BT1 FY2019/ Top Three player in Chosen Market?
Quote:
Originally Posted by
Snoopy
Scott’s vision is to be ‘the global innovator in automation’. Type that phrase into Google and the company that comes out first is FANUC, formed in 1956. FANUC is listed on the Japanese stock exchange. FANUC is an acronym for Factory Automatic Numerical Control.
Judged as world leader by analyzing patent data and related metrics in a proprietary methodology (for comparison Scott’s have 17 patents), FANUC Corporation, is the world's most diversified manufacturer of CNC Systems, Robots, and Machine Tools,
The criteria used to evaluate innovation performance of companies that invent on a significant scale are:
1/ Work on developments that are acknowledged as innovative by others around the world (patent approval success rate, patent influence in literature citations and overall patent volume).
2/ Inventions that are globally protected due to their importance (global reach of patent portfolio).
Thomson Reuters, judge of the 2011 Top 100 Global Innovator methodology, used these criteria to reach their conclusion rating FANUC as number one.
FANUC's innovative technology has contributed to a worldwide manufacturing revolution, which evolved from the automation of a single machine to the automation of entire production lines. Today, FANUC has more than 600 engineers working in R&D to provide the most reliable, efficient and innovative CNC systems available - ensuring the very lowest Total Cost of Ownership.
With 50 years of experience and more than 2,200,000 CNCs and 220,000 robots installed worldwide, FANUC is the undeniable global leader in CNC and robotics.
OK, so despite the bold statement, I think Scott Technology still has a way to go to fulfill their own vision. A differentiating point of Scotts from FANUC is that their headline robotics projects (meat industry and milking) have an ‘animal tissue interface’. That means the Scott robotics must develop a ‘feel’ and ‘room for dimensional tolerance’ that is not just a transplant of established industrial robotic technology available in Japan. The page 3 Scott AR2011 remark ‘we lead the world in our chosen markets’ is perhaps the more believable quote.
Eight years on how have Scott's progressed? Looking back at my previous comparison with 'FANUC', I feel as though it wasn't fair. Scott's are more into making turnkey project solutions rather than making all the individual units of hardware that supply that solution. Having said this, Scott's are capable of making the hardware. But if a robot is available off the shelf, there is no reason to reinvent the wheel.
Today typing 'industrial automation leader' into a search engine, what comes up?
1/ Omron Automation: Integrated Robotics: Design and install flexible manufacturing enabled by the seamless integration of robotics with advanced machine control. This includes Autonomous Intelligent Vehicles (has largest installed base in manufacturing), Robotic installations include Vision, Motion and Safety functions, and Automated Warehouses. Omron is headquartered in Japan and has over 35,000 employees, with nearly 24,000 of those in overseas subsidiaries. Omron's Industrial Automation division turnover comprises 46% of total company turnover of about $US8billion.
Since the 1990s, in the industrial area, Omron has focused on microelectronics. They strove to become number one worldwide in components and industry leader in the systems field. Omron was quick to detect the emerging need for programmable controllers with a fast processing speed to facilitate a trend away from 'mass production' of a single product, to high-mix, low-volume production runs. Omron, as a company, seems to be two orders of magnitude larger than Scotts.
2/ Comau: is an Italian domiciled multinational and a subsidiary of Fiat Chrysler Automobiles. A developer of Industry 4.0 (the trend towards automation and data exchange in manufacturing technologies and processes)-enabled systems, products and services. Comau is active in vehicle manufacturing, heavy industry, railway and renewable energy. Comau have 9,000 employees, operate 32 centres across 14 countries, including 5 'innovation centres' and 14 manufacturing plants. This company is an order of magnitude larger than Scotts but in a slightly different market space: Scott's is more orientated towards light manufacturing production lines and food industry processing lines.
3/ ABB (Asea Brown Boveri Ltd): ABB, a Swiss domiciled multinational conglomerate, operate a 'Machinery and Factory Automation' division, 'MF' (formerly a separate company B&R, founded by Erwin Bernecker and Josef Rainer). MF operate in more than 200 offices worldwide and have more than 3,400 employees. MF combines state-of-the-art technology with advanced engineering to provide customers in virtually every industry with complete solutions for machine and factory automation, motion control, Human Machine Interface and integrated safety technology. MF operate in the Automotive, Printing, Food & Beverage, Handling & Robotics., Oil & Gas and Metalworking industrial spaces. MF is a complementary business to another ABB business arm: the ABB Robotics Division that actually manufactures robots. The workforce at the ABB ML division is over four times larger than the 784 that are employed at Scott Technology at EOFY2019.
