Will Scott will go the way of MHM and be lost to the NZX ……probably yes
Wonder how ‘strategic review’ going ..or have I missed something
Suppose ‘takeover’ will be at 5 bucks plus
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Will Scott will go the way of MHM and be lost to the NZX ……probably yes
Wonder how ‘strategic review’ going ..or have I missed something
Suppose ‘takeover’ will be at 5 bucks plus
Well with MHM out of the picture, who else other than Scott is there in the NZX automation/technology space? And with SCT out of the picture, who else is there in the NZX automation/technology space?
NZ Top ten NZ Technology firms: https://www.teamtweaks.com/blog/it-c...n-new-zealand/
NZ automation companies: https://www.lusha.com/company-search...ew-zealand/83/
Have fun with your research :) ;
Rakon?
https://www.rakon.com/about
When I hear the term 'margin' unqualified, I understand it to mean 'net profit margin', which is 'net profit' divided by 'revenue', such as I calculated above. Scott's may calculate it a little differently because I have normalised the net profit figure (refer post 1069). If we use the declared net profit figure of $15.436m, as quoted by Scott, the calculation becomes:
$15.406n / $267.526m = 5.8%
That not impressive enough for you? Let's raid the 'Consolidated Statement of Comprehensive Income' (AR2023 p32) and get net profit margin before tax as our base calculation figure.
Before tax Profit margin = $19.199m / $267.525m = 7.2%
Doesn't that sound good? But wait there is more. Since ability to pay dividends is all about 'cashflow', the figure of interest to investors should really be EBITDA margin. Using the income statement again, we can calculate this as:
EBITDA margin = $30.374m / $267.525m = 11.4%
But hold on. That figure contains the contribution cost of all those head office dudes who suck on the workers and don't do anything. In the case of a takeover all those dudes and dudettes could be fired. Their egregious costs may be found on p47 of AR2023 to be $14.835m. So let's stick that figure back onto the EBITDA earnings. Now we have:
Worker generated EBITDA margin = ($14.835m+$30.374m) / $267.525m = 16.9%
Are you getting the point yet? Fiddle around with the earnings figure definition and you can get a 'margin' figure of whatever you like (within reason).
But how about this? Go to this years presentation and look at slide 10
https://scottautomation.com/assets/I...tober-2023.pdf
The margin there for the whole group is listed as 27%. Absolutely fantastic! There is a mention of this figure in the Annual Report of 2023 on p3 as a 'group margin'. However nowhere in the report can I find a definition of what 'group margin' means. I assume it is a non-GAAP measure? In the absence of a formal definition I will make one up:
"Group margin" = "The highest margin the "groupthink" of senior management can get away with, without inquisitive shareholders asking awkward questions on how such a number might be derived."
By this definition, I do not believe that 27% is the Scott 'Group margin' for FY2023! I have looked long and hard at the Scott income statement for FY2023 and cannot get a margin figure anywhere near 27%. Can anyone shed any light on how such a 'group margin' figure of 27% might be arrived at?
SNOOPY
Snoops …the margin they quote is possibly an internal metric to measure the profitability of contracts
A hint is that line in P&L “Raw Materials, consumables and operating expenses” and then take a portion of the employee costs that are deemed to be directly related to doing the contract work.
Sort of splitting expenses into those are productive (contracting) and support (hq functions etc).
It’s not very clear is ir ..you have to believe them
Give them a buzz …. They might give you the numbers
Dr. Google tells us that
Which in my view confirms winners assumption. They count some of their cost as "cost of sales" - I suppose anything they need to produce a certain product and to sell it, while all other cost (e.g. management salaries, cost of governance, tea lady, other non sales specific admin and rest of waterhead are not cost of sales and covered by the gross margin.Quote:
Group Gross Margin means the revenue of the Group less the Cost of Sales of the Group.
Unless they allow you to do due diligence, you probalby need to believe them (or not :) ;.
Thanks for your thoughts here Winner. I was under the impression that I had missed something obvious, but it appears not. I am sure there is good logic behind the 'group margin percentage' Scott's publish. But without knowing what that logic is, my tendency is to remain skeptical. If your hunch is right and they have ring fenced out a whole heap of central admin costs, well it probably is a better way to judge the results of a 'specialised tech business'. But then someone, somewhere down the line, does have to pay all of those costs at 'central HQ'. It strikes me as akin to a family man saying; "Well I would be a zillionaire if I could live in a tent on dried noodles and save and compound all my earnings by investing in Buffett style companies." But the truth is, our man does have a family and has to pour most of his resources into supporting them - and keeping up the family HQ- , his house. So the whole argument of what he would do if he lived in a tent becomes moot. If that is Scott's argument, ring fencing out essential costs, to improve the performance of the sales force on the ground, then it seems flawed to me.
