SCT - Scott Tech

[Snoopy]

GENERAL: SCT: SCT ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D

10 December 2010

SCOTT TECHNOLOGY LTD ATTRACTS MAJOR GOVERNMENT SUPPORT FOR R&D

The company is pleased to advise that we have been successful in our application for the Governments Technology Development Grant. This has been awarded to Scott to a maximum of $3.7 million over 3 years and is payable at the rate of 20% of eligible spend on research and development (R&D).

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That's another nice little cashflow bonus for SCT shareholders. $3.7m represents 11.7cps! Note quite cash in the bank as SCT will have to spend $18.5m over three years to get the $3.7m rebate. But having such a vote of confidence in the company by the government will not do SCT any harm.

SNOOPY

[Snoopy]

That's another nice little cashflow bonus for SCT shareholders. $3.7m represents 11.7cps! Note quite cash in the bank as SCT will have to spend $18.5m over three years to get the $3.7m rebate.

A good day for SCT today with the share price rising 15c to $1.36. Looks like that near cash in the bank got recognised by the market.

I ended up taking the cash dividend like most shareholders. As it turned out I would have been better to take the DRP shares like our arbitrage player. But I'm not sure I wanted to risk my cash payout by trying to be clever with some arbitrage deal! The problem with SCT from my perspective is that the potential has been there for a long time. Realising that potential in cash has been a harder task, as dividends have been very thin in the five years up until the most recent payout. I am guessing many shareholders were in this position, and that accounts for the relative failure of the DRP. I am not sure I join the chorus of blaming directors for relatively few shares being issued under the DRP. I am more of the opinion that long term historical company performance is to blame. When shareholders are starved of cash for a long time, cash on the table, in the form of a dividend cheque, is hard to resist.

SNOOPY

[Snoopy]

The problem with SCT from my perspective is that the potential has been there for a long time. Realising that potential in cash has been a harder task, as dividends have been very thin in the five years up until the most recent payout. When shareholders are starved of cash for a long time, cash on the table, in the form of a dividend cheque, is hard to resist.

I took the opportunity to unload a few SCT shares over the last few trading days. This will come as a shock I guess to some reading this thread where I have sometimes seemed like a single handed SCT tout! However don't be too concerned as SCT remains my second largest NZX shareholding, and I certainly won't be selling out of the company overall.

The reason for my selldown is to reduce what has become quite an overweight position for me in a somewhat illiquid company. The $1.40 price I sold at represents a ten year average gross yield of 5.6% based on a 30% tax rate. As a strictly yield based investment, I think that is a fair price albeit at the bottom end of the range that I would consider 'fair'. My retrospective analysis also assumes that management will be unable to improve their 10 year dividend performance, a suggestion that I suspect management would hotly dispute!

What swung me to sell down was management's comment at the AGM about the SCT price being restored to more appropriate levels, whereas before that comment I had considered SCT to be dirt cheap! I also noted that after the latest release of results there was no top up buying from management, as had been evident after the last result release when the share price was around $1.20. So reluctantly I sold down a few shares reducing my average purchase price from a dizzying $1.23 to $1.22.

Also negative I thought was the comments about looking to raise more capital, albeit in the context of the dividend reinvestment plan. When SCT made their last acquisition of Rocklabs, part of the purchase price was paid in shares. Rocklabs has since turned out to be an excellent acquisition. But to buy Rocklabs SCT effectively devalued their existing businesses by giving away shares at $1.20 or so IIRC. I think there is potential for the same thing to happen again should SCT find another acquisition they fancy.

So will I sell down more SCT shares? Certainly I don't need to, and long term I think my recent sell down decision will be seen as stupid. However, there is a possibility that following the expiry of their European hedging in a couple of years time, profits from the appliance production line division will not flow so easily. Given the unproven nature of the meat handing robot divisions profits and the possibility of a medium term capital dilution - mimicing the Rocklabs acquisition - it was an easy decision to take to reduce my holding just a little. There are the negatives on the table lest anyone think that I have fallen in love with SCT.

Hopefully other shareholders will post their thoughts as to why I was wrong to sell down. I need to you to convince me of my foolishness so that I can feel happier about the 90% of my SCT shares that I still hold! In the meantime I will stick to my old adage of 'selling into market strength' after a fairly good couple immediate past couple of years for SCT sharehoilders.

