Building Block Analysis: Introduction
Quote:
Originally Posted by
Snoopy
I think at the roadshow either Hopkins or McLauchlan (can't remember which), mentioned they look for a 15% return on their new investments. But whether that has been a long established policy (I got the impression it was) or a new target hinted at by JBS, this I don't know. By way of an aside, I look for an ROE of 15%+ from my own sharemarket investments (doesn't always happen), or at least the 'growth' ones. So I am very happy that the SCT board has a similar policy.
Scott's have grown the size of their business enormously over the last five years. The JBS cash issue (aka takeover) of Scott Technology during FY2016 provided a $40.597m bucket of cash that has allowed Scott to build project engineering skill bases 'on the ground' by acquisition in Europe, Australia and the United States in particular. Yet how successful this strategy was in terms of 'earnings per share' is an open question.
If you give a kid a bag of building blocks, shaking those blocks up and throwing them on the floor will not produce anything productive in itself. But if your kid takes those blocks and tries to 'knit them together', then this process could produce something of substance. It is the synergies between blocks and any associated cross selling opportunities that will determine whether Scott's will have just 'growth in earnings' or the much more desirable 'growth in earnings per share'.
Underlying growth in 'eps' has not yet happened. So can we conclude that 'our' little kid 'Scotty' has simply taken his new blocks and thrown them on the floor? Let's find out!
SNOOPY
Building Blocks bought via the JBS lead Capital Raising
Quote:
Originally Posted by
Snoopy
Underlying growth in 'eps' has not yet happened. So can we conclude that 'our' little kid 'Scotty' has simply taken his new blocks and thrown them on the floor? Let's find out!
For those who came in late, Scott Technology had a very drawn out capital raising process (because of unsupportive major shareholders) that culminated in a new major shareholder, the JBS group out of Brazil, via Australia, promising to back the company into its next stage of development. The buying spree that used this new capital actually started in the year before the capital was raised, FY2015. Here is a table of the Scott Technology acquisitions over the last five years:
Year |
Acquisition |
Purchase Price |
EBITDA Contribution |
Days Owned |
Annualised EBITDA Contribution Estimate |
FY2015 |
Machinery Automation & Robotics (MAR) |
$14.324m |
$0.626m (1) |
212 |
$1.078m |
FY2016 |
Somako Hirsch & Attig GmbH |
$0.880m |
-$0.147m |
149 |
-$0.360m |
FY2017 |
DC Ross Limited |
$0.375m |
NM |
92 |
$0.0m |
|
Scott Separation Technology |
$0.433m |
NM |
131 |
$0.0m |
FY2018 |
Alvey |
$19.303m |
$0.9m |
159 |
$2.066m |
|
Transbotics |
$4.873m |
$0.8m |
122 |
$2.393m |
FY2019 |
Normaclass |
$2.940m |
NM |
89 |
$0.0m |
Total |
|
$43.128m |
|
|
$5.177m |
So we can see that with these seven 'building blocks' bought, the $40.597m of capital raised has been 'well and truly spent'. Or perhaps I should have said simply 'truly spent?'
Notes
(1) The 2015 annual report does not give an EBITDA contribution from MAR. So I have apportioned the interest paid by Scotts for holding MAR after purchase to the revenue turned over by MAR relative to the revenue of the whole group.
$1.198m x ($13m / $72.298m) = $0.215m
I have estimated the depreciation and amortisation charge at MAR by
a/ Looking at the plant and equipment assets on the MAR books at takeover date
b/ Comparing that to the total plant an equipment on the Scott Technology book at the end of the year AND
c/ apportioning the total D&A to the fraction of plant and equipment owned by MAR
$1.636m x ($1.062m/$11.468m) = $0.151m
To estimate EBITDA from this:
NPAT / T + I +DA = ($0.161/0.7) + $0.245m + $0.151m = $0.626m
SNOOPY
Building Blocks all over the floor Profit
Quote:
Originally Posted by
Snoopy
So we can see that with these seven 'building blocks' bought, the $40.597m of capital raised has been 'well and truly spent'. Or perhaps I should have said simply 'truly spent?'
The figure I want to focus on now is the $5.177m "Annualised EBITDA Contribution Estimate." What would happen if we add this figure to the FY2014 EBITDA figure, the year before this JBS headed capital raise was required? If we did that, we could calculate the 'building blocks thrown all over the floor' profit where there are no integration benefits or synergies from all these acquisitions.
EBITDA for FY2014: $4.231m + $0.514m + $1.336m = $6.131m
Now add in our "Annualised EBITDA Contribution Estimate" from acquisitions over the last five years:
Underlying EBITDA 'blocks all over the floor' = $6.131m+ $5.177m = $11.308m
Of course Scotts have now had up to five years to bed in all these acquisitions so the benefits of the integrations and synergies can flow through. So what was the actual EBITDA profit figure for FY2019?
According to AR2019 the EBITDA figure for FY2019 was $20.010m. However that figure was boosted by $4m because of an accounting standards change in relation to leases. So the comparable figure is actually $16.010m. It does seem then that up to $5m in synergy and integration benefits may have been realised? Then again the EBITDA increase could have just been organic growth from the core business already owned before FY2015. In truth this is a fairly 'flimsy analysis' for several reasons:
1/ I am extrapolating a part of a year earnings contribution as representative of the whole year.
2/ I am assuming that the year in which a new business unit was acquired represents a 'typical' earnings contribution for any year.