My own approach, in post 1078, is probably equally open to criticism. What I have done is allocate those central admin costs across all of the sales divisions in proportion to the sales in those divisions. The base thinking behind this idea is that you have a factory turning out boxes of widgets. However, some markets are bigger than others and require more logistics to move those widgets. Thus if you have a fleet of delivery trucks you set aside more trucks and drivers to handle the bigger markets and so distribution costs are divided asymmetrically according to market size. Such logic tends to break down a bit with tech companies like Scotts.
It would be more accurate to say that the initial 'return' on Scotts clever engineering solutions is zilch, in fact negative in the early years. But then it turns around and then pays off 'big time' when a completed concept comes to market. It is also more likely that profit relates to the value the market places on the capability of the product, and is not proportional to the revenue earned when that unique product is put to market. I could at this point be 'clever' and try to adjust for these factors in my modelling. But I suspect it would take someone cleverer than me to do so. Indeed, if I tried it, I would likely end up with some pomped up numbers that reflected nothing more than my unconscious personal biases. Given this, I feel it is more honest to keep my analysis relatively simple, and probably slightly wrong, while pointing out where I believe my errors are likely to be (as I have done in this paragraph). I feel that I am better to count the central HQ admin costs, even if I apportion them in not quite the right way, rather than try to spirit away some costs (as Scotts appear to have done) completely.
I will sleep on that suggestion.
SNOOPY
Snoops …. I think what Scott do is reasonable, problem not that clear
Think retailer like Briscoes ….. Margin (gross) is sales less what the cost of those goods sold ….relatively straight forward eh
But Yale Metro Glass where Margin (gross) is sales less the cost of glass (including production/processing) less the cost of glaziers who put the glass in. This basically how Scott calculate their margin I’d say.
Maybe you could look at Scott’s p&l a different way …like recast it as revenues less .’cost of sales’ (calculate that to give the 30% margin) and see what is other stuff is to come to the profit line.
Based on MHM takeover numbers Forbar reckons Scott value is at least $4.73
“We view SCT's valuation discount to MHM as unjustified, and conservatively believe it should trade at least in line with MHM's multiple,” Lindsay and Twiss stated.
Good thinking. So revenue is $267.526m. 'Group Margin' is 27%. So cost of sales must be: $267.526m x (1-0.27) = $195m
Now, from the 'Consolidated Statement of Comprehensive Income' we learn that 'raw materials, consumables and operating expenses' totalled $158.967m, call it $159m.
So the cost of labour to 'do the job' was: $195m - $159m = $36m.
We also learn that 'Employee Benefits expense' for the year was $79.703m. That means $79.703m - $36m = $44m is spent on non-productive people.
That means a lot more money is being spent on people 'making the tea' and supervising ESG matters than 'doing the job'. That $44m figure no doubt includes CFO Cameron Matthewson as one of the 'chief troughers'?
SNOOPY
Hey Snoops …..Sales and Marketing people get upset if you label them non-productive
So the valuation has gone up even more since Forbar did their 19th October update? (was $4.47 then)
https://www.forsythbarr.co.nz/assets...ore-growth.pdf
But let's not forget who financed, and is continuing to finance, this ongoing valuation exercise:
"This publication has been commissioned by Scott Technology (“Researched Entity”) and prepared and issued by Forsyth Barr in consideration of a fee payable by the Researched Entity."
And look at those profit projections on the front page of that referenced document. It is a straight line upwards (yeah right), with a near doubling of profits being forecast in just three years time!
Then look at the reference companies from which Forbarr is deriving their comparative ratios from (p6 of that publication). Those comparative norms now seem to be based on large USA based corporations (where did that come from?) Even so the 12m forward PE ratio today looks about right given the SCT price has risen 9% to $3.80 since that report was drafted (so the projected 12 month forward PE is now 17.9, well within comparative norms).
Is the market really undervaluing SCT at $3.80? Only if you believe those 'straight to the sky' profit projections made by a pimply faced lackey using a straight edge as a forecasting tool in a report on Scott funded by themselves.
SNOOPY
SCT management do not see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.
Year Dividends as Declared Gross Dividends Gross Dividend Total FY2019 6.0c+4.0c 8.33c + 5.56c 5.56c FY2020 (1) 4.0c (18.41% I) + 0c 5.02c + 0c 5.02c FY2021 0c + 2c (NI) 0c + 2.00c 2.00c FY2022 4c (NI)+ 4c (NI) 4.00c + 4.00c 8.00c FY2023 4c (NI)+ 4c (NI) 4.00c + 4.00c 8.00c FY2024 4c (NI)+ ?c 4.00c + ?c 4.00c Total 32.6c
Notes
1/ A sample calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:
FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)
Discussion
Averaged over 5 years of dividend payments, the dividend works out at 32.6/5 = 6.52c (gross dividend).
I consider that under a more focussed industrial standard product model, with a year's evidence of sound execution, an appropriate gross yield return on investment is now 6.0%. This means that a 'fair value' for SCT shares, based on the 5 yearly historic dividend record, is:
6.52c / (0.06) = $1.09
Now, using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.
