BT2/: Increasing EARNINGS PER SHARE (One setback allowed) FY2018 View
Quote:
Originally Posted by
Snoopy
2013: ($26.631-$0.871-$7.595)m/ 192.806m = 9.4cps
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps
2016: ($29.099+$0.800+$1.275-$8.429+0.28*$0.145)m /192.806m = 11.8cps
2017: ($31.435-$2.507-$9.300+0.28*$0.025)m /192.806m = 10.2cps
Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs.
d/ Result for FY2017/FY2016 adjusts for not including a $25,000/$145,000 cost from relocation expenses respectively, by adding back the 'after tax' effect of not having incurred these costs.
Conclusion: Fail test
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps
2016: ($29.099+$0.800+$1.275-$8.429+0.28*$0.145)m /192.806m = 11.8cps
2017: ($31.435-$2.507-$9.300+0.28*$0.025)m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.7cps
Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs.
d/ Result for FY2017/FY2016 adjusts for not including a $25,000/$145,000 cost from relocation expenses respectively, by adding back the 'after tax' effect of not having incurred these costs.
Conclusion: Fail test
SNOOPY
BT3/: RETURN ON EQUITY (>15% for five years, one setback allowed) FY2018 View
Quote:
Originally Posted by
Snoopy
2013: $18.165m /$124.673m= 14.6%
2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%
2016: $22.786m /$155.855m= 14.6%
2017: $19.635m /$159.247m= 12.3%
Conclusion: Fail test
2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%
2016: $22.786m /$155.855m= 14.6%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
Conclusion: Fail test
SNOOPY
BT4/: ABILITY TO RAISE MARGINS ABOVE THE RATE OF INFLATION: FY2018 View
Quote:
Originally Posted by
Snoopy
2013: $18.165m /$189.496m= 9.6%
2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
After a grudgingly but nevertheless slowly persuasive increase in net profit margin in recent years, FY2017 has reversed all the good work. The last time profit margins were this low was in FY2010! I guess shareholders will have to hope that FY2017 was a rogue transition year?
Conclusion: Fail test
2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
I see a 'steady margin' picture with a low year of FY2017 offset by a higher year in FY2014
Conclusion: Fail test
SNOOPY
Buffett Test: Overall Evaluation Conclusion (FY2018 Perspective)
Quote:
Originally Posted by
Snoopy
From being in a position to pass 'all four' of the Buffett growth tests, the FY2017 Skellerup only passes one! The biggest surprise, and one that was not evident from a casual read of the published earnings was the very significant $2.507m foreign currency gain that made the headline FY2017 result look a lot better ( 'above guidance' [sic] ) than it really was. Of course this doesn't mean that SKL has necessarily become a dud investment. It just means that the 'Buffett Growth Model' will likely prove unreliable as a predictor, so a different valuation technique is required.
I refer readers to my post 614, using an alternative valuation technique, the 'Capitalised Dividend Valuation Method', based on an FY2017 perspective. I quote from the end of that post:
-----
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Business Cycle Valuation: $1.59 x 1.2 = $1.91
Bottom of Business Cycle Valuation: $1.59 x 0.8 = $1.27
------
At $1.71 (the Friday close) and just ex a 6c dividend, I would regard SKL as 'ever so slightly overvalued', but still well within fair valuation bounds. I am a long term holder and consequently won't be either buying or selling based on any revelations from the results of the FY2017 financial year.
I open this post with a couple of quotes from the Panda which I think are both poignant and sobering.
Quote:
Originally Posted by
Patient Panda
Over the past few years the majority of shareprice gains have been made up of PE expansion rather than a business going gangbusters. Just something to keep in mind for future risk weighted returns.
The historic PE at 30-09-2015 was 11.6. Three years later and it is 15.6 (both with my adjustments).
Quote:
Originally Posted by
Patient Panda
not a great track record, don’t really own up to bad results and always optimistic for future only to contradict themselves with the result. Maybe Liz Coutts will be an improvement over Selwyn.
Until they get some wins under their belt a PE of 14.7 looks very rich.
One good result does not a trend make. The result was good but, as an investor, the likes of Buffett must always consider the multi year perspective. The performance of Skellerup isn't consistent enough to apply the Buffett multi year growth model reliably. This doesn't mean it isn't a good investment. It just means we can't use a technique like Buffett might use to value it.
