'product catalogue' looks like this:

1/ Dairy (Agri): Food grade rubber-ware componentry for the milking shed, including 'udder liners', tubing & filters for hygiene, and feeding teats for the calves. Skellerup are the number 2 supplier of maintenance milking equipment worldwide AND

2/ Specialist Footwear (Agri): The traditional 'Red Band' gumboots to look after our farmer's feet. In fact the gumboots are so well thought of that they find wider application in the fire, forestry and electrical installation industries. Skellerup are the recognised leaders in this market in New Zealand

3/ Transport (Industrial): Vacuum systems, seals, injectors, couplings and gaskets, utilised throughout the transport industry in applications as wide as Mack trucks to Maserati cars.

4/ Houses (Industrial): Suppliers of seals to leading manufacturers of taps, showers, plumbing, and HVAC equipment - even some kitchen appliances. Skellerup also market roofing product directly.

5/ Medical Health Hygiene Equipment (Industrial): Face masks, filters and seals for respiratory equipment, orthotics and prosthetics.

6/ Utility Infrastructure (Industrial): Seals for potable water and wastewater applications. Covers and lids for water fire and electrical services on streets. valves and seals for industrial applications (food, liquid and material processing).

7/ Sport & Leisure (Industrial): Foam boat decking, Foam used in ski and snowboard boots.

Skellerup products are either leading market players in their own right, or are partners with well known branded market leaders via their components in the manufacturing chain.

Conclusion: 'Pass Test'

SNOOPY

Snoopy

28-11-2022, 07:36 AM

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

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
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2017 $2.507m, FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2017 adjusts for removing the one off $25,000 earthquake relocation expenses (AR2017 p39) respectively, by adding back the effect of a hypothetical situation where these losses were not incurred. The $9.300m tax figure used for FY2017 respectively has 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.

c/ FY2020/FY2021 results adds back an after tax $0.400m/$0.319m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
d/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

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

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
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022 results adds back an after tax $0.400m/$0.319m/$0.274m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

SNOOPY

Snoopy

28-11-2022, 07:45 AM

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

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%
2021: $40.243m/$196.140m= 20.5%

Conclusion: 'Pass Test'

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

2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%

Conclusion: 'Pass Test'

SNOOPY

Snoopy

28-11-2022, 07:52 AM

Net Profit Margin = Normalised Net Profit / Revenue

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= 11.4%
2021: $40.243m/$279.613m= 14.4%

I see a good margin lift from FY2017 to FY2021 with just a small dip on the year Covid-19 hit.

Conclusion: Pass test

Net Profit Margin = Normalised Net Profit / Revenue

2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%

I see a good margin lift from FY2018 to FY2022 with just a small dip on the year Covid-19 hit.

Conclusion: 'Pass test'

SNOOPY

Snoopy

28-11-2022, 08:25 AM

I have had a quiet look at the FY2021 annual report. I have done a Buffett style evaluation and found the company very fully valued. So for a different perspective, what does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

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

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) + 6.5c (50% I) 8.96c + 7.76c16.72c

FY202210.5c (50% I) + ?c (50% I) 12.54c + ?c 12.54c

Total78.61c

Averaged over 5 years, the dividend works out at 78.61/5 = 15.7c (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. Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, i ma reducing my sought gross yield from 7.5% to 7%.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

15.7 / (0.07) = $2.25

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: $2.25 x 1.2 = $2.70
Bottom of Business Cycle Valuation: $2.25 x 0.8 = $1.80

My target accumulation price is 10% below 'fair value', and that equates to $2.03.

SKL shares are trading at $6.06 as I write this (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.03 and a 'growth premium' of $6.06 - $2.03 = $4.03 (which is quite a bit).

discl: hold SKL

I have had a quiet look at the FY2022 annual report. What does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20186.0c+4.0c8.33c + 5.56c5.56c

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) + 6.5c (50% I) 8.96c + 7.76c16.72c

FY202210.5c (50% I) + 7.5c (50% I) 12.54c + 8.96c 21.50c

FY202313.0c (50% I) + ?c (50% I) 15.53c + ?c 15.53c

Total89.91c

Averaged over 5 years, the dividend works out at 89.91/5 = 18.0c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I consider a gross of 7% an acceptable return.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

18.0 / (0.07) = $2.57

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: $2.57 x 1.2 = $3.08
Bottom of Business Cycle Valuation: $2.57 x 0.8 = $2.06

SKL shares finished trading at $5.70 last week (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.57 and a 'growth premium' of $5.70 - $2.57 = $3.13. $3.13 is a lot, but down from the overheated $3.71 from 30-09-2021.

SNOOPY

discl: hold SKL

Snoopy

28-11-2022, 08:58 AM

I skipped the BT1/ test because Skellerup is just as powerful in its chosen target markets as it was last year, but incrementally better. So the 'Pass Test' result for 'Buffett Test 1' is carried over from FY2020.

https://www.sharetrader.co.nz/showthread.php?4091-Skellerup-(SKL)-Fundamentals&p=843610&viewfull=1#post843610

Very impressive result on all four Buffett tests over FY2021. As per my equivalent FY2020 round up, the fact that Skellerup is a great company is no secret. But almost everyone involved in the markets knows this. This is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021. So it is very important potential investors bear in mind the value equation

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

Can the historical PE ratio has continue to expand even further? The share price has doubled over a year. The dividend is up by around 30% over the same period. Investors can see from this that most of the share price gain over the year has been due to 'multiple expansion'. I would be very surprised to see the share price double again in the coming year.

But what is the investment case for new investors from here? This is the next task for me to investigate.

Very impressive result on all four Buffett tests over FY2022. The idea that Skellerup is a great company gains fewer and fewer dissenters as the years roll by. However, this is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021, even if one year later that PE figure has dropped to a more conservative but still high 22. It is very important potential investors bear in mind the value equation:

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

.... and so it proved over the year. Despite earnings per share jumping by 17%, the share price declined by 10% over the September year as FY2022s bumper result was digested. This shows the folly of buying a good company with no regard to the share price, in the short term at least. In the case of SKL this was well signalled by me as well.

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:
Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2022 Capitalised Dividend valuation for SKL (post 1189) is $2.57.

Share Price equals
Capitalised Dividend Value plus
Implied Growth Premium

30-09-2021$5.96
$2.25
$3.71 (+165%)

30.09-2022$5.38$2.57$2.81 (+109%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

SNOOPY

winner69

28-11-2022, 09:00 AM

Snoops - the last paragraph on Dividend post you mention growth premium

From you numbers the implied dividend growth is only about 2.6% pa .... not much

Think I have sums right

Snoopy

28-11-2022, 09:49 AM

Snoops - the last paragraph on Dividend post you mention growth premium

From you numbers the implied dividend growth is only about 2.6% pa .... not much

Think I have sums right

You are talking about post 1189? If that is so, your 'implied dividend growth' is too high - it should be 0%. And why is that?

It is because the 'capitalised dividend model' is based on 'zero dividend growth' - this is the essence of the model. That is not the same as saying the dividend will not change over the business cycle. I am modelling that in the future the dividend will go up and down in accordance with the dividends actually paid over the preceding five year period. But what I am saying is that at the end of that immediate past five year period, the same dividend paying pattern will repeat. Or put another way, the average dividend paid over the last five years will be exactly the same as the dividends the 'capitalised dividend model' is forecasting for the next five years.

Now if you look again at the table of dividends paid by Skellerup over the last five years in post 1189 by comparing interim and final dividends over 5 years, then you will see that both interim and final dividends are either staying the same or increasing. This does not fit with the capitalised dividend model assumptions. So it is likely the capitalised dividend model will give you an implied share price that does NOT reflect the dividend paying potential of Skellerup. This means as a single tool, in this instance, the capitalised dividend model is not very useful.

The reason I am persisting with the 'capitalised dividend model', is that I can use the share price as determined by 'Mr Market', and subtract from that the 'capitalised dividend value' to get a measure of the 'growth premium' that Mr Market is paying for Skellerup. I hope that clears things up a bit.

SNOOPY

winner69

28-11-2022, 10:01 AM

You are talking about post 1189? If that is so, your 'implied dividend growth' is too high - it should be 0%. And why is that?