3/ There is no way to separate out 'organic growth' from acquisition synergy growth. For example, in October 2016 Scott's purchased the intellectual property associated with 'Bladestop'. 'Bladestop' is an innovative design of bandsaw with a 'double safety catch' to prevent injury to operators hands and limbs. The principal application is in the meat processing industry. Scott's have paid the 'Bladestop' intellectual property holders $6m cash with an additional $4m being set aside as an earn out payment. Because these payments are for pure intellectual property in an industry where Scotts already operates, I consider this purchase part of 'organic growth'.
4/ Given the lumpy nature of Scott's business, are the two comparative years of 2014 and 2019 truly representative? (Note: neither FY2014 nor FY2019 were great years, so I personally am happy with the two chosen years selected).
Nevertheless the figures that I have used are the only ones we are given to work with.
The other factor we need to keep in mind is that the number of shares on issue has dramatically increased over that five years. The EBITDA per share figure is as follows:
FY2014: EBITDA/share = $6.131m/44.009m = 13.9cps
FY2019: EBITDA/share = $16.010m/77.545m = 20.6cps
So perhaps the operating earnings 'growth job' put in by management over the last five years is not as bad as some here think?
SNOOPY
Research and Development Assistance: The Change Part 1
Quote:
Originally Posted by
Snoopy
GENERAL: SCT: SCT ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D
10 December 2010
SCOTT TECHNOLOGY LTD ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D
The company is pleased to advise that we have been successful in our application for the Governments Technology Development Grant. This has been awarded to Scott to a maximum of $3.7 million over 3 years and is payable at the rate of 20% of eligible spend on research and development (R&D).
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That's another nice little cashflow bonus for SCT shareholders. $3.7m represents 11.7cps! Note quite cash in the bank as SCT will have to spend $18.5m over three years to get the $3.7m rebate. But having such a vote of confidence in the company by the government will not do SCT any harm.
Scotts are about to enter their tenth year of being on the R&D grant system in New Zealand. These R&D grants are distributed through Callaghan Innovation. But things are changing.
If necessary, when seeking to distinguish R&D from non-R&D, the further advice provided by the New Zealand Financial Reporting Standard 13 (NZ FRS 13) should be applied:
"R&D is distinguished from non-R&D by the presence or absence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is normally R&D; if it follows an established pattern it is normally not R&D.”
The Government has announced the final design of the R&D tax incentive and Growth Grants will be replaced by the tax incentive from 1 April 2019. The Growth Grant scheme will end on 31 March 2021.
The final date for commencing a new Growth Grant application in the online portal will be 12 noon, Thursday 20 December 2018. The final date for completion of new Growth Grant applications ready for assessment and approval is 31 January 2019. All Growth Grants commenced and subsequently approved in this period will have a Contract Start Date of 1 January 2019 and a Contract End Date of up to 31 March 2021 (depending on your tax year).
In dollar terms the 'old' tax grant scheme paid out 20% of the business’s eligible R&D spend up to $25m per annum - The amount paid is up to a maximum of $5m per year (0.2 x $25m =$5m). All R&D carried out in New Zealand is eligible for consideration. However there is one particular category of R&D where no payout will be made. This is when R&D is capitalised as an intangible asset. Scott's have told we shareholders for years that they expense all their R&D and they are being conservative. That is one way of looking at things. But it does appear the real reason they are expensing all their R&D is to qualify for the Callaghan Institute R&D Grants. Nothing really wrong with that. But it would have been nice to know 'up front' exactly why Scott's are being conservative with their R&D expensing.
So what will 'the change' mean for Scotts?
SNOOPY
Research and Development Assistance: The Change Part 2
Quote:
Originally Posted by
Snoopy
The Government has announced the final design of the R&D tax incentive and Growth Grants will be replaced by the tax incentive from 1 April 2019. The Growth Grant scheme will end on 31 March 2021.
So what will 'the change' mean for Scotts?
From the ird website:
https://www.classic.ird.govt.nz/rese...incentive.html
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The key features of the R&D tax credit include:
• A 15% tax credit available from the beginning of a business' 2020 tax year
• A minimum R&D expenditure threshold of $50,000 per year
• A $120 million cap on eligible expenditure
• A definition of R&D intended to ensure accessibility across all sectors
• A limited form of refunds in the first year. This will allow some firms with a tax loss to receive a refund of the tax credit.
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Scott's declared R&D spending (admittedly spread between Australia and NZ) of $14m over FY2019. So there is little doubt they qualify for the $50,000 minimum threshold spend.
We can work out the dollar cap of any payment:
15% of $120m is: 0.15 x $120m = $18m.
That is quite a lift from the maximum 'payout' under the old scheme of $5m. I put 'payout' in quotation marks. That is because, under the old system, the payment was made up front with the ability to claw back payments when any approved R&D project is not completed.
A 'tax credit' has the connotation that profits must be earned and a tax bill incurred before a credit can be given. Weirdly this interpretation doesn't tie into the fifth IRD bullet point above, whereby some firms with a tax loss can receive a tax credit. I have to admit I am baffled by this. I wonder if it means there is relief from provisional tax in the ensuing year? But of course if the company is making a loss there shouldn't be any requirement to pay provisional tax!
What is clear is that this change is bad for cashflow. The R&D expenditure must be paid for up front by the company up front before any tax relief is forthcoming.
SNOOPY