Profit downgrade confirmed
Quote:
Originally Posted by
Snoopy
I have noted the haircut that the SCT share price has taken. No news from the company to justify it, so we are forced to speculate. SCT have been growing their business in recent years largely around Rocklabs and a large part of that is supplying the gold mining companies. Many gold mining companies have been retrenching their activities of late. So maybe there is less demand for the sampling equipment that Rocklabs produce? There was more than a hint of that in the full year result to September 2013 with 'standard equipment' (mostly Rocklabs) sharply down and Appliance Line manufacturing sharply up. For those who just looked at the headline figure the overall profit picture was a flat result while the underlying picture at divisional level was anything but that.
My suspicions about a Rocklabs slow down have been confirmed
"The Directors of Scott Technology wish to advise that due to the fast changing environment we are experiencing, it is appropriate to provide a trading update."
"Scott Technology’s revenue line remains solid and our order book is at good levels, providing us with a level of comfort over our forward work situation. The rapid appreciation of the New Zealand dollar, combined with the continuation of the global slow down in the Mining sector, is having an impact on our margins in the short term.
The company continues to review its operations with a view to mitigating the risk of further New Zealand dollar appreciation."
Shouldn't affect the share price though, because revenues have held up and customers are happy. Or am I getting confused with Xero there?
SNOOPY
Buying SCT the Snoopy way
Quote:
Originally Posted by
Snoopy
My growth investment strategy, which is rather different to the way others do it. My preconditions for buying a growth investment are:
1/ Make sure of a potential profit rise of at least 40% being on the table.
2/ Buy on a dividend yield that means that even if growth fails, you will still get an income equivalent to what is on offer at the bank.
So how does this stack up when you are looking at investing in SCT today?
My first growth investment requirement is easily satisfied. SCT was trading around $2.70 just a few months ago. Nothing has fundamentally changed about the company since then. So buying at $1.90 or below satisfies my first requirement.
I don't know when the SCT share price will return to $2.70 of course. It may take years. But I am certain as I can be that as the currency and market for the products go through their respective cycles it will get there. The no term debt policy always ensures that SCT is exceptionally good at weathering the investment cycle.
Now the dividend requirement. Because the SCT business has been volatile in the past, I always consider what has happened over the last ten years so that I can gauge a full business cycle picture. Complicating this picture was the acquisition of Rocklabs in FY2008, which was bought in a shares and cash deal. In recent years Rocklabs has been the star in the SCT investment portfolio. So any 10 year assessment of the SCT portfolio wouldn't be correct without factoring in Rocklabs. But it was a private company in FY2007 and before, so no earnings figures are available for those periods. We do know the first years segmented profit for Rocklabs was some $700,000. So I have assumed an average profitability level of some $500,000 for the years 2003 to 2007 inclusive. I have also assume that half of that profit would have been available to pay out as dividends over those years. Based on the number of SCT shares on issue during FY2007 (24,964m) this conveniently works out as a dividend of 1c per share.
Now to deal with the elephant in any SCT investment pie. By the end of FY2013, the number of SCT share on issue had ballooned to 41,122m. That means it would be misleading to look at previous years dividends in terms of dividends per share, because the number of shares today is so much higher. The solution is to apply a 'scaling factor' for previous year's dividends, so that dps in today's number of shares terms is recognized.
A sample calculation:
The 2010 dividend paid was 5.25cps. The number of shares on issue just after the time of the FY2010 result was 31,322m. So the equivalent dps for FY2013 was:
5.25c x (31,322m/41,122m ) = 4.0cps
Thinking of it in another way scaling factor on the 2010 5.25c dividend works out at
31,322/41,122 = 0.7612
OK there is the method. So how does this business cycle dividend yield model work out in practice?
SNOOPY
SCT Holding firm in the tech sell off!
Cynics would say the price has already collapsed from two year highs of $2.70 down to around $1.50. But at least SCT is still making a profit and is about to pay a dividend. The imminent arrival of a dividend is always good to support a share price. I wonder if any directors of those startup Saas companies know what a dividend is? I guess if you don't make profits, you don't have to know that!
SNOOPY
Decreasing Shareholder Wealth (Lesson 1): Borrow to pay the dividend
Quote:
Originally Posted by
Snoopy
What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!