It is because the 'capitalised dividend model' is based on 'zero dividend growth' - this is the essence of the model. That is not the same as saying the dividend will not change over the business cycle. I am modelling that in the future the dividend will go up and down in accordance with the dividends actually paid over the preceding five year period. But what I am saying is that at he end of that immediate past five year period, the same dividend paying pattern will repeat. Or put another way, the average dividend paid over the last five years will be exactly the same as the dividends the 'capitalised dividend model' is forecasting for the next five years.

I assumed from your post the no growth value today is $2.57 but at $5.70 the market has created a ‘growth premium’ which you said was ‘a lot’ and I did a sum and said that implied growth of that premium was 2.6% pa

We probably misunderstood each other again

Whatever SKL.great company and I look forward to what you come up with from your next task

Snoopy

28-11-2022, 10:53 AM

I assumed from your post the no growth value today is $2.57 but at $5.70 the market has created a ‘growth premium’

Your assumption is 100% correct

Which you said was ‘a lot’ and I did a sum and said that implied growth of that premium was 2.6% pa

We probably misunderstood each other again.

The only calculation I did was $5.70 - $2.57 = $3.13. I called that $3.13 a 'growth premium'. But I did not attempt to explain it any more than that. It is just the premium, once a fair value of the existing dividend stream is removed, that Mr Market is prepared to pay, - the result of a simple subtraction. It only makes sense if, as an investor, Mr Market believes that SKL is worth more than its historical dividend payment capability. I am not disagreeing with Mr Market. I think he is onto something. But what I want to know is: "Is Mr Market being 'over-exuberant' or 'under-exhuberant' on SKLs prospects?"

Mr Market is obviously looking at SKL growth into the future to justify a total SKL share price of $5.70. But how far into the future is Mr Market looking? I don't know. I make no assumptions about that. I am just reporting the $3.13 growth premium that 'is'.

SNOOPY

Snoopy

28-11-2022, 12:48 PM

'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

FY2017[/u][/TD]
FY2018
FY2019
FY2020
FY2021

Bolt on Acquisitions
New Wigram factory opens

Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)
Projects Vanilla & Tika IT upgrades

Cash & Cash Equivalents: {A}
$6.022m
$9.681m
$9.639m
$13.617m
$15.673m

Non Current Borrowings:
$41.777m
$40.400m
$46.215m
$41.300m
$24.000m

add Current Borrowings:
$0.0m
$0.0m
$0.0m
$0.830m
$0.409m

equals Total Borrowings: {B}
$41.777m
$40.400m
$46.215m
$42.130m
$24.409m

Total Net Borrowings: {B} - {A}
$35.755m
$30.719m
$36.576m
$28.513m
$8.734m

Net profit declared {C}
$22.110m
$27.277m
$29.063m
$29.064m
$40.175m

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

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. 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 useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. 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.

One way to 'cheat' at the Buffett tests is to leverage up your business to such an extent that your ROE looks fantastic, but the debt taken on puts your business at unacceptable risk. How do we know if debts at a business are out of control? One way is to look at the 'Minimum Debt Repayment Time' or MDRT.

'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

FY2018
FY2019
FY2020
FY2021
FY2022

Bolt on Acquisitions

Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)
Projects Vanilla & Tika IT upgrades
Talbot Technologies Ltd (NZ)

Cash & Cash Equivalents: {A}
$9.681m
$9.639m
$13.617m
$15.673m
$14.796m

Non Current Borrowings:
$40.400m
$46.215m
$41.300m
$24.000m
$40.000m

add Current Borrowings:
$0.0m
$0.0m
$0.830m
$0.409m
$0.0m

equals Total Borrowings: {B}
$40.400m
$46.215m
$42.130m
$24.409m
$40.000m

Total Net Borrowings: {B} - {A}
$30.719m
$36.576m
$28.513m
$8.734m
$25.204m

Net profit declared {C}
$27.277m
$29.063m
$29.064m
$40.175m
$47.813m

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

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. Skellerup are in the second most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. 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

Snoopy

28-11-2022, 08:33 PM

For the FY2021 edition of the Buffett growth model, I have recalculated these parameters as below.

FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
Average

Return on Shareholder Equity
14.7%
12.3%
15.2%
16.4%
15.7%
20.0%
15.7%

Dividend Payout Ratio
92%
88%
71%
83%
87%
68%
82%

PE Ratio at 30th September
11.5
16.6
15.7
15.2
19.9
29.1
18.0

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. 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."

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

For the FY2022 edition of the Buffett growth model, I have recalculated three essential parameters as below:

FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
Average

Return on Shareholder Equity
14.7%
12.3%
15.2%
16.4%
15.7%
20.5%
22.4%
16.7%

Dividend Payout Ratio
92%
88%
71%
83%
87%
68%
75%
81%

PE Ratio at 30th September
11.5
16.6
15.7
15.2
19.9
29.1
22.3
18.6

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. 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."

I have elected to use a reference period of seven years, to provide a 'decent tail' to average across my Return on Equity, Dividend Payout Ratio results and the market rated PE numbers. I seriously thought about using just the last five years of results. If ROE continues to hold up, that indicates that Skellerup has gone to a new level in the utilisation of their factory equipment, and that should be reflected in my base estimate numbers going forwards. But I have elected to be a bit conservative and consider the full seven year history of 'the new Skellerup'.

SNOOPY

Snoopy

28-11-2022, 09:19 PM

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 15.7% (the actual average of the last 6 years) AND
b/ a dividend payout ratio of 82% (the actual dividend payout ratio of the last 6 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 column in my table (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

SOFY

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

2020 (historical)
0.916
0.150
0.011
(0.130)
0.031
(0.018)

2021 (historical)0.942
0.205
(0.01)
(0.140)0.055(0.020)

20220.9970.157

(0.128)0.029(0.018)

][
20231.0260.161
(0.132)0.029(0.018)

20241.0550.166
(0.136)0.030(0.019)

20251.0850.170
(0.140)0.030(0.020)

20261.1150.175
(0.144)0.031(0.020)

20271.1460.180
(0.148)0.032(0.021)

20281.1780.185
(0.152)0.033(0.021)

20291.2110.190
(0.156)0.034(0.022)

20301.2450.195
(0.160)0.035(0.022)

20311.2800.201
(0.165)0.036(0.023)

20321.3160.207

Ten Year Total
(1.461)(0.204)

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

With FY2032 projected earnings of 20.7cps, and using a PE ratio of 18.0 (actual average over the last 6 years), the expected share price for Skellerup in ten years time is:

18.0x 0.207 = $3.73

The net dividend return for shareholders over that time is $1.461 - $0.204 = $1.257 (as per above table)

Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year. Is this a joke? How can such a projected return every year for ten years - no less - be correct?

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2032 are 20.7cps, verses actual earnings for FY2021 of 20.5cps. IOW I am modelling earnings to be virtually flat after ten years, with years of lesser earnings in between! Is that a plausible scenario? From where we shareholders sit today, such a result would be extremely disappointing to be sure. Yet if we use the actual historic return on equity, averaged over 6 years, and the actual dividend payout ratio, then these are the kind of earnings we shareholders might expect.

This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong.

The second modelling assumption that is well out of whack with today's market (PE of 29) is that I am assuming a PE ratio of 18 in 2032. I did not pull that figure of 18 out of thin air. It is the actual historical average over six sample dates. Shareholders coming on board over the last couple of years (eps has grown 37% since FY2019) might like to reflect that most of their share price gains (SP +160% over the same period) have been due to 'valuation multiple expansion'. Growth in earnings has occurred. But the share price growth has way outstripped earnings growth. IMO the 'multiple expansion' that has driven so much of shareholder returns over the year or two in particular has now become a real risk factor that could sting shareholders if that PE valuation metric deflates. If that is a somewhat sombre note on which to end this analysis, then so be it. Don't e-mail Warren Buffett and ask what he thinks, as I don't think there is any chance he will be on the Skellerup share register!

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

P(1+0.15)^10 = (3.73+1.26) => P= $1.23c

SNOOPY

discl: shareholder, with an average entry price of $1.33

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 question, I will plug the modelling numbers that I have generated into the Buffett style ten year growth model.