With no need to take my research further, it is clear that Scott is not in the top three companies that offer integrated manufacturing solutions in the industrial automation space. But neither do Scott choose to emulate the industry big boys. This is an analogous position to Scott subsidiary 'Rocklabs'. 'Rocklabs', build sample preparation equipment. They became a friend of the smaller laboratories. These were laboratories that had formerly had been forced to wait behind bigger customers to be supplied by bigger equipment manufacturers out of Germany and the United States. Like Rocklabs, the Industrial Automation part of Scott's go after the 'second tier', in this case the appliance manufacturing industry. Appliance manufacturing is a sector without the glamour of the larger automotive companies, but which nevertheless requires first class metal pressing and component handling skills to service it well.
In the 'secondary industry space', where Scotts choose to operate, they work with the biggest names in those industries. For appliance manufacturing lines this includes Haier, General Electric, Bosch and Electrolux. For meat carcase packaging, this includes the world's largest player JBS, a multinational beef, lamb and chicken processor who are also the majority Scott's shareholder. JBS is ultimately domiciled in Brazil.
Conclusion: Pass Test
SNOOPY
BT2 FY2019/ Increasing 'eps' 5yr trend (One setback allowed)
Quote:
Originally Posted by
sanctus671
EPS figures over the years I pulled from Scott Tech's annual reports:
2009:1.1
2010:8.5
2011: 16.6
2012:16.7
2013:13.6
2014: 6.2
2015:13.8
2016:13.3
2017:13.2
2018: 14.3
2019: For first half of year is 6.6, last year it was 4.2 for first half of the year
Of course, we can only speculate what this years EPS would be so instead better to look at last years figures. 14.3 is more than 13.2. It's a marginal increase hence why I said weak EPS growth.
You'll need to forgive me as I'm definitely not a financial expert. Perhaps I have this wrong, and if so, please let me know. I'm not hugely knowledgeable on EPS and other financial measures of a company which is probably why I missed certain things with Scott Tech. I guess what confuses me is how revenue growth can be so strong while EPS growth isn't.
Thanks for your post Sanctus. I have pulled out what I consider the 'normalised' earnings per share over the last five years based on the number of Scott Technology shares on issue at the end of the financial year. This, no doubt, is why some of my eps figures are a little different to yours. The results are below:
FY2015: $4.803m / 45.474m = 10.6cps
FY2016: $8.929m / 74.681m = 12.0cps
FY2017: $8.959m / 74.681m = 12.0cps
FY2018: $10.205m / 75.903m = 13.4cps
FY2019: $9.464m / 77.545m = 12.2cps
Notes: NPAT normalisation calculations
FY2015: These adjustments may be found on p31, p32 of AR2015. I have:
a/ Subtracted the gain on sale of property plant and equipment ($0.280m)
b/ Added back fair value losses on derivatives held as fair value hedges ($0.449m).
c/ Subtracted foreign exchange gains ($1.538m) and add back unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.108m) and subtracted fair value gains on firm commitments ($0.449m).
$6.113m-($0.280m)+ 0.72($0.449m-$1.538m+$0.108m-$0.449m)= $4.803m
FY2016: These adjustments may be found on p33 of AR2016. I have:
a/ Added back a loss on sale of property plant and equipment ($0.215m) and an impairment of net assets at QMT Machinery Technology Co. Ltd in China ($0.449m).
b/ Added back fair value losses on firm commitments ($1.051m).
c/ Added back foreign exchange losses ($0.027m) and unrealised fair value losses on fair value losses on foreign exchange derivatives ($0.155m) and subtracted fair value gains on derivatives held as fair value hedges ($1.051m).
$8.134m+($0.215m+$0.449m)+ 0.72($1.051m+$0.027m+$0.155m-$1.051m)= $8.929m
FY2017: These adjustments may be found on p30,31 of AR2017. I have:
a/ Subtracted a gain on sale of property plant and equipment ($0.073m)
b/ Added back fair value losses on firm commitments ($0.001m).
c/ Subtracted foreign exchange gains ($0.269m) and unrealised fair value gains on fair value gains on foreign exchange derivatives ($0.143m) and fair value gains held as fair value hedges ($0.001m).
d/ Subtracted a fair value gain on purchase of business "DC Ross" ($0.936m).
$10.265m-($0.073m+$0.936m)+ 0.72($0.001-$0.269m-$0.143m-$0.001m)= $8.959m
FY2018: Most of these adjustments may be found on p33 of AR2018. I have
a/ Added back the $0.021m loss on disposal of property plant and equipment.
b/ Added back in the unrealised loss on foreign exchange derivatives ($0.271m) and losses on derivatives used as fair value hedges ($1.579m) and the unrealised fair value losses on interest rate swap contracts ($0.043m) .
c/ Subtracted foreign exchange gains ($1.627m) and fair value gains on firm commitments ($1.579m).
d/ Added back $0.496m being due diligence and acquisition costs (including the $0.271m of due diligence services from the auditors)
$10.772m+($0.021m)+ 0.72($0.271m+$1.579m+$0.043m-$1.627m-$1.579m+$0.496m)= $10.205m
FY2019: Most of these adjustments may be found on p39 of AR2019. I have
a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .
