SCT Chart

[k1w1]

Under $3.40 so lets see you techies take your medicine like men !

I don't want any MacDunk wobblers who act contrary to their hybrid code, always with some weasel worded ex post facto rationalisation.

Phaedrus here are my views on the fundamentals.

Scott's real asset is its location and workforce. Because of where it is and because South Islanders are real men who do real jobs they have a highly skilled workforce who arent going to leave. Peter Jackson sourced many of his Weta technicians from small towns in the bottom of the South Island where making do with whats available, creating and fixing are just a way of life. Like farmers used to do, and mechanics before they became replacement part fitters. So just like Weta these Scott boys are world class. Like all of us Mainland born lads.

I read there was almost a cult amongst managers who had installed their plant. Setting up assembly lines in the third world seems to be the sort of niche that we should be in to me. They always have no debt. Currently the currency will hurt them. In Buffet terms they have lumpy earnings which the market doesnt like. So thats my fundy take on them.

Enough of that. Its entertainment time. I want to go watch the SCT shareprice as the techies hold hands as they jump from the Twin Towers

GO YOU LEMMINGS !!!!

[stephen]

Another fundie-orientated take: these guys potentially have a real franchise. This is stuff is hard-core engineering. They have protection from competition both in intellectual property law (or do they? an interesting thing to investigate) and in sheer know-how; implementing this kind of machinery takes skill and you can't afford to be close enough or rough around the edges.

Having said that, the promise of this machinery is that it is cheaper than paying people. In the long term, skilled labour becomes ever-more expensive; there can be many short term hiccups.

The meat industry stuff worries me. I used to work at MIRINZ; slaughterhouse automation is a very difficult problem. Animals do not come in standard sizes, the conditions are awful for machinery, the industrial accident potential is horrendous, and slaughterhouse staff are sadly a lot cheaper than they used to be. All luck to these guys, but this itself requires investigation at a deep level before I would have faith in its potential.

I agree on the lumpy earnings. Unless we are all confident that they will see substantial and sustained earnings growth in the future they are over-valued significantly right now.

[Phaedrus]

K1w1,
You haven't answered my question - Do you consider SCT to be worth buying at $3.40? In other words, what do you value SCT at?

[k1w1]

No I wouldn't buy at 3.40. But I will hold what I hve.

[stephen]

Can I try to answer? My bedside reading is a new value investing book so let's see what I learned.

A very conservative, old-school person would simply look at the present value of their current earnings. Let us make some back of the envelope assumptions:
- eps as reported is accurate (really we should poke hard at the annual report)
- for fairness' sakes, we'll call this year a currency blip, and average with last year, giving an eps of 0.20
- we'll assume a cost of capital around 10%

This would give you a no-growth valuation of just over $2.

How much do we value their growth prospects at? Weeeeell, I don't see much of a trend over the last five years - I see up and down. Any growth potential, and particularly growth where there are barriers to entry from competitors, has yet to be demonstrated in my view. So personally, I see $3 as being more than fair at this point, noting the worries I mentioned above. A true value investor would want more safety margin than that.

k1w1, how'd I do?

[stephen]

PS: dunno how you would value a big bunch of machine tools but I would wonder whether a typical Taiwanese engineering firm would have much trouble cloning their operation. I would be most interested in an informed opinion from someone with a commercial engineering background.

[Phaedrus]

Kiwi,
What do you value SCT at?

Stephen,
Since you value SCT at $3, does that mean that you would have sold at that level on the way up? Certainly that valuation must make SCT overpriced and thus a screaming sell at the moment - Yes?

[stephen]

Not necessarily. Yes, I would have sold if I felt there was a significantly better opportunity elsewhere. Right now, if I held SCT (which I don't) I would be doing my homework on the issues I raised about prospects for growth, the success of the meat industry initiative, and the vulnerability to competitors. If my fears proved correct, why yes, I certainly would sell. Of course we can't say another opportunity is genuinely better unless we have done our homework on that potential purchase also.

Of course, if I really held SCT, I would have done that homework already, and wouldn't be so cagey now.

[Stock Man]

Down .44c or 11.5% so far. It will be interesting to see if sct has 'hit the floor' and buyers move in...

[Taijon]

SCT traded at $3.35 in Nov 2003 cum a 1 for 8 bonus issue and a final dividend of 8 cents per share which was paid out on the bonus shares as well as the holding pre-bonus.

After going ex bonus and final dividend the share price dropped to $2.85.

Looking at the situation now, there is no bonus issue and the final dividend (7 cents) is 1 cent lower. The recent prices of $3.85 - $3.90 were most likely based on the expectation of another bonus issue, similar to those of 2002 and 2003.

The bright light on the horizon is the order book which is said to be very high. Some of these contracts will have been signed at this higher exchange rate for the $NZ and so profits are less likely to be eroded by an unfavourable exchange rate. The company says it is also going to outsource overseas, some activities to reduce costs.

I wouldn't buy today at more than $3 cum dividend, based on the current scenario. I expect profits for year-end Oct 2005 will be higher than this year. Between now and then if there are opportunities to buy at around $2.70-$2.80 I for one will be in.