Key Model Inputs
Average over Seven Years

Return on Shareholder Equity
16.7%

Dividend Payout Ratio
81%

PE Ratio at 30th September
18.6

I have noted that the dividend going forwards is likely to be no more than 50% imputed. The reason why the Skellerup dividend is only 50% imputed today is that around 50% of profits (and 75% of revenues) 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 column' (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

SOFY

FYAsset BackingOperations Earnings
adjust OCI (1)less Dividend
equals Retained EarningsUnimputed Dividend Tax

2020 (historical)
0.916
0.150
0.011
(0.130)
0.031
(0.018)

2021 (historical)
0.942
0.206
(0.010)
(0.140)
0.056
(0.020)

2022 (historical)
1.00
0.245
0.010
(0.180)
0.075
(0.025)

][
20231.080.180
(0.146)0.034(0.020)

20241.1140.186
(0.151)0.035(0.021)

20251.1490.192
(0.156)0.036(0.022)

20261.1850.198
(0.160)0.038(0.022)

20271.2230.204
(0.165)0.039(0.023)

20281.2620.211
(0.171)0.040(0.024)

20291.3020.217
(0.176)0.041(0.025)

20301.3430.224
(0.181)0.043(0.025)

20311.3860.231
(0.187)0.044(0.026)

20321.4300.239
(0.194)0.045(0.027)

20331.4750.246

Ten Year Total
(1.687)(0.235)

Notes

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

(2) Sample calculations for FY2023:

Operations Earnings = $1.08 x 0.167 = $0.18
Dividend = 0.18 x 0.81 = $0.146
Retained earnings = $0.180 - $0.146 = $0.034
50% Unimputed Dividend Tax @28% (shareholder perspective only) = $0.146 x 0.5 x 0.28 = $0.020
Asset backing (subsequent year): $1.08 + $0.034 = $1.114

-----------

With FY2033 projected earnings of 24.6cps, and using a PE ratio of 18.6 (actual average over the last 7 years), the expected share price for Skellerup in ten years time is:

18.6 x 0.246 = $4.58

The net dividend return for shareholders over that time is $1.687 - $0.235 = $1.452 (as per above table)

Using a market share price today of $5.65, the expected compounding annual return 'i' can be calculated from the following equation.

$5.65(1+i)^10 = ($4.58 +$1.45) => i= 1.0065

This represents a projected return of 0.65% per year, for the next ten years (!)

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2032 are 24.6cps, verses actual earnings for FY2022 of 24.5cps. IOW I am modelling earnings to be virtually flat after ten years, with years of lesser earnings in between! Is that a plausible scenario? From where we shareholders sit today, such a result would be extremely disappointing to be sure. Yet if we use the actual historic return on equity, averaged over 7 years, and the actual dividend payout ratio, then these are the kind of earnings we shareholders might expect.

This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2023, (AR2022 p9, consolidating 3 operating sites in Auckland into one low energy site), this modelling assumption looks likely to be wrong.

The second controversial modelling assumption is that today's PER of 22.3, will reduce to a PE ratio of 18.6 in 2032. But I did not pull that figure of 18.6 out of thin air. It is the actual historical average over seven years on my 30th September sampling dates.

Shareholders coming on board since FY2016 (which some regard as the re-imagining of Skellerup into the modern group we see today) which had normalised earnings of 11.8cps (post 655) to 22.4cps (post 1186), a rise of 90%. Over that same time period, using my 30th September reference date shows the share price has risen from $1.37 to $5.38, a rise of nearly 300%. This means that most of the spectacular gains made by shareholders over this time have come from 'earnings multiple expansion' and not 'earnings expansion'. There is a real risk factor here that could sting shareholders if that PE valuation metric deflates back towards historic levels.
modelling

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

P(1+0.15)^10 = ($4.58 +$1.45) => P= $1.49c

SNOOPY

Muse

28-11-2022, 10:14 PM

So where to from here Snoops re: your shareholding? Hold, sell, combo?

Snoopy

29-11-2022, 02:55 PM

So where to from here Snoops re: your shareholding? Hold, sell, combo?

The only thing I can say for sure is, I am in a better position this year....

Using a market share price today of $5.65, the expected compounding annual return 'i' can be calculated from the following equation.

$5.65(1+i)^10 = ($4.58 +$1.45) => i= 1.0065

This represents a projected return of 0.65% per year, for the next ten years (!)

....than I was one year previously:

Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year , every year.

Ah well, I did warn myself, I guess :-(.

SNOOPY

Snoopy

29-11-2022, 03:13 PM

Snoopy

29-11-2022, 04:07 PM

Snoopy

01-12-2022, 11:07 AM

Just finished my annual 'battle of the manufacturers' head to head comparison between SKL and SCT (Scott Technology). This year it is on the Scott Technology thread for those that want to read it.

https://www.sharetrader.co.nz/showthread.php?368-SCT-Scott-Tech&p=984365&viewfull=1#post984365

SNOOPY

Pegasus2000

05-12-2022, 11:21 AM

Thank you Snoopy very much for the excellent/hard work, and sharing with us.

Sideshow Bob

16-02-2023, 09:04 AM

https://www.nzx.com/announcements/406764

Skellerup announced today record unaudited earnings before interest and tax of $33.5 million for the six months ended 31 December 2022, an increase of 3% on the prior comparative period (pcp). Net profit after tax (NPAT) was $23.0 million down 1% on pcp due to higher interest and tax costs.

Key points for the six months ending 31 December 2022

• Revenue of $165.5 million, up 10% on prior comparative period (pcp)
• Earnings before interest and tax (EBIT) of $33.5 million, up 3% on pcp
• Industrial Division EBIT of $21.4 million, up 14% on pcp
• Agri Division EBIT of $14.6 million, down 12% on pcp
• Corporate costs of $2.5 million, down 15% on pcp
• Net profit after tax (NPAT) of $23.0 million, down 1% on pcp
• Operating cash flow of $20.2 million, up 3% on pcp
• Net debt of $39.0 million, up $13.8 million on FY22 year-end
• Interim dividend of 8.0 cents per share (an increase of 0.5 cps), up 7% on pcp
• FY23 NPAT forecast unchanged in the range of $48 to $52 million.

winner69

16-02-2023, 09:54 AM

Just as well they don’t do the old PGW trick and use ‘Inflation Adjusted EBIT’ as then it wouldn’t be a record H1

And NPAT less than last year but I suppose the I and T don’t really count so no worries.

Whatever …a pretty solid result so you can’t really blame them for adding a bit of colour to the story.

Sideshow Bob

16-02-2023, 11:38 AM

winner69

14-06-2023, 02:09 PM

Been nothing from SKL since half year announcement so assume they still on track for a record profit in F23

Share price down 15% since half year and now about 30% down from its recent high.

Downtrend still intact …wonder for how much longer as PE currently looking reasonable

Maybe as low as 4 bucks before full results announcement in August?

If I was them I’d find an excuse to come out and say things are still all hunky dory.

Sideshow Bob

26-07-2023, 12:15 PM

bull....

10-08-2023, 04:56 PM

Farmer confidence hits record low as price fall and costs rise

https://www.stuff.co.nz/business/farming/132717377/farmer-confidence-hits-record-low-as-price-fall-and-costs-rise

CD_CHCH

10-08-2023, 10:34 PM

winner69

11-08-2023, 07:55 AM

Potential job losses Loom at Christchurch manufacturer — Chris Lynch Newsroom (chrislynchmedia.com) (https://www.chrislynchmedia.com/news-items/potential-job-losses-loom-at-christchurch-manufacturer)

Shareholders have much appreciated the “skill, drive and commitment of our team” to drive record profits and increased dividends.

But life is tough some time and some jobs will have to go ….maybe become too productive and efficient….and profits must grow

Suppose not a good look if they tout record profits next Thursday if they telling staff they are out of a job.

Have to replace record in the headlines with guff like ‘solid performance in challenging times’ eh

Ricky-bobby

12-08-2023, 09:00 AM

Explaining the gradual decline in share price… just creeped into the red on this one. It’s going to be an interesting set of results, but to be honest know a lot of businesses who are currently looking at staffing numbers.

Ggcc

12-08-2023, 09:30 AM

Quite an amazing company, but pulled out at $5 reluctantly as manufacturing in general was struggling with inflation and wage increase demands of staff in every sector. Looking back it was the right call and feel now the price is almost ready to go back in if I had funds. Personally I would be waiting until it goes sub $4 though maybe even $3.50 if reserve bank increases the interest rate again

Ricky-bobby

12-08-2023, 10:03 AM

Yep agree! I should have done the same… have u re-invested elsewhere? What are u targeting?