$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m
Conclusion: Pass Test
SNOOPY
BT3 FY2019/ ROE > 15% for 5yr (One setback allowed)
FY2015: $4.803m / $50.618m = 9.5%
FY2016: $8.929m / $94.600m = 9.4%
FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.464m / $111.817m = 8.5%
Conclusion: Fail Test (a comprehensive fail covering each of the last five years). The last time Scott's passed this test for a single year was back in 2010!
BT4 FY2019/ Ability to raise margins above inflation
Quote:
Originally Posted by
BlackPeter
They paid too much for the "goodwill"? Not the first company falling into that trap ...
Just so exciting for directors and CEO's to buy additional revenue. Great revenue pointers showing into exactly the right direction (top-right). Just don't talk about margins - I guess, who wants that much detail?
Here are the net profit margins for the last five years.
FY2015: $4.803m / $72.298m = 6.6%
FY2016: $8.929m / $112.044m = 8.0%
FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%
Doing more and more business while making proportionately less profit over many years is not the way to go. The 'glitch' in FY2016 saw Scott's sell multiple repeat sales of automated lamb boning room units (the most profitable business that Scott's does) coupled with a good year at 'Rocklabs'. More of this will be required if there is to be any hope of restoring net profit margins to respectable levels.
Conclusion: Fail test
SNOOPY
Hopkins 'caught on the hop'?
Quote:
Originally Posted by
percy
It may be a rather long phone call.
Would think it may pay to speak to Chris Hopkins.
CEO Chris Hopkins is set to give his last address to shareholders today. So no more phone calls from shareholders. Chris has been sacked, oh sorry, moved into his new position of 'sales director'.
"Scott Technology’s Board of Directors has appointed John Kippenberger as the company’s next Chief Executive Officer. John is an experienced business leader who has a successful career as CEO of a number of international business‐to‐business and consumer branded companies.This has included time in Australia as CEO of several industrial companies of George Weston Foods Limited before leading their large meat & dairy organisation which included 1,200 people operating across seven factories. After returning to New Zealand in 2006 with his wife Julie and children Emily and Tom, John was a part‐owner and the Chief Executive of Premier Beehive NZ Limited. More recently,John led the exponential growth and development of Manuka Health NZ Limited.This included expansion of the company’s agricultural and factory operations,along with an acquisition in Germany and the opening of company operations in Australia, the United States, the United Kingdom and parts of South East Asia and China."
The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?
SNOOPY
Buffett Tests 2019: Summary
Quote:
Originally Posted by
Snoopy
The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?
I never envisaged when writing this summary it would be an epitaph to the Chris Hopkins era. But here we go. Benchmarking one company against another, even if they are not direst competitors, can be insightful. I choose Skellerup Limited as a foil for Scott Technology.
The net profit margin at Scott Technology is roughly half that of Skellerup Ltd. Granted these businesses operate in different industrial and agricultural spaces. But both are kiwi based exporters that have expanded in recent years. Both have substantial overseas based manufacturing interests scattered across the globe. Both have around 800 employees. And both have sales of around $230m to $240m per year. Both expense any research and development expenses in the year those expenses are incurred. Scott's call this R&D policy conservative. However the amount of Research and Development build that can subsequently be recovered by being 'on sold' as part of a new project over the last five years has been very low (1). So I would argue Scott's R&D policy is better termed realistic.
The earnings per share picture, once normalised, is quite consistent over five years. But eps growth at Scott's over a five year period of 15% compares poorly with Skellerup's 36%. One argument as to why the comparison is unfavourable could be that Scott's is going through a more transformative phase. Scotts want competent and adaptable engineering teams worldwide at several sites. Whereas Skellerup have their key products made at specialist manufacturing plant at different sites. A look over the change in staff numbers over five years show how Scotts have now achieved their goal of global employee balance (AR2019 p2):
Number of Staff |
FY2015 |
FY2019 |
New Zealand |
94 |
248 |
Australia |
70 |
101 |
Asia |
52 |
36 |
Americas |
45 |
83 |
Europe |
1 |
316 |
The drop in staff numbers in Asia since 2015 is because a then four year agreement with 25% China partner 'Teknatool International Ltd' came to an end in October 2015, with Scott's former joint venture staff then resized and reskilled to pursue Scott Technology projects only.