Money borrowed is tax deductable. That means the after tax interest rate paid on overdraft by SCT is:
0.72 x 11.4% = 8.2%
At a share price of $1.70, SCT is on an FY2014 dividend yield of:
(2.5c+5.5c)/170 = 4.7% (net, after tax)
So the cost of paying you, an SCT shareholder, an annual dividend of 9c, will decrease your share of SCTs cash balance by (8.2/4.7) x 9c = 15.7c.
Shareholders get their 9c dividend in their bank account (great to have that in the right pocket), but to do that SCT have had to pull 15.7c out of you left pocket. Great eh?
SNOOPY
Business Cycle Valuation 2014
Quote:
Originally Posted by
Snoopy
Hope I haven't blown the faith US. Here is another angle on valuing SCT, based on dividend payments alone.
It is not an easy job to value a share with a patchy earnings history. As a long-term investor I am always interested in the dividend yield over the business cycle as a return that is very tangible. In mom and pop investor terms, this is the cash in bank account received by the long-term investor.
I favour looking at ten years of operating result history. This is a compromise between averaging out over the business cycle and dropping payments from so long ago that they are no longer indicative of today.
For Scott Technology, I have added together all of the dividends paid in each current financial year ended 31st August. In annual terms from FY2011 looking backwards the dividends paid out were as follows:
6.0, 1.8, 0, 4.4, 4.4, 0, 9.5, 10.2, 8.5, 2.9
That comes out to a grand total of 47.7cps over ten years. I should note that the per-share earnings have been retrospectively adjusted to reflect the number of shares on issue today. Significant changes in the number of shares without the addition of any cash earning business unit were as follows:
1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
3/ A 1:8 bonus issue on 4th December 2003
4/ A 1:8 bonus issue on 8th December 2002
Assume a Scott Technology share price of $1.65, and an average annual over the business cycle cash payout of 4.77cps
4.77c/$1.65= 2.89% net = 4.1% gross
That compares favourably with term deposit rates in this current low interest rate environment. Therefore I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline for any less than $1.65, for no improvement in cash return. For me $1.65 has become the bottom line indicative price that I would consider selling at.
Scott Technology is unusual on the NZX: A high technology company that makes a profit and pays a good dividend. Notice I said ‘makes a profit’ not ‘makes a consistent’ profit. Despite diversification over the last seven years, Scott Technology has a patchy earnings and an inconsistent dividend record.
My favoured way to look at a company with ‘inconsistent dividends’ is to try and take an overview over a full business cycle. I choose ten years as a reasonable full business cycle to consider.
Starting with the December 2010 full year dividend, shareholders have had the option of participating in a dividend reinvestment plan. This has increased the liquidity of shares and incrementally increased the capital of the company. But it also has had the effect of diluting earnings per share. Because we live in 2014, I find it necessary to discount prior year dividends per share to take account of this. Also taken into account are:
1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
In tabulated form my adjusted dividend data is calculated as follows:
Financial Year |
Dividend Declared |
Adjustment Factor |
AdjustedDividend |
Rocklabs Addition |
2015(est) |
8.0 |
1.0 |
8.0 |
|
2014 |
10.0 |
41.122/44.009 |
9.3 |
|
2013 |
8.0 |
40.689/44.009 |
7.4 |
|
2012 |
7.0 |
39.721/44.009 |
6.3 |
|
2011 |
5.25 |
31.322/44.009 |
3.4 |
|
2010 |
1.00 |
28.475/44.009 |
0.6 |
|
2009 |
0.00 |
N/A |
0.00 |
|
2008 |
9.00 |
24.964/44.009 |
5.1 |
0.16 |
2007 |
0.00 |
N/A |
0.00 |
0.16 |
2006 |
4.0 |
24.964/44.009 |
2.3 |
0.16 |
Total |
|
|
42.4 |
0.48 |
That comes out to a grand total of 42.9cps over ten years.
4.29c/0.7= 6.1cps (gross)
6.1c/$1.65= 3.9% gross
That compares favourably with term deposit rates in this current “low interest rate” environment. Therefore, I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline. The earnings of the automated milking system and even the meat industry robotics are not reflected in the earnings/dividends that I have quoted. Think of SCT as a bank debenture quantum interest return, complete with a series of free lottery tickets in the emerging technologies I have described. That’s why I believe SCT is –still- the best technology investment on the NZX
SNOOPY