Ggcc

12-08-2023, 10:58 AM

Yep agree! I should have done the same… have u re-invested elsewhere? What are u targeting?
At the time I feel I bought more of Infratil and some more Turners. Looking back I bought mostly back into Task.

Sideshow Bob

17-08-2023, 08:33 AM

Shareholders have much appreciated the “skill, drive and commitment of our team” to drive record profits and increased dividends.

But life is tough some time and some jobs will have to go ….maybe become too productive and efficient….and profits must grow

Suppose not a good look if they tout record profits next Thursday if they telling staff they are out of a job.

Have to replace record in the headlines with guff like ‘solid performance in challenging times’ eh

https://www.nzx.com/announcements/416484

Skellerup today announced record audited net profit after tax of $50.9 million for the year ended 30 June 2023, a seven per cent increase over the previous record result.

Highlights for the year ending 30 June 2023

· Strategy continuing to deliver substantial growth in earnings and returns to shareholders.
· Revenue of $333.5 million, up 5% on the prior comparative period (pcp).
· Earnings before interest and tax (EBIT) of $71.7 million, up 7% on the pcp.
o Industrial Division’s EBIT of $42.9 million, up 10% on the pcp.
o Agri Division’s EBIT of $34.0 million, up 1% on the pcp.
· Net profit after tax (NPAT) of $50.9 million, up 7% on the pcp.
· Operating cash flow of $54.1 million, up 25% on the pcp.
· Net debt of $26.8 million, an increase of $1.6 million on the pcp.
· Final dividend of 14.0 cents per share (cps) (50% imputed) bringing the total FY23 dividend to 22.0 cps (50% imputed) for the full year, up 7% on the pcp.

Skellerup’s CEO David Mair said he was proud the Skellerup team had delivered another record profit, particularly during challenging global economic conditions. “It reflects the success of our business strategy, purpose and focus. The FY23 NPAT was $50.9 million, a seven per cent improvement on last year’s record result. Over the past seven years, NPAT has grown at a compound annual growth of 14 per cent. We are confident we can continue to deliver long-term sustainable earnings growth.”

Mair added, “The key element to our sustained earnings improvement is our unwavering focus on, and commitment to, understanding customer needs. We use our deep expertise in material science and our capability to combine different materials, rapidly build and deliver prototypes, and to manufacture precision products in a scalable way. This enables us to continue to create new opportunities to grow Skellerup’s business.”

Industrial Division’s EBIT was $42.9 million, a record result and up 10 per cent on the pcp. Revenue was $216.8 million, up five per cent on the pcp. Mair said increased sales into wastewater, high-performance foam and roofing applications were the key drivers for another record result in FY23.

“Our Industrial Division generates 85 per cent of its revenue from international markets. FY23 sales revenue growth of five per cent was slower than in recent years. Strong revenue growth was realised from sales of vacuum systems for wastewater applications (most notably in the USA), sales of high-performance marine foam products (into the USA, NZ and Australia) and roof-flashing products for solar energy installations (in the UK). This growth was partially offset by lower sales for potable water and appliance applications as customers reduced inventories; this reflected both lower demand and an easing of supply chain pressures such as raw material shortages and freight congestion prevalent during the COVID-19 pandemic of the preceding two years. The FY23 result again demonstrated that the broad range of applications we serve is a feature and strength of our Industrial Division. This enables us to leverage our expertise and not be exposed to changes in demand from any one sector.”

Agri Division’s EBIT was $34.0 million, up one per cent on the pcp. Revenue was $117.0 million, up six per cent on the pcp. Mair said increased sales of footwear were key to another record result in FY23.

“Our Agri Division remains a world leader in the design and manufacture of essential consumables for the global dairy industry and the design and manufacture of rubber footwear for farming and specialty applications including electricity, fire and forestry. Footwear was a standout during FY23 as increased sales in NZ (hardware channels and urban markets) and the USA (electricity applications) delivered earnings growth. Sales volumes of dairy consumables were down as customers reduced inventories due to lower demand and an easing of freight congestion prevalent during the COVID-19 pandemic. Sales price adjustments in the second half of the year lagged the impact of raw material cost increases incurred in the first half; however, productivity gains helped offset the impact of lower production volumes, higher raw material prices and freight costs.”

Mair noted that Skellerup continued to invest for future growth.

“We allocate financial and intellectual resources carefully, targeting sustained earnings growth. During FY23 we increased our ownership of Sim Lim – a manufacturer of liquid silicone products – from 35 per cent to 100 per cent. We also increased our investment in internal engineering capability to ensure our technical and product leadership position is retained, as well as investing in advanced design and equipment capacity to improve the efficiency and adaptability of manufacturing for the future. And we continue to invest in our systems to provide us with the information we need and ensure we make it easy for customers to work for us.”

Chair John Strowger saluted the performance of the Skellerup team noting the FY23 result was the outcome of many years of work.

“The key to Skellerup’s success is to work closely with our customers to identify and produce enduring solutions to their problems. The intellectual capability of our people is as much an asset of the Group as the bricks and mortar which are reported on the balance sheet. Done well, this can create lasting trade relationships which can be hard to shift; the results reported now reflect years of investment in this process – there is no ‘overnight success’ in the FY23 result.”

Strowger noted that celebrations of the 20-year anniversary of Skellerup’s business in Jiangsu, China, and the 75-year anniversary of DEKS in Melbourne, Australia, further highlighted the enduring, long-term strength of Skellerup.

Strowger highlighted the robust financial position of the business. “At Skellerup, we are often told by well-intentioned third-party commentators that we have a ‘lazy’ balance sheet.

It is true that we do carry low levels of debt, but in periods of uncertainty have found this to be a distinct advantage; this ensures we make the right decisions for the business in a holistic sense, rather than responding to short-term exigencies. It also enables us to distribute a healthy proportion of our earnings to shareholders in the form of dividends. The Directors are very pleased to announce a final dividend of 14 cents per share, imputed to 50 percent, which takes the full-year dividend to 22 cents per share, a seven per cent increase on the prior year. The final dividend will be paid on 13 October 2023 with the record date of 29 September 2023.”

For further information, please contact:

bull....

17-08-2023, 08:35 AM

good result , no mention i could see of an outlook statement ? ill take that as the outlook is not good and they didnt want to dampen the positive announcement

Sideshow Bob

17-08-2023, 08:36 AM

good result , no mention i could see of an outlook statement ? ill take that as the outlook is not good and they didnt want to dampen the positive announcement

Dairy farmer will be putting away the chequebook big time. Suspect already seeing this, hence their Chch announcement.

winner69

17-08-2023, 08:39 AM

Yep Bob ….another RECORD

I like this bit a lot …highlights a high degree of discipline

Strowger highlighted the robust financial position of the business. “At Skellerup, we are often told by well-intentioned third-party commentators that we have a ‘lazy’ balance sheet. It is true that we do carry low levels of debt, but in periods of uncertainty have found this to be a distinct advantage; this ensures we make the right decisions for the business in a holistic sense, rather than responding to short-term exigencies. It also enables us to distribute a healthy proportion of our earnings to shareholders in the form of dividends.

Filthy

17-08-2023, 09:01 AM

good result , no mention i could see of an outlook statement ? ill take that as the outlook is not good and they didnt want to dampen the positive announcement

no outlook; but there was this snippet: "We are confident we can continue to deliver long-term sustainable earnings growth"

Muse

17-08-2023, 09:20 AM

Solid result, in my view.

Interesting to look at the phasing of the result over the two halves.

1H FY23 NPAT was actually down 1% on 1H FY22.

2H FY23 NPAT grew 13.7% on the prior year. Combination of factors - really strong expansion of GP (39.5% to 43%), driving PBT to grow 8%. Lower effective tax rate dropping down to 13.7% NPAT growth.

Revenue growth was stronger in the first half but didn't translate down into earnings growth, the reverse happened in the 2H. Probably product mix & sales price adjustments catching up in the 2H to cost increases borne in the first half without commiserate increase in pricing.

Nice to see it hit consensus and achieve growth. Question of the lack of outlook and rational for the redunancies out of CHCH (is it demand led or rationalisation & improvement led).