SNOOPY

[percy]

I think you are correct to sell down.Long led times,difficult to retain staff in down turns,and doubt over future dividends makes this thinly traded share an at risk investment.You would never know what the future holds with them.A cheap share,a dear share,just when you think you understand it managemebt come up with a contrary view.You may be more comfortable with RYM which I am sure you fully understand after your's and sauce's discusions,[which led me to buy more].What ever I look forward to seeing where you invest.

[Snoopy]

I think you are correct to sell down. Long lead times, difficult to retain staff in down turns,..

Both points are known to the market Percy, and to some extent reflected with the low PE ratio the share now trades at (around 10). Matching staff to the ongoing workload I acknowledge is an ongoing issue. But my impression is the staff are treated well, and retaining staff is not an issue, provided the work keeps coming. I think there is some duty sharing between Christchurch (Appliances) and Dunedin (Robotics). Perhaps Rocklabs in Auckland is not so well integrated yet?

SNOOPY

[Snoopy]

I think you are correct to sell down. Doubt over future dividends makes this thinly traded share an at risk investment.You would never know what the future holds with them.A cheap share,a dear share,just when you think you understand it management come up with a contrary view.

To invest in SCT, you need the long term view Percy. If you ask me where they will be in any given year, I couldn't tell you. But ask me where they will be in ten years and I think the answer is much more certain. SCT have world class intellectual capital. When they can harness that into sales and at how high a margin is where the uncertainty exists.

SNOOPY

[percy]

If they are still in business in 10 years time you could be right,but why take the risk.?

[Phaedrus]

I will stick to my old adage of 'selling into market strength'

You certainly are consistent in your dogged refusal to recognise the importance of keeping on the right side of market trends, Snoopy. "Selling into market strength" is just as foolish as the "buying into market weakness" that you were doing all the way down! I have plotted a few of your comments on the chart below and it is painfully obvious that you would have done far better keeping your money in your pocket, rather than averaging down as you did. Buying an obviously downtrending stock is not a good idea - and you provide a perfect example of what happens to anyone foolish enough to do this. Certainly you were able to reduce your average entry price, but all the time you were doing this, your capital was being eroded as you were adding to your SCT shareholding taking positions that, years later, are still under water.

You are selling a few now? The time to sell was when I did - way back in 2005 when SCT stopped rising and started falling. Currently, SCT is in an uptrend but hitting consistent resistance at around $1.42.

Snoopy, you made a huge gain on SCT - and gave nearly all of it back to the market. Having tripled your money in just 3 years, you have ended up with a 10 year average gross yield of just 5.6%. How? By holding on to (and buying more of) a downtrending stock.

You say that "you have to be prepared to hold shares across the ups and downs of the business cycle" and here we see a graphic illustration of the folly of doing just that.

[Snoopy]

If they are still in business in 10 years time you could be right,but why take the risk.?

SCT are probably the most conservatively managed company on the NZX Percy. Debt is kept to a minimum and currency hedging is only carried out when a contact is signed. If SCT goes down in the next ten years, I don't think there will be an NZX to invest in.

SNOOPY

[Snoopy]

You certainly are consistent in your dogged refusal to recognise the importance of keeping on the right side of market trends, Snoopy. "Selling into market strength" is just as foolish as the "buying into market weakness"

It all depends on the liquidity Phaedrus. Selling out at any price would be foolish if there were no buyers. This is the dilemma of thinly traded small cap shares. In theory buying small cap shares will allow you to outperform the index. In practice if you try to sell those shares at the 'market' price generally you can't. That's because your potential share sale will distort whatever market was there before. I well recall your 2005 sell off of SCT, even though I was out of the country at the time. IIRC you had trouble exiting, and gave back many of those theoretical profits to the market yourself! Far from just reacting to the market as usual, I think you were the one that started the very downtrend that you have just illustrated.

My solution to this dilemma is to treat my small caps as 'value investments' which can be traded against market sentiment. When everyone else wants to selll I will be in there buying, like I did in 2009 down as low as 70c. When everyone thinks SCT is a sure thing then I will sell, creating the market those buyers desperately want. Long term I am not worried as I think SCT will be worth $1.80 within the next couple of years. But I can't be 100% sure of that, which is why I took the prudent option of selling down at about your $1.42 resistance level. It might take some more good news to push SCT beyond $1.40, and that may be 4 months away.

SNOOPY