SNOOPY
Capitalised Dividend Valuation: FY2014 to FY2018 data
Quote:
Originally Posted by
Snoopy
I have updated my valuation using the latest five years of 'rolling data'. It is always a bit of a judgement call doing this. I have to ask myself if the data from FY2012 is still representative. In the case of PGW (as worked through on the PGW thread) I would say 'yes'. In the case of SKL I would say 'no'. I think the SKL growth plan is well enough bedded in to suggest that dividends will not regress to FY2012 levels. So what does dropping the FY2012 dividend payments and adding the FY2017 dividend payments do for my valuation?
Year |
Dividends |
Dividend Total |
2013 |
5.0c+3.0c |
8.0c |
2014 |
5.0c+3.5c |
8.5c |
2015 |
5.0c+3.5c |
8.5c |
2016 |
5.5c+3.5c |
9.0c |
2017 |
5.5c+3.5c |
9.0c |
Total |
|
43.0c |
Averaged over 5 years, the dividend works out at 43.0/5 = 8.6c (fully imputed).
So based on a 7.5% gross yield, 'fair value' for SKL is:
8.6 / (0.075 x 0.72) = $1.59
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Busines Cycle Valuation: $1.59 x 1.2 = $1.91
Bottom of Busines Cycle Valuation: $1.59 x 0.8 = $1.27
At close to $1.50, I would put SKL as a reasonable 'accumulate' proposition, particularly as it is still cum the 3.5c dividend up until March 10th.
I have updated my valuation using the latest five years of 'rolling data'. Since we know the first dividend to be paid in FY2019 (which is the FY2018 final dividend) I have used that 'latest information' and dropped the first dividend paid in FY2014 from my five years of rolling data. However that dividend will for the first time not be fully imputed (55% imputed only). So the equivalent gross figure can be worked out as follows:
7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend) (A)
Year |
Dividends |
Dividend Total |
2014 |
5.0c+3.5c |
3.5c |
2015 |
5.0c+3.5c |
8.5c |
2016 |
5.5c+3.5c |
9.0c |
2017 |
5.5c+3.5c |
9.0c |
2018 |
6.0c+4.0c |
10.0c |
2019 |
7.0c+?.?c |
|
Total |
|
40.0c |
This gives a cumulative gross dividend of 40.0c/0.72 = 55.6c
We need to add to this the first dividend to be paid in FY2019 (A), expressed as a gross dividend:
55.6c + 8.5c = 64.1c
Averaged over 5 years, the dividend works out at 64.1/5 = 12.8c (fully imputed).
So based on a 7.5% gross yield, 'fair value' for SKL is:
12.8 / (0.075) = $1.71
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Busines Cycle Valuation: $1.71 x 1.2 = $2.05
Bottom of Busines Cycle Valuation: $1.59 x 0.8 = $1.37
At this part of the investment cycle, with conditions very favourable towards shares, I would argue that for SKL shares to be trading at $2.05 (the upper end of my expected range) would not be unusual. The fact they are trading above this at $2.15, suggests to me there is a growth premium built into the share price. What we have here is investors willing to pay a growth premium which from an historical perspective is not justified. Of course if the growth targets the company has set itself materialise, SKL could well be worth $2.15. I am a shareholder and have done very nicely out of SKL over the last few years. But I won't be topping up at $2.15. Good company. But for me the risk/reward equation does not stack up to be 'market outperforming' from here. Nevertheless I will be sticking with all my shares for now. Although I see them as 'overvalued', they are no more overvalued in my judgement than many shares in the market today.
SNOOPY
Capitalised Dividend Valuation: FY2015 to FY2019 data
Quote:
Originally Posted by
Snoopy
I have updated my valuation using the latest five years of 'rolling data'. Since we know the first dividend to be paid in FY2019 (which is the FY2018 final dividend) I have used that 'latest information' and dropped the first dividend paid in FY2014 from my five years of rolling data. However that dividend will for the first time not be fully imputed (55% imputed only). So the equivalent gross figure can be worked out as follows:
7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend) (A)
Year |
Dividends |
Dividend Total |
2014 |
5.0c+3.5c |
3.5c |
2015 |
5.0c+3.5c |
8.5c |
2016 |
5.5c+3.5c |
9.0c |
2017 |
5.5c+3.5c |
9.0c |
2018 |
6.0c+4.0c |
10.0c |
FY2019 |
7.0c+?.?c |
|
Total |
|
40.0c |
This gives a cumulative gross dividend of 40.0c/0.72 = 55.6c
We need to add to this the first dividend to be paid in FY2019 (A), expressed as a gross dividend:
55.6c + 8.5c = 64.1c
Averaged over 5 years, the dividend works out at 64.1/5 = 12.8c (fully imputed).