Muse

17-08-2023, 10:59 AM

Optimistic tones from the earnings call.

re the redundancies at the CHCH facility it's nothing to do with demand but rather a labour intensive process being better automated.

demand overall remains strong, ups and downs. growth from new products that had been delayed kicking in during q4 and should continue into this year. yes milk payout lower but recall many of the dairy products are consumables linked to dairy volumes not prices. industrial going well and has a lot of growth opportunities.

re no outlook reiterated during Q&A they usually do not provide outlook until the ASM. but do see the yr just been as a base from which to grow from.

result impacted by high currency hedges which resulted in some negative revaluations at close dragging down result. Hedged fx could be a drag this yr if currency stays below 60c but the P&L impact will be much reduced. freight costs only reduced in q4.

DavidB

17-08-2023, 11:12 AM

A solid result. I have been a long-term holder of Skellerup shares which are up now around 140% for me, even after the steep price correction of the last year. I have been very impressed over the years with the growth in their industrial division, which is now the largest revenue-generating division within the company. As much of this is derived from overseas markets the decline in our exchange rate should give a nice little boost to those earnings. This may in turn help to offset some of the reduced revenue that is expected from the smaller Agri division as its dairy farmer customers grapple with declining dairy prices. Nevertheless, the days of Skellerup being solely a gumboot and rubber tubing supplier to the dairy industry are well and truly behind it. If they are able to continue to innovate and come up with new materials and new applications of materials in close collaboration with their customers in the US, Australia, and elsewhere, I think the long-term outlook for the company will remain very positive. Could Skellerup one day be our first genuinely multinational industrial company? Time will tell I guess. But any company that keeps a tight lid on its debt levels is one - well that's just smart business as far as I am concerned.

mshierlaw

17-08-2023, 05:44 PM

Today's chart was all over the place. Appears punters could not make up their minds about the quality of this result
Open 4.37
High 4.70
Low 4.21
Close 4.44

In that order & what a candle!

Agree with above posts & re-entered @ 4.30

Toddy

17-08-2023, 07:33 PM

I'm a new investor as of today. Avg entry price $4.37.

zulu

21-08-2023, 02:11 PM

I Don't understand, inspite of declaring impressive results why there is massive drop in the sp?
Any thoughts?

Filthy

21-08-2023, 02:47 PM

I Don't understand, inspite of declaring impressive results why there is massive drop in the sp?
Any thoughts?

market is dragging it down. punters likely just reallocating funds / balancing portfolios to other stocks that have dropped. just think of it as a good opportunity to top-up!

Soolaimon

21-08-2023, 03:37 PM

My order filled today....thankyou.

X-men

21-08-2023, 03:42 PM

Don't U guys read the news...farmers are all mourning...tighten thier belts ..going to use the old rusty bike...bla..bla...not going to survive this year or next because of low milk price

Soolaimon

21-08-2023, 08:56 PM

Been there before, think long term.

Sideshow Bob

25-10-2023, 01:48 PM

$51.9m NPAT this past year, so steady as she goes.....

https://www.nzx.com/announcements/420484 (https://www.nzx.com/announcements/420484)

Skellerup guides for another strong year

25/10/2023, 12:36 pmMKTUPDTESpeaking ahead of today’s Annual Shareholders’ Meeting, Chair John Strowger provided initial guidance for Skellerup’s FY24 year.

Strowger said “Q1 results are mixed. The Industrial Division has traded in line with expectations and ahead of pcp. Agri Division sales are lower than expected due to international dairy customers reducing demand and inventory due to challenging market conditions. However, footwear sales remain solid.

For the full year we expect the Industrial Division to continue to grow both from sales of new products and more stable demand for existing products (following the destocking of the prior year). For the Agri Division we expect dairy sales to gradually increase as market conditions improve.

The global environment makes forecasting future results particularly difficult at the current time; Skellerup is not immune to market uncertainties. However, based on prevailing conditions and our current expectations in respect of how trading conditions and customer demand play out for the year, we expect FY24 NPAT to be in the range of $50 to $55 million. Our strategy of working closely with customers to provide engineered products that assure performance is the bedrock of delivering continued and sustainable earnings growth.”

bull....

26-10-2023, 05:29 PM

The global environment makes forecasting future results particularly difficult at the current time; Skellerup is not immune to market uncertainties. However, based on prevailing conditions and our current expectations in respect of how trading conditions and customer demand play out for the year, we expect FY24 NPAT to be in the range of $50 to $55 million. Our strategy of working closely with customers to provide engineered products that assure performance is the bedrock of delivering continued and sustainable earnings growth.”

So feeling the slowdown eh is skl

RBNZ agree's with them

The agricultural sector is facing difficult economic conditions, because of low dairy, meat and forestry prices, high operating expenses and increased debt servicing costs.
Longer term, the sector faces uncertainty about the scale and timing of the costs of climate change, reports the Reserve Bank of New Zealand

https://www.scoop.co.nz/stories/BU2310/S00312/farmers-facing-heightened-challenges.htm

Rawz

31-10-2023, 08:55 AM

a good read for the morning

https://justthebusinessjennyruth.substack.com/p/skellerup-one-of-the-strongest-and

winner69

31-10-2023, 09:29 AM

a good read for the morning

https://justthebusinessjennyruth.substack.com/p/skellerup-one-of-the-strongest-and

Good eh rawz

As I’ve posted many times SKL one of the few NZ stocks which has grown its EVA (excess returns over its cost of capital) over the years …and rewarded by the market with increasing Market Value Added (market Cap less Equity)

No reason why they can’t keep it up.

Ricky-bobby

31-10-2023, 02:28 PM

Thanks for posting chaps! Will have a read

Snoopy

12-11-2023, 09:43 PM

I have had a quiet look at the FY2022 annual report. What does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20186.0c+4.0c8.33c + 5.56c5.56c

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) + 6.5c (50% I) 8.96c + 7.76c16.72c

FY202210.5c (50% I) + 7.5c (50% I) 12.54c + 8.96c 21.50c

FY202313.0c (50% I) + ?c (50% I) 15.53c + ?c 15.53c

Total89.91c

Averaged over 5 years, the dividend works out at 89.91/5 = 18.0c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I consider a gross of 7% an acceptable return.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

18.0 / (0.07) = $2.57

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: $2.57 x 1.2 = $3.08
Bottom of Business Cycle Valuation: $2.57 x 0.8 = $2.06

SKL shares finished trading at $5.70 last week (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.57 and a 'growth premium' of $5.70 - $2.57 = $3.13. $3.13 is a lot, but down from the overheated $3.71 from 30-09-2021.

I have had a look at the FY2023 annual report. What does the announcement of the HY2024 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 then chairman Liz Coutts highlighted in the FY2022 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, FY2021s, FY2022s, FY2023s and FY2024s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021, FY2022, FY2023 and FY2024 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

FY2023 P2/ 8.0c (50% imputed) = 4.0c (FI) + 4.0c (NI) = 4.0c/0.72 +4.0c = 5.56c + 4.0c = 9.56c (gross dividend)

FY2024 P1/ 14.0c (50% imputed) = 7.0c (FI) + 6.5c (NI) = 7.0c/0.72 +6.5c = 9.72c + 6.5c = 16.22c (gross dividend)

Year
Dividends as DeclaredGross DividendsGross Dividend Total

FY20197.0c (55% I) +5.5c (50% I) 8.50c +6.57c6.57c

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

FY20217.5c (50% I) + 6.5c (50% I) 8.96c + 7.76c16.72c

FY202210.5c (50% I) + 7.5c (50% I) 12.54c + 8.96c 21.50c

FY202313.0c (50% I) + 8c (50% I) 15.53c + 9.56c 25.09c

FY202414.0c (50% I) + ?c (50% I) 16.22c + ?c 16.22c

Total101.63c

Averaged over 5 years, the dividend works out at 101.63c/5 = 20.3c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I now consider a gross of 6% an acceptable return.

Based on my selected sought after 6.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

20.3 / (0.06) = $3.38

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: $3.38 x 1.2 = $4.06
Bottom of Business Cycle Valuation: $3.38 x 0.8 = $2.70

SKL shares finished trading at $4.82 last week (above the upper end of my capitalised dividend valuation range). SKL has such a good growth record I am not seriously suggesting that 'capitalised dividend valuation' (which assumes no growth) is a satisfactory way to value the company. But an alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $3.38 and a 'growth premium' of $4.82 - $3.38 = $1.44. $1.44 is significant, but down from the overheated $3.31 from 28-11-2022.

