SCT - Scott Tech

[percy]

The net profit after tax of $9.5 mil is very modest for a company which has a market capitalisation of over $242 mil.

[Arthur]

It may seem expensive, but the PE of 25 is well below NZ market average. It will be interesting to see what happens in the future. Robotics and mining equipment seems to be a good space, but Scott have a history of not meeting their potential. Is this time different?

[BlackPeter]

It may seem expensive, but the PE of 25 is well below NZ market average. It will be interesting to see what happens in the future. Robotics and mining equipment seems to be a good space, but Scott have a history of not meeting their potential. Is this time different?

Not sure whether this is true. FWIIW - the 80 plus stocks on my watchlist have an average PE of 19 ... and many of these companies have on top of that as well a material earnings CAGR, quite different to SCT which didn't manage to grow their average EPS for many years.

Scott is clearly dear in comparison based on backward looking indicators, and whether they will manage to turn their long term stagnation into future growth is anybody's best guess.

The current MIQ situation makes business for them obviously still harder than it used to be. Their competitors in the US, in Europe and in Asia are able to travel, to visit customers, install and maintain plants. Scott however can't - thanks to our retarded MIQ system. While they can send their specialist staff abroad, they can't get them back anymore (well, just go into the lottery to see whether you are allowed to return at some stage months or years later ...).

Quite average company now operating with additional spanners thrown in the wheels ... not my idea of a promising investment.

[Ferg]

So perhaps a better indicator of Scott's profitability might be to add the Contract Revenue to the Contract Liabilities TOGETHER, as that would represent work recently completed AND that still underway?

Apologies for the delayed response Snoopy - I missed this earlier question.

The profitability on projects is per my workings on post #951. Unfortunately with most Annual Reports you cannot see the level of detail required to calculate what you want to see. But adding the revenue and liabilities together will give a meaningless number - refer again to the table on post #951 to see what figures you are adding for a single project and what that calculation returns versus the base figures*. Incidentally the note on page 31 of the 2020 AR confirms the method I outlined in post #951.

*Keep in mind you are adding half of the J3 journal and the WIP balance per column I - you have effectively added a transaction value to a balance value. FYI the J3 journal was simplified in my earlier post #951. I suspect the original post and notes that were lost had expanded on this.

The J3 Journal I presented for column H was:
Debit Contract WIP say 1,000
Credit P&L say 1,000

Fully expanded the journal would be:
Debit Contract WIP 1,000
Debit P&L Contract Costs say 9,000
Credit P&L Contract Revenue say 10,000 <- this is what you see in the P&L

The best assessment for future profitability would be to assess future margins being future revenues x expected margin %. I know you are a long term guy so maybe use the average margin % achieved over the past 5 years being contract margin / contract revenue, assuming those figures are disclosed. Often the AR will show the forward workload of contracts, usually the figure they quote is what has not yet been recognised per column A less column H (they do not use column G). Note 2020 AR has this on page 35 at $85,297k. This will give you the best measure of forward profitability, being future workload x average margin observed. If however the margins are not disclosed an alternative (and rather raw) method would be to compare unrecognised revenue year on year - you want to see this figure growing (in conjunction with top line revenues growing) because it means they are growing their contract register and are securing forward workload. The figure they have disclosed of $85.2m is column A (per #951) less the revenue components of column H (refer my expanded J3 note above).

Would the margins be those values disclosed on 2020AR p39 per the segment revenue & results? e.g. $6,498 / $186,073 = 3.49%? Or is that an all in margin that includes overheads etc? I don't know given I have only glanced at it. One might apply some sort of weighting assuming fast moving goods and contracts are at lower margins and long term projects are at higher margins...perhaps?

Hopefully this helps.
FERG

[Snoopy]

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

CEO of two years, John Kippenberger , has certainly made his mark on Scott Technology. JK is the architect of the "Scott 2025" vision, and its three pronged 'Systems', 'Products' & 'Services' approach. Gone is the ambition to be 'the global leader in automation'. Instead Scott's is re-orientating, looking at niche project areas, where Scotts have achieved success (rather than taking on any challenge - which technically they could do - but at an unforecastable cost).

Products

There is a big new emphasis on 'standard products', and Scotts have identified three 'core standard products'.

a/ Rock crushing and pulverizing equipment and supplying what is termed 'reference material'. This is selling equipment central to 'medium scale mining' lab analysis (testing what is actually being dug out of the ground) - a truly globally market. This 'product' is from the 'Rocklabs' business unit, based in Auckland, New Zealand.

b/ The 'Bladestop' safety bandsaw, features dual acting switching technology, to all but eliminate the possibility of maiming the bandsaw operator. This was developed for the meat industry, but has other potential applications. The technology was developed in Australia, and the IP was subsequently bought by Scotts in 2016. 'Bladestop' is manufactured by Scott’s Australian subsidiary, Scott Automation & Robotics Pty Limited.

https://www.nzx.com/announcements/291423

c/ Selling new and refurbished industrial robots under the 'RobotWorx' brand, both in the USA and Australia.

