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 |
FY |
Asset Backing |
Operations Earnings |
adjust OCI (1) |
less Dividend |
equals Retained Earnings |
Unimputed 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 |
1.08 |
0.194 |
|
(0.149) |
0.045 |
(0.021) |
2024 |
1.125 |
0.203 |
|
(0.156) |
0.047 |
(0.022) |
2025 |
1.172 |
0.211 |
|
(0.162) |
0.049 |
(0.023) |
2026 |
1.221 |
0.220 |
|
(0.169) |
0.051 |
(0.024) |
2027 |
1.272 |
0.230 |
|
(0.177) |
0.053 |
(0.025) |
2028 |
1.325 |
0.239 |
|
(0.184) |
0.055 |
(0.026) |
2029 |
1.380 |
0.248 |
|
(0.191) |
0.057 |
(0.027) |
2030 |
1.437 |
0.259 |
|
(0.199) |
0.060 |
(0.028) |
2031 |
1.497 |
0.269 |
|
(0.207) |
0.062 |
(0.029) |
2032 |
1.559 |
0.281 |
|
(0.216) |
0.065 |
(0.030) |
2033 |
1.624 |
0.292 |
|
|
|
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.