SNOOPY

discl: hold SKL

Snoopy

13-11-2023, 08:38 AM

Skellerup designs and manufactures critical components for OEM manufactuers. All such critical components incorporate rubberized material or foam as constituent parts. These components are often required to meet stringent food, drinking water, hygiene and safety standards. Skellerup's competitive advantage is to leverage their expertise in engineering, chemistry and manufacturing to create rapid product prototypes to tight specifications, that can nevertheless be manufactured cost effectively.

For effective management Skellerup products are grouped under two broad divisions: 'Agri' and 'Industrial'. Further broken down the 'product catalogue' looks like this:

1/ Dairy (Agri): Food grade rubber-ware componentry for the milking shed, including 'udder liners', tubing & filters for hygiene, and feeding teats for the calves. Skellerup are the number 2 supplier of maintenance milking equipment worldwide AND

2/ Specialist Footwear (Agri): The traditional 'Red Band' gumboots to look after our farmer's feet. In fact the gumboots are so well thought of that they find wider application in the fire, forestry and electrical installation industries. Skellerup are the recognised leaders in this market in New Zealand

3/ Transport (Industrial): Vacuum systems, seals, injectors, couplings and gaskets, utilised throughout the transport industry in applications as wide as Mack trucks to Maserati cars.

4/ Houses (Industrial): Suppliers of seals to leading manufacturers of taps, showers, plumbing, and HVAC equipment - even some kitchen appliances. Skellerup also market roofing product directly.

5/ Medical Health Hygiene Equipment (Industrial): Face masks, filters and seals for respiratory equipment, orthotics and prosthetics.

6/ Utility Infrastructure (Industrial): Seals for potable water and wastewater applications. Covers and lids for water fire and electrical services on streets. valves and seals for industrial applications (food, liquid and material processing).

7/ Sport & Leisure (Industrial): Foam boat decking, Foam used in ski and snowboard boots.

Skellerup products are either leading market players in their own right, or are partners with well known branded market leaders via their components in the manufacturing chain.

Conclusion: 'Pass Test'

Skellerup has been what I would term a 'slow bake success story'. There haven't been 'headline grabbing breakthroughs'. But they have baked in plans and incremental changes, that overall have created a much richer earnings pie. The industries that Skellerup have built their success with are well documented (see the post I am quoting above). So this year rather than just repeating WHAT Skellerup are doing, I am taking a leaf out of the book of CEO David Mair, who in his CEO annual report has become somewhat reflective, and talk about HOW Skellerup are doing it. From David's report:

"The key element in achieving corporate value is our unwavering focus on, and commitment to, understanding customer needs and using our:

i/ Deep material science expertice AND
ii/ Capability to combine materials AND
iii/ Ability to rapidly build and deliver prototypes AND
iv/ Possessing the ability to manufacture precision products in a scalable way.

This enables us to create new opportunities to grow Skellerup's business."

"A culture of continuous improvement is essential to motivate every employee to spend time working on improving the processes they are involved in, not merely a focus on outcomes."

"Our strong balance sheet offers Skellerup the flexibility to fund aligned acquisitions."

In summary, 'deep core material knowledge', 'continuous improvement' and 'capital to execute the ideas'. Another interesting statistic was that 14 of Skellerups top 20 customers were also in the top twenty five years before at EOFY2019. This shows that you don't always have to be driving for new business if you are in the habit of treating your existing customers really well. Budding CEOs I think could take many 'learning leaves' from the tree of Skellerup CEO David Mair.

Conclusion: PASS TEST

SNOOPY

Snoopy

13-11-2023, 08:49 AM

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

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
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022 results adds back an after tax $0.400m/$0.319m/$0.274m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

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

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
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps
2023: ($66.987+$2.113-$16.046+$0.477)m/196.072n = 27.3cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed ( FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m, FY2023 $2.113m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022/FY2023 results adds back an after tax $0.400m/$0.319m/$0.274m/$0.477m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'PASS TEST'.

SNOOPY

Snoopy

13-11-2023, 08:59 AM

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

2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%

Conclusion: 'Pass Test'

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

2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%
2023: $53.501m/$225.436m= 23.7%

Conclusion: PASS TEST

SNOOPY

Snoopy

13-11-2023, 09:08 AM

Net Profit Margin = Normalised Net Profit / Revenue

2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%

I see a good margin lift from FY2018 to FY2022 with just a small dip on the year Covid-19 hit.

Conclusion: 'Pass test'

Net Profit Margin = Normalised Net Profit / Revenue

2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%
2023: $53.501m/$333.537m= 16.0%

I see a good margin lift from FY2019 to FY2023 with just a small dip on the year Covid-19 hit. Inflation of 7% over FY2023 required a rise in net profit margin from 14.9% to (1.07x14.9%=15.9%). Actual margin achieved over FY2023 was 16.0%, so the job was done.

Conclusion: PASS TEST

SNOOPY

Snoopy

13-11-2023, 09:56 AM

Very impressive result on all four Buffett tests over FY2022. The idea that Skellerup is a great company gains fewer and fewer dissenters as the years roll by. However, this is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021, even if one year later that PE figure has dropped to a more conservative but still high 22. It is very important potential investors bear in mind the value equation:

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

.... and so it proved over the year. Despite earnings per share jumping by 17%, the share price declined by 10% over the September year as FY2022s bumper result was digested. This shows the folly of buying a good company with no regard to the share price, in the short term at least. In the case of SKL this was well signalled by me as well.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2022 Capitalised Gross Yield for SKL (post 1014) is 7.7c / $2.80 = 2.75%.

Share Price equals
Capitalised Dividend Value plus
Implied Growth Premium

30-09-2021$5.96
$2.25
$3.71 (+165%)

30.09-2022$5.38$2.57$2.81 (+109%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

Very impressive result with a pass on all four Buffett tests over FY2023. This is particularly notable as companies that are manufacturers and require a lot of capdeclined by 13% over the September year as FY2023s bumper result was digested. This shows, for the second year in a row, the folly of buying a good company with no regard to the share price, in the short term at least. For long term investors with a time frame greater than two years such share price movements make little difference. Dividends have continued to increase over the year and I personally have had no need to sell. If I had been in a position where I was short of capital for investment opportunities that may emerge I may well have sold down my position a couple of years back. But if anything I am in the opposite position with my fixed interest portfolio, bank term deposits, at its highest ever level and good equity investment opportunities scarce.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2023 Capitalised Gross Dividend Yield, a no growth metric, for SKL (post 1236) is $3.38

Share Price equals
Capitalised Dividend Value plus
Implied Growth Premium

30-09-2021$5.96$2.25$3.71 (+165%)

30.09-2022$5.38$2.57$2.81 (+109%)

30.09-2023$4.65$3.38$1.27 (+37.6%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

SNOOPY

winner69

13-11-2023, 11:57 AM

Hey snoops, something for you.

You’ve probably noticed I like using returns on capital (including debt) to monitor company performance. Preferred one is Economic Profit (EP) which is company’s excessive profits over and above its cost of capital…ie is it a value creator. (Surprising how many companies don’t achieve this)

Below is how Skellerup have performed recently. Pretty impressive growth in EP eh.

Of interest is the breakdown between ‘growth’ and ‘productivity’

A valuation metric often used by finance gurus is Market Value Added (MVA) = Market Cap less Equity = NPV of future EP

For Skellerup MVA is $720m ($945m- $225m). All that value creation rewarded with $225m equity now worth $945 on the market.

So the NPV of future EP is $720m. This implies future EP growth of 4%/5% pa….forever

I’m sure this value creation is an important discussion point within Skellerup powers to be

Whatever you might interesting

Snoopy

13-11-2023, 01:46 PM

Interesting little table winner. A bit more sophisticated than some of the stats I bring to the forum. A couple of questions if you don't mind.