The thinking behind this 'product' strategy: if you have technically superior product, then you have 'brand recognition' and 'pricing power'.

Systems

'New thinking' has rolled into the manufacture of production lines for the world's appliance manufacturers (long a mainstay of Scott revenue) as well. From p21 AR2021 "Our goal is for production lines in the future to be at least 80% standardised."

Certainty = Cost Control = Predictable Profits

is the new Scott 'equation'.

Services

More new thinking has gone into the servicing arm of the business. From AR2021 p18

"We`re proactively seeking to become a service business, verses re-actively doing it where we can. This means we are introducing servicing earlier in the project process (at the point of sale), rather than it being an after thought." (includes regular servicing and preventative maintenance.)

This isn't just words. Scott's are about to increase the number of service technicians in each country in which they operate.

Selecting the markets in which you have greatest advantage, and successfully executing that strategy, makes answering the question at the head of this post easy.

Conclusion: Pass Test

SNOOPY

[Snoopy]

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

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
FY2020: -$0.259m / 78.311m = -0.0033cps
FY2021: $11.146m / 78.636m = 14.2cps

Notes NPAT normalisation calculations

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

FY2020: This is the year in which the Covid-19 crisis struck! Most of these adjustments may be found on p5 and p36 of AR2020.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.328m (assumed non taxable)
b/ Added back $7.600m from the impairment of assets (ceased development of projects Scott dairy and automated pork processing).
c/ Added back $4.257m of restructuring impairment related to the closure of subsidiaries DC Ross Toolmakers in Dunedin and Scott Automation GmbH, the machine tools workshop arm in Germany. Since these represent complete and final closure of these businesses I am assuming no tax is recoverable
d/ Added back $6.295m of project impairments, closing out several challenging Australasian legacy projects (assumed no tax recoverable).
e/ Added back in the unrealised loss on foreign exchange derivatives, $0.082m and fair value losses on derivatives used as hedges, $0.890m.
f/ Subtracted foreign exchange gains, ($0.450m); fair value gains on firm commitments, ($1.036m); unrealised fair value gains on foreign exchange derivatives, ($0.146m) and unrealised fair value gains on interest rates swaps ($0.146m).

-$17.503m-($0.328m)+$7.600m+$4.257m+$6.295m +0.72($0.082m+$0.890m-$0.450m-$1.036m-$0.146m-$0.146m)= -$0.259m

FY2021: Most of these adjustments may be found on p39 and p40 of AR2021.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.068m (assumed non taxable)
b/ Added back an actual foreign exchange loss of $1.706m and an unrealised fair value losses on derivatives used as hedges of $0.521m.
c/ Subtracted unrealised fair value gains on foreign exchange derivatives, ($0.132m) and unrealised fair value gains on interest rates swaps ($0.155m).
d/ Added back the amortisation of HTS 110 goodwill, now a legacy asset that has been sold, of $0.403m.

$9.527m-($0.068m) +0.72($1.706m+$0.521m-$0.132m-$0.155m) + 0.72x$0.403m= $11.146m


Conclusion: You will notice that I calculated six years of results, whereas I am meant to be considering only five. I have done this because for Scotts, I believe the FY2020 result was so unusual (Covid-19 related), that it would be misleading to to think of it as any part of a 'normal business cycle'. Thus for the first time ever in an analysis like this, I am going to 'look through' FY2020 as though it didn't happen. The one sense where I will consider FY2020 is that on normalised profit metrics the business was close to break even. So with the benefit of hindsight government support, and no doubt lots of prudent management behind the scenes, we can see that the SCT business was not put at risk of closing by Covid-19. Consequently I do not think that SCT will be forced to close down should Covid-19 restrictions again come to the fore. With FY2020 excluded, and only one blip on the 'eps' growth scoreboard, the result of the second Buffett test is clear.

Conclusion: Pass Test

SNOOPY

[Snoopy]

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!

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%
FY2020: -$0.259m / $92.947m = -0.29%
FY2021: $11.146m / $98.195m = 11.4%

Is FY2021 a portent to a much improved utilisation of shareholder funds in the future? It could be, but Scott's have a lot of catching up to do in the return on shareholder equity space.

Conclusion: Fail Test

SNOOPY

[Snoopy]

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

Here are the net profit margins for the last six years.