The good thing about Scotts having a manufacturing base in China, the United States, Europe and Australasia is that you can make your projects in a location that will avoid trade barriers. But the bad side to that strategy is that while trade barriers exist, you will always have some of your manufacturing base in the wrong place. Given Scott's results since the 'globalised bases of scale' strategy has come to fruition, I am not clear it is the right strategy. The fact that Scott's have been able to maintain fully imputed dividends while only around a quarter of the workforce is NZ based, shows how 'profitable' (sic) the overseas manufacturing bases are. Of course there may be some internal transfer pricing that artificially inflates the New Zealand contribution to profit when more than one manufacturing base contributes to a project, But it isn't clear that any of the overseas bases are real profit stars.
With Scott Technology we have a highly skilled workforce doing clever things and making very average profits. Of course there are plenty of technology companies out there that make no profits at all, and Scott's deserve kudos for actually making money while doing smart stuff. But the automated boning room project has been a disappointment of late, principally because the lamb boning room which was technologically very successful and profitable has such a small potential market. The real money in automated meat processing is in processing beef. And the larger beef carcass, more variable in size, seems to be proving problematic to adapt to the robotised technology proven in the lamb boning room.
There have been other failures too. Scott Milktech, the robotised milking shed project, was first absorbed into the parent Scott Technology in 2017, as their industry partner sold out, and now it doesn't rate a mention in this years annual report or presentations. The HTS-110 company in Lower Hutt, a full subsidiary since 2014 battles away building applications with magnetic superconductor technology that is globally well respected in international academia and industry. Yet so far the king hit application that will really put HTS-110 on the map remains illusive. No matter. Should either of these business units get on board the commercial express train, then shareholders buying at today's prices will get the benefits 'for free'. In cutting edge technology, ultimate success is often the outcome of a series of failures.
Scotts know there is room for improvement. The last line in the objectives for FY2020 is to "Review all areas of operations to improve bottom line" In the short term, the sale of more proven meat processing equipment is the key to this. And Europe, where most of the company's material handling expertise lies, will have to shake off their 'Brexit Headache'. If you think they can do this there is every reason to remain invested. But I don't think Warren Buffett will be joining you on the share register.
Notes
(1) If some R&D expenditure manifesting as equipment in storage was written off but subsequently recycled, I imagine it would be brought back onto the books as 'Property Plant and Equipment' at no cost. The price it was sold at would then be all profit. So one test to see if this did happen would be look at the profit margin of the Property Plant and Equipment sold during any year when an overall profit was made. Looking at the three years of 'Property Plant and Equipment' when this happened.
|
P,P&E Profit |
P,P&E Sales |
P,P&E Profit Margin |
FY2015 |
$0.280m |
$0.445m |
63% |
FY2017 |
$0.073m |
$1,483m |
4.9% |
FY2019 |
$0.343m |
$0.302m |
114% |
It looks to me as though some previously written off R&D funded equipment may have been resold in FY2015 and FY2019. But the quantum of that recycling less than $0,632m in total over five years is not material to the company.
SNOOPY
discl: hold SCT and SKL
Capitalised Dividend Valuation: FY2015 to FY2019.5 data
Quote:
Originally Posted by
BlackPeter
They bought as well a lot of additional revenue, but if you look at the earnings per share - they are flatlining now for a long time around 13 cents. PE around 19 with no (EPS-) growth at all.
So - it is clearly not a growth company (remember, its only EPS growth which counts for shareholders) and while their interests might be aligned with the interests of the majority shareholder (they are building tools for them) - for anybody else they are basically equivalent to a BB or less rated bond (they are neither a gentailer nor IFT) paying (at today's SP) in average 4.2% interest, which well may turn towards less or even nil when the next recession arrives.
While they are certainly worth something, there are many better dividend payers (if that's your thing) as well as much better growth games out in the market.
I am not sure SCT management 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.
The calculation to work out the equivalent gross figure for the FY2020s unimputed 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)
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2015 |
5.5c+2.5c |
N/A c + 3.47c |
3.47c |
FY2016 |
5.5c+4.0c |
7.64c + 5.56c |
13.20c |
FY2017 |
5.5c+4.0c |
7.64c + 5.56c |
13.20c |
FY2018 |
6.0c+4.0c |
8.33c + 5.56c |
13.89c |
FY2019 |
6.0c+4.0c |
8.33c + 5.56c |
13.89c |
FY2020 |
4.0c (18.41% I) + ?c |
5.02c + ?c |
5.02c |
Total |
|
|
62.67c |
Averaged over 5 years, the dividend works out at 62.67/5 = 12.5c (gross dividend).
I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.
So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SCT is:
12.5 / (0.075) = $1.67
Now using my plus and minus 20% 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: $1.67 x 1.2 = $2.00
Bottom of Business Cycle Valuation: $1.67 x 0.8 = $1.34
At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SCT shares trading at $2.30 (above the upper end of my expected range) are now overvalued by 15%.
SNOOPY