Originally Posted by
Snoopy
Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high?
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.