'Economic Profit' is based on the difference between the 'underlying asset value of the company' and 'market value of the shares' or:
Market Cap less Equity = NPV of future EP

as you put it. Now imagine I stepped in and bought a whole lot of SKL shares, forcing the share price up in the process. Then EP would go up, right? So therefore the implied perpetual growth rate, that you calculate at 4-5% would go up too. Then I could congratulate myself for buying into a company with a 'rising perpetual growth rate'. But wouldn't I really be cashing in, on paper, on my own ego in doing this? I like the company - so it becomes worth more courtesy of my own buy in process, - so I pat myself on the back. A self fulfilling circular argument? I think Carmel Fisher used to do this buying into small caps in the early days of Fisher Funds. Jeez, am I allowed to say that?!?

At first I got alarmed when I saw the EP growth slowing right down in your table to just 0.1% in FY2023. But then I realised that is merely a reflection of a reverse argument similar to what I have just outlined. Namely if the share price goes down then the implied EP growth rate goes down. But if productivity continues to improve, then no worries?

Of interest is the breakdown between ‘growth’ and ‘productivity’

A valuation metric often used by finance gurus is Market Value Added (MVA) = Market Cap less Equity = NPV of future EP

For Skellerup MVA is $720m ($945m- $225m). All that value creation rewarded with $225m equity now worth $945 on the market.

So the NPV of future EP is $720m. This implies future EP growth of 4%/5% pa….forever

I wonder if you could clarify what you mean by 'growth' and 'productivity'. If EP growth is measured by 'market value' - "asset value', then growth is determined by share price growth. Whereas by productivity you are referring to growth in earnings(?). So when you say "Of interest is the breakdown between ‘growth’ and ‘productivity’", what you are talking about here goes under the technical accounting term of 'hype'?

SNOOPY

winner69

13-11-2023, 02:45 PM

I’ll try and answer this query first

At first I got alarmed when I saw the EP growth slowing right down in your table to just 0.1% in FY2023. But then I realised that is merely a reflection of a reverse argument similar to what I have just outlined. Namely if the share price goes down then the implied EP growth rate goes down. But if productivity continues to improve, then no worries?

EP is not affected by market cap (share price).

Simple form EP formula is EBIT less Tax (at company tax rate) less a Capital Charge (capital used times WACC) ……WACC being Weighted Average Cost of Capital employed (equity plus debt)

EP growth slowed in F23 v F22 mainly because of a higher WACC used from previous year resulting a higher Capital Charge.

And yes if market cap falls MVA falls and implied EP growth rate falls

winner69

13-11-2023, 03:02 PM

Re this

'Economic Profit' is based on the difference between the 'underlying asset value of the company' and 'market value of the shares' or:
Market Cap less Equity = NPV of future EP

as you put it.

Formula for Economic profit is as previous post ………simple form EP formula is

EBIT less Tax (at company tax rate) less a Capital Charge (capital used times WACC)

So not dependent on market cap

The Market Cap less Equity is that thing called Market Value Added. This not Economic Profit

And this MVA equals the NPV of future EP so from current EP number you can come to an implied future growth rate (although as you know that depends on what discount rate you use)

Your scenario of buying an increasing the market cap would increase implied growth rate ……..but no doubt this would adjust in the future ….bearing in mind that the implied EP growth rate is basically a test of current share reasonable, nothing more or anything else.

I’m sorry I don’t always make things clear …….and I’ll have a go at the growth / productivity query later

Snoopy

14-11-2023, 10:36 PM

One way to 'cheat' at the Buffett tests is to leverage up your business to such an extent that your ROE looks fantastic, but the debt taken on puts your business at unacceptable risk. How do we know if debts at a business are out of control? One way is to look at the 'Minimum Debt Repayment Time' or MDRT.

'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

FY2018
FY2019
FY2020
FY2021
FY2022

Bolt on Acquisitions

Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)
Projects Vanilla & Tika IT upgrades
Talbot Technologies Ltd (NZ)

Cash & Cash Equivalents: {A}
$9.681m
$9.639m
$13.617m
$15.673m
$14.796m

Non Current Borrowings:
$40.400m
$46.215m
$41.300m
$24.000m
$40.000m

add Current Borrowings:
$0.0m
$0.0m
$0.830m
$0.409m
$0.0m

equals Total Borrowings: {B}
$40.400m
$46.215m
$42.130m
$24.409m
$40.000m

Total Net Borrowings: {B} - {A}
$30.719m
$36.576m
$28.513m
$8.734m
$25.204m

Net profit declared {C}
$27.277m
$29.063m
$29.064m
$40.175m
$47.813m

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

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. Skellerup are in the second most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. 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.

One way to 'cheat' at the Buffett tests is to leverage up your business to such an extent that your ROE looks fantastic, but the debt taken on puts your business at unacceptable risk. How do we know if debts at a business are out of control? One way is to look at the 'Minimum Debt Repayment Time' or MDRT.

'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

FY2019
FY2020
FY2021
FY2022
FY2023

Bolt on Acquisitions
Nexus Foams (NZ) & 35% of SimLim (USA)
Silclear (UK)
Projects Vanilla & Tika IT upgrades
Talbot Technologies Ltd (NZ)
Sim Lim (USA) (majority ownership)

Cash & Cash Equivalents: {A}
$9.639m
$13.617m
$15.673m
$14.796m
$17.094m

Non Current Borrowings:
$46.215m
$41.300m
$24.000m
$40.000m
$42.300m

add Current Borrowings:
$0.0m
$0.830m
$0.409m
$0.0m
$1.624m

equals Total Borrowings: {B}
$46.215m
$42.130m
$24.409m
$40.000m
$43.924m

Total Net Borrowings: {B} - {A}
$36.576m
$28.513m
$8.734m
$25.204m
$26.830m

Net profit declared {C}
$29.063m
$29.064m
$40.175m
$47.813m
$50.941m

MDRT ({B} - {A}) / (C}
1.3 years
1.0 years
0.22 years
0.53 years
0.53 years

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. Skellerup are in the second (equal) most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. 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

Snoopy

15-11-2023, 09:45 AM

I wasn't very happy with the numbers that came out of my Buffett analysis (Iteration A). Tending to it day to day on my share farm, my SKL shares are akin to a 'healthy growing porker'. But take it to market and it looks like I am sitting on an overpriced SKL pig.

For the FY2022 edition 'second iteration' of the Buffett growth model, I will change my assumptions to assume that the last five years of company results represent the 'new paradigm' in which SKL operates I have recalculated our three essential parameters as below:

FY2018
FY2019
FY2020
FY2021
FY2022
Average

Return on Shareholder Equity
15.2%
16.4%
15.7%
20.5%
22.4%
18.0%

Dividend Payout Ratio
71%
83%
87%
68%
75%
77%

PE Ratio at 30th September
15.7
15.2
19.9
29.1
22.3
20.4

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. 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. This iteration B uses just the last five years of results.

For the FY2023 edition of the Buffett growth model, I will assume that the last five years of company results represent the 'new paradigm' in which SKL operates I have recalculated our three essential parameters as below at my 30th September reference dates:

FY2019
FY2020
FY2021
FY2022
FY2023
Average

Return on Shareholder Equity
16.4%
15.7%
20.5%
22.4%
23.7%
19.7%

Dividend Payout Ratio
83%
87%
68%
75%
77%
78%

PE Ratio at 30th September

15.2
19.9
29.1
22.3
17.0
20.7

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. 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. This exercise uses just the last five years of results.

SNOOPY

Snoopy

15-11-2023, 10:08 AM

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? My first iteration A says 'yes'. But I have changed my input parameters to reflect a more 'forward looking view' of the company.

What will happen when I put the revised inputs (below) into the Buffett style ten year growth model?

