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 twithinhe 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!