SCT - Scott Tech

[winner69]

Will Scott will go the way of MHM and be lost to the NZX ……probably yes

Wonder how ‘strategic review’ going ..or have I missed something

Suppose ‘takeover’ will be at 5 bucks plus

[GTM 3442]

Well with MHM out of the picture, who else other than Scott is there in the NZX automation/technology space? And with SCT out of the picture, who else is there in the NZX automation/technology space?

[BlackPeter]

Well with MHM out of the picture, who else other than Scott is there in the NZX automation/technology space? And with SCT out of the picture, who else is there in the NZX automation/technology space?

NZ Top ten NZ Technology firms: https://www.teamtweaks.com/blog/it-c...n-new-zealand/
NZ automation companies: https://www.lusha.com/company-search...ew-zealand/83/

Have fun with your research ;

[Wai Wai]

Rakon?
https://www.rakon.com/about

[Snoopy]

FY2023: $15.702m / $267.526m = 5.9%

When I hear the term 'margin' unqualified, I understand it to mean 'net profit margin', which is 'net profit' divided by 'revenue', such as I calculated above. Scott's may calculate it a little differently because I have normalised the net profit figure (refer post 1069). If we use the declared net profit figure of $15.436m, as quoted by Scott, the calculation becomes:
$15.406n / $267.526m = 5.8%

That not impressive enough for you? Let's raid the 'Consolidated Statement of Comprehensive Income' (AR2023 p32) and get net profit margin before tax as our base calculation figure.
Before tax Profit margin = $19.199m / $267.525m = 7.2%

Doesn't that sound good? But wait there is more. Since ability to pay dividends is all about 'cashflow', the figure of interest to investors should really be EBITDA margin. Using the income statement again, we can calculate this as:
EBITDA margin = $30.374m / $267.525m = 11.4%

But hold on. That figure contains the contribution cost of all those head office dudes who suck on the workers and don't do anything. In the case of a takeover all those dudes and dudettes could be fired. Their egregious costs may be found on p47 of AR2023 to be $14.835m. So let's stick that figure back onto the EBITDA earnings. Now we have:
Worker generated EBITDA margin = ($14.835m+$30.374m) / $267.525m = 16.9%

Are you getting the point yet? Fiddle around with the earnings figure definition and you can get a 'margin' figure of whatever you like (within reason).

But how about this? Go to this years presentation and look at slide 10
https://scottautomation.com/assets/I...tober-2023.pdf

The margin there for the whole group is listed as 27%. Absolutely fantastic! There is a mention of this figure in the Annual Report of 2023 on p3 as a 'group margin'. However nowhere in the report can I find a definition of what 'group margin' means. I assume it is a non-GAAP measure? In the absence of a formal definition I will make one up:

"Group margin" = "The highest margin the "groupthink" of senior management can get away with, without inquisitive shareholders asking awkward questions on how such a number might be derived."

By this definition, I do not believe that 27% is the Scott 'Group margin' for FY2023! I have looked long and hard at the Scott income statement for FY2023 and cannot get a margin figure anywhere near 27%. Can anyone shed any light on how such a 'group margin' figure of 27% might be arrived at?

SNOOPY

[winner69]

Snoops …the margin they quote is possibly an internal metric to measure the profitability of contracts

A hint is that line in P&L “Raw Materials, consumables and operating expenses” and then take a portion of the employee costs that are deemed to be directly related to doing the contract work.

Sort of splitting expenses into those are productive (contracting) and support (hq functions etc).

It’s not very clear is ir ..you have to believe them

Give them a buzz …. They might give you the numbers

[BlackPeter]

Dr. Google tells us that

Group Gross Margin means the revenue of the Group less the Cost of Sales of the Group.

Which in my view confirms winners assumption. They count some of their cost as "cost of sales" - I suppose anything they need to produce a certain product and to sell it, while all other cost (e.g. management salaries, cost of governance, tea lady, other non sales specific admin and rest of waterhead are not cost of sales and covered by the gross margin.

Unless they allow you to do due diligence, you probalby need to believe them (or not ;.

[Snoopy]

Snoops …the margin they quote is possibly an internal metric to measure the profitability of contracts

A hint is that line in P&L “Raw Materials, consumables and operating expenses” and then take a portion of the employee costs that are deemed to be directly related to doing the contract work.

Sort of splitting expenses into those are productive (contracting) and support (hq functions etc).

It’s not very clear is ir ..you have to believe them

Thanks for your thoughts here Winner. I was under the impression that I had missed something obvious, but it appears not. I am sure there is good logic behind the 'group margin percentage' Scott's publish. But without knowing what that logic is, my tendency is to remain skeptical. If your hunch is right and they have ring fenced out a whole heap of central admin costs, well it probably is a better way to judge the results of a 'specialised tech business'. But then someone, somewhere down the line, does have to pay all of those costs at 'central HQ'. It strikes me as akin to a family man saying; "Well I would be a zillionaire if I could live in a tent on dried noodles and save and compound all my earnings by investing in Buffett style companies." But the truth is, our man does have a family and has to pour most of his resources into supporting them - and keeping up the family HQ- , his house. So the whole argument of what he would do if he lived in a tent becomes moot. If that is Scott's argument, ring fencing out essential costs, to improve the performance of the sales force on the ground, then it seems flawed to me.

My own approach, in post 1078, is probably equally open to criticism. What I have done is allocate those central admin costs across all of the sales divisions in proportion to the sales in those divisions. The base thinking behind this idea is that you have a factory turning out boxes of widgets. However, some markets are bigger than others and require more logistics to move those widgets. Thus if you have a fleet of delivery trucks you set aside more trucks and drivers to handle the bigger markets and so distribution costs are divided asymmetrically according to market size. Such logic tends to break down a bit with tech companies like Scotts.

It would be more accurate to say that the initial 'return' on Scotts clever engineering solutions is zilch, in fact negative in the early years. But then it turns around and then pays off 'big time' when a completed concept comes to market. It is also more likely that profit relates to the value the market places on the capability of the product, and is not proportional to the revenue earned when that unique product is put to market. I could at this point be 'clever' and try to adjust for these factors in my modelling. But I suspect it would take someone cleverer than me to do so. Indeed, if I tried it, I would likely end up with some pomped up numbers that reflected nothing more than my unconscious personal biases. Given this, I feel it is more honest to keep my analysis relatively simple, and probably slightly wrong, while pointing out where I believe my errors are likely to be (as I have done in this paragraph). I feel that I am better to count the central HQ admin costs, even if I apportion them in not quite the right way, rather than try to spirit away some costs (as Scotts appear to have done) completely.

Give them a buzz …. They might give you the numbers

I will sleep on that suggestion.

SNOOPY

[winner69]

Snoops …. I think what Scott do is reasonable, problem not that clear

Think retailer like Briscoes ….. Margin (gross) is sales less what the cost of those goods sold ….relatively straight forward eh

But Yale Metro Glass where Margin (gross) is sales less the cost of glass (including production/processing) less the cost of glaziers who put the glass in. This basically how Scott calculate their margin I’d say.

Maybe you could look at Scott’s p&l a different way …like recast it as revenues less .’cost of sales’ (calculate that to give the 30% margin) and see what is other stuff is to come to the profit line.

[winner69]

Based on MHM takeover numbers Forbar reckons Scott value is at least $4.73

“We view SCT's valuation discount to MHM as unjustified, and conservatively believe it should trade at least in line with MHM's multiple,” Lindsay and Twiss stated.