Top of Business Cycle Valuation: $1.09 x 1.2 = $1.31
Bottom of Business Cycle Valuation: $1.09 x 0.8 = 87c
SCT shares were trading at $3.85 on Tuesday 7th November 2023 as I write this (about triple the upper end of my expected range). By this measure shares are now ($3.85-$1.09=) $2.76 or $2.76/$1.09= 250% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 250% 'growth premium' (because a capitalised dividend valuation assumes no growth).
This current gross annual dividend rate being modelled of 6.52cps, is a bit below the current twelve month dividend rate of 8cps. Furthermore the expected future restoration of imputation credits (after 3.5 years of none) would suggest the modelled gross dividend return, compared to what is likely, under-states the likely real gross return in the future. That means the modelled growth premium going forwards is actually not likely to be as high as $2.50 per share.
Nevertheless it is clear the market is pricing SCT well above what we might expect from 'a dividend payer'. This means the market clearly 'believes the growth story'. So capitalising the dividend is not a good sole tool to measure the worth of this company.
SNOOPY
A bit behind catching up on the Forbarr analysis of SCT (Muse's heads up was in April). But I have made up for it by reading the latest version.
https://www.forsythbarr.co.nz/assets...ore-growth.pdf
A few statements in that exercise in self funded promotion stood out. From p3
"SCT has now fully its tax losses, so corporate tax rates in the future should normalise toward NZ headline rates."
The revenue from New Zealand operations ($49.864m) only makes up $49.864m/$267.526m = 18.6% of the productive capacity of the company. So why would corporate tax rates head towards the NZ tax rates, when 81.4% of Scott's output are produced in countries like the USA, China, Australia, Belgium the Czech Republic and France? Does this not have implications for the rate of dividend imputation (assumed by ForBarr to be 100%) going forwards?
From p6
"Given its recent revenue growth trajectory and prospects relative to peers, these (valuation) discounts appear unjustified. SCT's revenue rose +21% in FY23 and we forecast a solid +13% increase for FY24. By contrast, companies included in the peer group are expected to grow revenues by an average of +5% over the next year."
While I would love this to be true, why is it that revenue is expected to grow at a rate so far above Scott's comparator companies again? Oh that's right, revenue grew by 21% last year, so just dial down last years growth rate a bit and carry on. But if you look at the growth rate over the last five years (AR2023 p3), the actual compounding annual revenue growth rate at SCT was:
$211,585m(1+g)^5= $267.526m => g=4.8%,
or very close to the 5% industry average that ForBarr talk about. I would also expect growth in Scott's new product sales to be offset by the reduction in revenue from some of the larger more complex projects that Scott have done in the past and are now being phased out. Furthermore even if revenue did grow at these annual +10% heady rates, in the past this has meant more work at overtime rates, and sub contracting. And that means there is not a linear increase in profit rate with revenue rate (you only need to look at European production over FY2023 with segment revenue up 54% while segment profits fell by 3.3%, to see this).
From p1 of the report
"The Materials Handling and Logistics segment had a blockbuster period. This reflected an unwinding of the forward order book due to easing supply chain constraints."
So even ForBarr themselves are saying that much of the MHL division growth from $57.885m to $88.997m = $31.112m was due to a one off catch up situation, even as total company revenue grew from $221,757 to $267.526m = $45.769m over the same period. Take out the one off MHL effect and underlying revenue growth was $45.769m-$31.332m=$14.437m, or $14,437m/ $221.757m = 6.5%. That is still good but only half the growth rate that Forbarr are projecting out into the future for three years in a row!
I am calling BS on the growth rates going forwards assumed in this ForBarr analysis, and the underlying assumption that growth in revenue will necessarily be followed by growth in profits to the same degree. Like it or not, SCT have customers in cyclical industries. Mineral production and the global markets for meat have been very up and down in the past. I don't believe those revenue projections and in particular I don't believe these profit projections out to FY2026 will be met. Revenue trends in these industries do not go up in a straight line like that, they just don't!
By the same token I am not saying SCT will be a poor investment going forward. But successful investing is very much about timing. If only I had bought a parcel of shares in January of this year when the historical PE fell back to that multi year low of 15 and the share price was just $2.50! Oh, hang on, I did do that. I guess what I am saying here is that buying shares in SCT has been most rewarding when the shares are at 'minimum hype'. Going forward with a PE of 18 or 19, where SCT is trading today does not tick the value box for me. And remember it only jumped to these lofty PE levels when a hint for an offer for the whole company that 'might happen' was disclosed to the market in June.
This talk of a private equity offer at 5 bucks? Yes it might happen. But are those Pacific Equity Partner people that stupid? Surely they will have their own people pouring over the books and will not be relying on any ForBarr report. Current Scott CEO JK has already trimmed the dead wood from the company operations. I don't see that loading Scott up with debt, as private equity is prone to do, will help things. In fact it was just such a scenario (insufficient ability to raise cash) that drove Scott into the arms of JBS in 2015.
Of course if that $5 per share offer does come through, then I will immediately get down off my moral high horse and sell out, (as all short term minded kiwi investors are destined to do).
SNOOPY