Scott's 'have a plan' (see post 1010) and are 'executing the plan'. The flaw in the plan execution is the mediocre (to a Buffett eye at least) return on equity capital. This isn't a surprise for an asset rich manufacturing business, particularly so when war is on the doorstep of the company's largest revenue earner, the Material Handling Automation unit in financially strained Europe. Yet all the of those Buffett tests are by their nature historical. Let's look to the future. What is the contracted 'workload on the books', signed up to at years end?
|
Forward Work (1) |
Revenue in Following Year |
FY2020 |
$102m |
$216,234m |
FY2021 |
$119m |
$221.757m |
FY2022 |
$172m |
? |
Note
1/ Forward Workload is 'contracted activity' taken from slide 4 of FY2022 results presentation (PR2022).
By this indicator, FY2023 is looking to be better than FY2022. Much of this forward work must be in 'Materials Handling', because there is $190m of such equipment on the order book (slide 6 PR2022).
I like to use a 30th September reference date, In the case of SCT, it covers the run up period to when the annual result is released. So there is a good incentive for institutional investors to align their expectations (by buying or selling shares) to bring the share price into line with what is a generally well signalled result. On 30-09-2022, the SCT share price was $2.80. That means the company was trading on a normalised historical PE ratio of: $2.80/$0.169= 16.6. This is a big drop from the equivalent historical PE ratio of last year (20.9) and is the lowest PE ratio Scott's have traded on since 2015. Nevertheless a PE ratio of 16.6 is not cheap, and implies significant future growth.
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 actual Capitalised Gross Yield for SCT (post 1014) is 7.7c / $2.80 = 2.75%.
|
Share Price equals |
Capitalised Dividend Value plus |
Implied Growth Premium |
30-09-2021 |
$2.85 |
$1.27 |
$1.58 (+124%) |
30.09-2022 |
$2.80 |
$1.10 |
$1.70 (+155%) |
By this measure, despite the share price being lower than last year, the market growth premium has increased.
What do I make of all this? Buffett is looking for a good return on equity. CEO John Kippenberger is working towards that goal, but is not there yet. So Buffett is off elsewhere seeking out suitable investment gems. What about we shareholders on the register already? We are waiting for growth while being paid just under 3% on our invested capital while we wait. Last year, with interest rates still near their record lows, that would have sounded OK. This year, if you pick the right bank, you can earn 5% on your term deposit money. So a 3% gross dividend yield doesn't cut it. It only makes sense to hold SCT today if you believe in the growth story. Finally if you do believe in that growth story, you have to decide what is a fair price to pay for that growth story.
If I look at the compound 'eps' growth rate 'g' over the last 5 years:
12.0cps(1+g)^5= 16.9cps => (1+g)^5 = 1.40 => g= 7.1%
To me paying a PE of more than 15 is a high price to pay for that level of growth. Granted the level of eps growth was higher last year: 16.9cps/14.2cps= 119% (or +19%). But 19% is the highest normal operating eps growth for the company on record. I am expecting growth going forwards to moderate. So I think that an SCT share price of $2.80 with an implied PE of 16.6 looks about right. SCT is a 'hold' for me at $2.80.