Key Model Inputs
Average over Five Years

Return on Shareholder Equity
18.0%

Dividend Payout Ratio
77%

PE Ratio at 30th September
20.4

I have noted that the dividend going forwards is likely to be no more than 50% imputed. The reason why the Skellerup dividend is only 50% imputed today is that around 50% of profits (and 75% of revenues) 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 'unimputed dividend tax' deduction column (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

SOFY

FYAsset BackingOperations Earnings
adjust OCI (1)less Dividend
equals Retained EarningsUnimputed Dividend Tax

2020 (historical)
0.916
0.150
0.011
(0.130)
0.031
(0.018)

2021 (historical)
0.942
0.206
(0.010)
(0.140)
0.056
(0.020)

2022 (historical)
1.00
0.245
0.010
(0.180)
0.075
(0.025)

][
20231.080.194
(0.149)0.045(0.021)

20241.1250.203
(0.156)0.047(0.022)

20251.1720.211
(0.162)0.049(0.023)

20261.2210.220
(0.169)0.051(0.024)

20271.2720.230
(0.177)0.053(0.025)

20281.3250.239
(0.184)0.055(0.026)

20291.3800.248
(0.191)0.057(0.027)

20301.4370.259
(0.199)0.060(0.028)

20311.4970.269
(0.207)0.062(0.029)

20321.5590.281
(0.216)0.065(0.030)

20331.6240.292

Ten Year Total
(1.810)(0.255)

Notes

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

(2) Sample forecast calculations for FY2023:

Operations Earnings = $1.08 x 0.18 = $0.194
Dividend = 0.194 x 0.77 = $0.149
Retained earnings = $0.194 - $0.149 = $0.045
50% Unimputed Dividend Tax @28% (shareholder perspective only) = $0.149 x 0.5 x 0.28 = $0.021
Asset backing (subsequent year): $1.08 + $0.045 = $1.125

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

With FY2033 projected earnings of 29.2cps, and using a PE ratio of 20.4 (actual average over the last 5 years), the modelled share price for Skellerup in ten years time is:

20.4 x 0.292 = $5.96

The net dividend return for shareholders over that time is $1.810 - $0.255 = $1.555 (refer above table)

Using a market share price today of $5.65, the expected compounding annual return 'i' over 10 years can be calculated from the following equation:

$5.65(1+i)^10 = ($5.96 +$1.56) => i= 1.0290

This represents a projected return of 2.90% per year, for the next ten years.

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2033 are 29.2cps, verses actual earnings for FY2022 of 24.5cps. This is modelling earnings to increase by 19.1% over 10 years or: (1+i)^10 = 1.191 => i=1.8% compounding per year. That doesn't sound too demanding.

But wait. We are coming off a $28.969m (14.8cps) to $47.205m (24.1cps) -or 62%- profit lift over just two years to EOFY2022. So if we assess 'eps' share growth over 12 years from FY2020 to FY2033, we get: 14.8(1+i)^12=29.2 => i=5.83% compounding (after tax). That is a good growth rate over 12 years from a company that isn't making substantial acquisitions. Would it be realistic to expect a 'boring rubber and foam component company' to make any more progress? And, even better, most of that growth is already 'baked in' (from EOFY2020 to EOFY2022). We know that much of the success of Skellerup over the last two years has come from buoyant dairy prices (Wigram factory NZ) and oil prices (via Masport USA). If profit margins on these commodities stall 'some time this decade', then some of the last two years of stellar growth could unwind. It is easy to imagine that boom times will continue when you are in a boom. But I don't think my 'Buffett Modelling', in iteration B form, is too far removed from what shareholders might expect, taking a realistic expectation of SKL's development.

On the issue of 'Price earnings ratio' thinking that today's PER of 22.3, will reduce to a PE ratio of 20.4 in 2032 is not unreasonable, particularly if growth rates slow over the next ten years .

With those changed 'Iteration B' parameters, what Skellerup share price (P) would Warren need to buy Skellerup at to get his much touted 15% compounding return per year over the coming decade?

P(1+0.15)^10 = ($5.96 +$1.56) => P= $1.86c

Skellerup is currently my largest NZX holding and have surprised on the upside in the recent past. But given the Buffett modelling calculations as I have laid them out, I would now seriously consider reducing that holding on any significant share price appreciation.

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? Let's see.

What will happen when I put the revised inputs (below) into the Buffett style ten year growth model?

Key Model Inputs
Average over Five Years

Return on Shareholder Equity
19.7%

Dividend Payout Ratio
78%

PE Ratio at 30th September
20.7

I have noted that the dividend going forwards is likely to be no more than 50% imputed. The reason why the Skellerup dividend is only 50% imputed today is that around 50% of profits (and 75% of revenues) 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 'unimputed dividend tax' deduction column (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

SOFY

FYAsset BackingOperations Earnings
adjust OCI (1)less Dividend
equals Retained EarningsUnimputed Dividend Tax

2020 (historical)
0.916
0.150
0.011
(0.130)
0.031
(0.018)

2021 (historical)
0.942
0.206
(0.010)
(0.140)
0.056
(0.020)

2022 (historical)
1.00
0.245
0.010
(0.180)
0.075
(0.025)

][
2023 (historical)1.080.2600.019
(0.209)0.070(0.029)

20241.150.227
(0.177)0.05(0.025)

20251.200.236
(0.184)0.052(0.026)

20261.2520.247
(0.192)0.055(0.027)

20271.3070.257
(0.201)0.056(0.028)

20281.3630.269
(0.209)0.06(0.029)

20291.4230.280
(0.219)0.057(0.031)

20301.4800.292
(0.227)0.065(0.032)

20311.5450.304
(0.237)0.062(0.033)

20321.6070.317
(0.247)0.065(0.035)

20331.6720.329
(0.257)0.072(0.036)

20341.7440.344

Ten Year Total
(2.150)(0.302)

Notes

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

(2) Sample forecast calculations for FY2024:

Operations Earnings = $1.15 x 0.197 = $0.227
Dividend = 0.227 x 0.78 = $0.177
Retained earnings = $0.227 - $0.177 = $0.05
50% Unimputed Dividend Tax @28% (shareholder perspective only) = $0.177 x 0.5 x 0.28 = $0.025
Asset backing (subsequent year): $1.15 + $0.05 = $1.20

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

With FY2034 projected earnings of 34.4cps, and using a PE ratio of 20.7 (actual average over the last 5 years), the modelled share price for Skellerup in ten years time is:

20.7 x 0.344 = $7.12

The net dividend return for shareholders over that time is $2.150 - $0.302 = $1.848 (refer above table)

Using a market share price today of $4.96, the expected compounding annual return 'i' over 10 years can be calculated from the following equation:

$4.96(1+i)^10 = ($7.12 +$1.85) => (1+i)=(8.97/4.96)^0.1 => i= 0.0610

This represents a projected compounding after tax return of 6.10% per year, for the next ten years.

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2034 are 34.4cps, verses actual earnings for FY2023 of 26.0cps. This is modelling earnings to increase by 32.3% over 10 years or: (1+i)^10 = 1.191 => i=2.8% compounding per year. That doesn't sound too demanding.

But wait. Using my adjusted profits (see post 1238, 1239), we are coming off a $28.969m (14.8cps) to $53.501m (27.3cps) -or 85%- profit lift over just three years to EOFY2023. So if we assess 'eps' share growth over 13 years from FY2020 to FY2034, we get: 14.8(1+i)^13=34.4 => i=6.70% compounding (after tax). That would be a good growth rate over 13 years from a company that isn't making substantial acquisitions. Would it be realistic to expect a 'boring rubber and foam component company' to make any more progress? Even better, most of that growth is already 'baked in' (over the period EOFY2020 to EOFY2023). I say the growth is 'built in' because, in the tabulated model, I am not forecasting an eps increase until 2028. We know that much of the success of Skellerup over the last three years has come from buoyant dairy prices (Wigram factory NZ) and oil prices (via Masport USA). If profit margins on these commodities stall 'some time this decade', then some of the last three years of stellar growth could unwind. It is easy to deceive yourself and imagine that boom times will continue when you are in a boom. That means I don't think my 'Buffett Modelling' today is too far removed from what shareholders might expect, taking a detached and realistic expectation of SKL's development.

On the issue of 'Price earnings ratio' thinking that today's 'depressed market' PER of 17.0, will increase to a PE ratio of 20.7 in 2033 is not unreasonable, particularly if the growth rates of the last two years is more indicative of growth over the next ten years .

As a theoretical exercise, what Skellerup share price (P) would Warren need to buy Skellerup at to get his much touted 15% compounding return per year over the coming decade?

P(1+0.15)^10 = ($7.12 +$1.85) => P= $2.22c

I think that means we won't see Warren on the SKL share register any time soon.

Skellerup is currently my largest NZX holding and managment have surprised on the upside in the recent past. But given the Buffett modelling calculations as I have laid them out, I think Mr Market is pricing this share very close to fair value. A 6.1% total return after tax is a 'good' but not a 'great' return per year. I would class SKL as a HOLD at $4.96, and that is what I intend to do with my own shareholding in this company.

SNOOPY