So based on a 7.5% gross yield, 'fair value' for SKL is:
12.8 / (0.075) = $1.71
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Busines Cycle Valuation: $1.71 x 1.2 = $2.05
Bottom of Busines Cycle Valuation: $1.59 x 0.8 = $1.37
At this part of the investment cycle, with conditions very favourable towards shares, I would argue that for SKL shares to be trading at $2.05 (the upper end of my expected range) would not be unusual. The fact they are trading above this at $2.15, suggests to me there is a growth premium built into the share price. What we have here is investors willing to pay a growth premium which from an historical perspective is not justified. Of course if the growth targets the company has set itself materialise, SKL could well be worth $2.15. I am a shareholder and have done very nicely out of SKL over the last few years. But I won't be topping up at $2.15. Good company. But for me the risk/reward equation does not stack up to be 'market outperforming' from here. Nevertheless I will be sticking with all my shares for now. Although I see them as 'overvalued', they are no more overvalued in my judgement than many shares in the market today.
I have updated my valuation using the latest five years of 'rolling data'. FY2019 has been the first year that dividends have not been fully imputed. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off. And the reason for not fully imputing those dividends, because of the outperformance success of Skellerup's overseas subsidiaries that do not generate earnings in NZ Dollars, is hardly a negative. Although detractors might say Skellerup should be doing more of their manufacturing in New Zealand. Given the escalation in global trade tensions, I think being geographically diversified with your manufacturing plants is probably a good idea. Even if, unlike Scott Technology (as another example of a NZ based, but internationally spread exporter), the overseas manufacturing facilities are not multipurpose. Skellerup can't choose in which overseas plant they manufacture their widgets!
The calculations to work out the equivalent gross figure for FY2019's unimputed dividends, those paid in the FY2019 financial year, are as follows:
7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)
5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2015 |
5.0c+3.5c |
6.94c + 4.86c |
11.80c |
FY2016 |
5.5c+3.5c |
7.64c + 4.86c |
12.50c |
FY2017 |
5.5c+3.5c |
7.64c + 4.86c |
12.50c |
FY2018 |
6.0c+4.0c |
8.33c + 5.56c |
13.89c |
FY2019 |
7.0c (55% I) +5.5c (50% I) |
8.50c +6.57c |
15.07c |
Total |
|
|
65.76c |
Averaged over 5 years, the dividend works out at 65.76/5 = 13.1c (gross dividend).
So based on a 7.5% gross yield, 'fair value' for SKL is:
13.1 / (0.075) = $1.75
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Busines Cycle Valuation: $1.75 x 1.2 = $2.10
Bottom of Busines Cycle Valuation: $1.75 x 0.8 = $1.40
At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.10 (the upper end of my expected range) would not be unusual. The fact they are trading at $2.14, just before a 5.5c dividend is paid, puts them within the top bound of my expected trading range on an ex dividend basis. The 'growth premium' from the half year has gone. From an historical perspective I believe this is justified. Skellerup have yet to earn their 'consistent growth stripes'.
Skellerup's underlying performance has caught up with their market valuation. I felt a touch of pride when I read about the 40 Maserati Quattroporte limousines bought for the Port Moresby APEC conference (the ones that Jacinda refused to ride in), knowing that each one had a Skellerup drive coupling faithfully transmitting all that 'torque' below the floor, while our leaders 'talked' above. But is such growth in the PNG market sustainable?
I have done very nicely out of SKL over the last three to four years. My average purchase price is $1.30. But I won't be topping up at $2.14. Good company. But for me the risk/reward equation is not proven to be 'market outperforming' from here. Lots could go right and lots could go wrong. But I have faith in the direction of management and governance. When I saw the photo of Chairman Liz Coutts in the HY2019 inside cover, I thought she had a touch of the wise look of the late great Stephen Hawking about her. And that can't be a bad thing for a science lead company!
SNOOPY