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%
FY2020: -$0.259m / $186.073m = -0.14%
FY2021: $11.146m / $216.234m = 5.2%

We have had a blip up from the lows of FY2019 (ignoring the one off FY2020 Covid-19 genesis year). Is this a result of the new 'product lead' and 'standardised unit' policy? I think it is too early to tell if this uptick in net profit margin will form part of a trend. One thing that is clear is that the net profit margin trend was all down before FY2021

Conclusion: Fail Test

SNOOPY

[Snoopy]

I don't think 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 partially imputed 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
FY2016	5.5c+4.0c	7.64c + 5.56c	5.56c
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) + 0c	5.02c + 0c	5.02c
FY2021	0c + ?c	0c + ?c	0c
Total			51.56c

Averaged over 5 years of dividend payments, the dividend works out at 51.56/5 = 10.3c (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. The cancelling of the last two dividend payments from Scotts, I think, shows that a relatively high discount rate on those dividends that were paid is required.

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:

10.3 / (0.075) = $1.37

Now using my plus and minus 20% rule of thumb 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: $1.37 x 1.2 = $1.64
Bottom of Business Cycle Valuation: $1.37 x 0.8 = $1.10

SCT shares were trading at $2.33 on Tuesday 29th December (well above the upper end of my expected range) and are now at least 30% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 30% growth premium (because a capitalised dividend valuation assumes no growth).

History would show that such a growth premium can be justified, in my view. But such a premium also assumes successful, and profitable, execution of the growth plan. Given the much slower roll out (or even failure) of the automated beef boning room project, and an unlikely rapid bounce back in Europe, I am glad that I acquired my SCT shares at an average price of just 72.6cps (admittedly over a more than 10 year average acquisition timeframe). I still 'believe the story' which is why I am holding. But I now can't rule out a further 'down leg' before the eventual recovery.

I don't think 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 partially imputed 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
FY2017	5.5c+4.0c	7.64c + 5.56c	5.56c
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) + 0c	5.02c + 0c	5.02c
FY2021	0c + 2c (NI)	0c + 2.00c	2.00c
FY2022	4c (NI)+ ?c	4.00c + ?c	4.00c
Total			44.3c

Averaged over 5 years of dividend payments, the dividend works out at 44.3/5 = 8.86c (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. Scott's seem to have been remarkably adept at solving the logistical transport problems created by Covid-19. They have even completed factory acceptance testing by virtual technology. I am now of the opinion that my previously selected sought after 7.5% gross yield over an historic five year business cycle window, should be reduced to 7.0%. This means that 'fair value' for SCT, based on the, 5 yearly historic dividend record is:

8.86c / (0.07) = $1.27

Now using my plus and minus 20% rule of thumb 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: $1.27 x 1.2 = $1.52
Bottom of Business Cycle Valuation: $1.27 x 0.8 = $1.02

SCT shares were trading at $3.25 on Wednesday 10th December as I write this (more than double the upper end of my expected range) and are now ($3.25-$1.27=$1.98) 155% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 155% growth premium (because a capitalised dividend valuation assumes no growth).

It is clear the market is pricing SCT well above what we might expect from the dividend payer that I am modelling. And this is assuming SCT will increase the current annual dividend rate of 2c +4c = 6cps, to more than 8cps. This means the market clearly believes the growth story. But a capitalised dividend valuation relies on 'runs on the board', not future hope.

SNOOPY

[Snoopy]

The current MIQ situation makes business for them obviously still harder than it used to be. Their competitors in the US, in Europe and in Asia are able to travel, to visit customers, install and maintain plants. Scott however can't - thanks to our retarded MIQ system. While they can send their specialist staff abroad, they can't get them back anymore (well, just go into the lottery to see whether you are allowed to return at some stage months or years later ...).

From HYR2021

Covid-19 Update

"The impact of Covid-19 is still being felt deeply across the Group, as travel restrictions within markets and across continents often prevent dales meetings in person and continues to inhibit some projects with balancing the project skills needs with the resources available within that state or region. However the Scott team, through its agility in adapting to new ways of working - including completing factory acceptance testing by virtual technology- has seen many examples of positive forward progress notwithstanding the travel challenges."

The 80 plus stocks on my watchlist have an average PE of 19 ... and many of these companies have on top of that as well a material earnings CAGR, quite different to SCT which didn't manage to grow their average EPS for many years.

Scott is clearly dear in comparison based on backward looking indicators, and whether they will manage to turn their long term stagnation into future growth is anybody's best guess.

Quite average company now operating with additional spanners thrown in the wheels ... not my idea of a promising investment.

If I use my normalised profit for FY2021 of $11.146m (14.2cpc), and compare that to the trading price today of $3.25, then I get a PE ratio of:

325/14.2 = 23

Almost down to the average of your 'hot 80' BP. I feel an investment slogan coming on:

"Buy Scott Technology: almost an average business." !

SNOOPY