SCT - Scott Tech

[Snoopy]

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.

Some of my SCT purchases are underwater Phaedrus, that I concede. But there is no tag on those shares on the register, which would allow me to 'keep' the good SCT shares and sell the bad ones. In fact the only thing that matters long term is the average entry price and I am certainly not underwater on that! The unenviable position I find myself in is because 'averaging down' (your term) has been very successful for me over the last couple of years. It is because the investment has gone from 70c to $1.40 or so that caused my problem, which many would say is not a problem at all.

Taking the ten year perspective, I have made 5.6% per year of gross income, plus about another 1.2% p.a. grossed up worth of capital gain, making a total ten year return of 6.8% before tax every year for ten years. That isn't a great result, but it isn't a failure either. In fact if you compare my SCT return immediately before the GFC compared to now, I have turned what was a breakeven investment at best around substantially.

Snoopy, you made a huge gain on SCT - and gave nearly all of it back to the market.

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.

I made a good gain in percentage terms Phaedrus, but I didn't hold that many shares back then. So the actual dollar gain was not so flash. But there has been no 'folly' here. Contrary to your explanation, this is a good example of how 'averaging down' (your words again) can dig you out of a precarious position.

SNOOPY

[Under Surveillance]

Having been in SCT since just August 2009, I've not lived the nightmare shown by Phaedrus' chart. This might advantage or handicap me in trying to give Snoopy confidence to hold the rump of his SCT shares.

There seems no evident reason why the pattern of improvement in SCT's net surpluses should not continue, at a more subdued rate, through 2011. Over the last 4 half years the net surpluses have been ($000): H1 2009 (474); H2 2009 739; H1 2010 973; H2 2010 $1,819. For the purposes of looking to 2011, the H2 2010 $1,819 could be read as $2,911, the difference reflecting the non-recurring tax change on building depreciation in H2 2010.

The company started 2011 with capacity fully committed for the first half year [annual report, page 9]. The AGM was told of $10 million of new orders, and another $4.5 million in advanced negotiation. Snoopy's intelligence from the aftermatch at the AGM told of 20 new staff to be added.

The above suggests to me that the net surplus for FY 2011 would disappoint if it were not within sight of being 2 times the adjusted $2,911 of H2 2010, i.e. $5.8 million. I have a higher figure in mind, but abstain from offering it, given the history of SCT turning silk purses into sows ears. Surely it would take multiple setbacks for the FY 2011 net surplus to be just $5 million [EPS 15.8c, dividends 9.5 cents/share @ the current payout rate of 60% EPS]?

Turning to a couple of Snoopy's particular anxieties....

The comment at the AGM about the SCT price was made by the chairman. The relevant paragraph from the chairman's address was:

Finally, to our shareholders, I am please [sic] the Directors are repaying the confidence you have shown with dividend payments and a share price that more truly reflects the intrinsic value of the company's world class reputation.

This reads to me like something scribbled down on the way to the meeting, and the product of a jaded mind. I took "more truly" to suggest that the 120 as of the AGM - which had then-recently been manipulated down from 140 - was closer to realistic than the 70 odd of early 2009. By the way, how about the chairman's valuation metric, the intrinsic value of the company's world class reputation? And this from a beancounter!

Snoopy suggested that the directors had not topped up their holdings after the release of the annual results. They topped up on 9 December 2010, the day after the AGM. Each of the 5 purchased 1,165 shares at 121. The Secretary/CFO purchased 1,163 @ 121. All these purchases were made off market, which is intriguing.
Incidentally, none of the directors seems to have taken shares under the DRP, rather than cash.

[Snoopy]

Snoopy suggested that the directors had not topped up their holdings after the release of the annual results. They topped up on 9 December 2010, the day after the AGM. Each of the 5 purchased 1,165 shares at 121. The Secretary/CFO purchased 1,163 @ 121. All these purchases were made off market, which is intriguing.
Incidentally, none of the directors seems to have taken shares under the DRP, rather than cash.

Thanks for your comforting words Under Surveillence! I feel a lot better about remaining a long term shareholder, and I would challenge others to make me feel even better!

Perhaps I was a little vague when I said the directors hadn't topped up. What I meant was the directors hadn't topped up by buying 'on market', as they had after previous results. In fact the way I read things all of the directors took part in the DRP. That explains why they acquired such strange numbers of shares. But why wouldn't you take part in the DRP when you found those shares were given away at such a substantial discount!

SNOOPY

[Snoopy]

If you have a big parcel to sell in a hurry, this is where brokers can in fact be quite useful as they have access to buyers with big purchasing requirement due to constant cash inflows and a good broker could unload a few % of the total SCT shares in a couple of days at a pretty good rate, albeit at some discount to the current sp.

'Discount' doesn't feature in my sales strategy Belg! Problem is there is a dearth of institutional investors on the SCT share register, so few 'big buyers'. My 'big sale' was close to a minimum parcel in brokerage terms, and it took a month to sell - albeit at 'my price'.

SNOOPY

[Under Surveillance]

Thanks for your comforting words Under Surveillence! I feel a lot better about remaining a long term shareholder, and I would challenge others to make me feel even better!

Perhaps I was a little vague when I said the directors hadn't topped up. What I meant was the directors hadn't topped up by buying 'on market', as they had after previous results. In fact the way I read things all of the directors took part in the DRP. That explains why they acquired such strange numbers of shares. But why wouldn't you take part in the DRP when you found those shares were given away at such a substantial discount!

SNOOPY

You've lost me, Snoopy. The off market purchases at 121 on 9 December don't seem to tie in with the allocation of shares under the DRP at an issue price of 109 on 3 December.

Further, elections to take part in the DRP had to be lodged by 29 November, and the sales on the NZX which mattered in arriving at the 109 took place 30 November to 2 December. The directors could not properly know upon electing what the weighted average sale price, to which was applied the 10% discount, would be.

The number of beneficially-owned shares held by the directors at 31 August 2010 ranged from 49K to 275K. It seems far fetched that they would put their heads together and decide to take differing percentages of dividend entitlements in shares so each would receive 1,165 DRP shares.

[Snoopy]

Perhaps more interesting is that contrary to what I said before the directors look like they took their cash dividend rather than reinvest in new shares via the DRP.

No, I was right the first time (even if my reasoning was wrong). Most of the directors did in fact acquire shares under the DRP. Slothfully, they only notified this fact to the market today, nearly eight weeks after the event!. Perhaps unsurprisingly, the market took this well with SCT shares up again today.

SNOOPY

[Snoopy]

Snoopy, I too am very confused as to why you'd be selling now.

If I was holding any I'd not be selling. The 1.42 resistance level is sure to be breached. (I think I have this right, some sort of wedge formation with higher lows and all that.) And we have another 18-48 months until the midpoint of the current economic cycle.

I see now someone is trying to offload some SCT shares at $1.35! Now that really is puzzling, even to me. Someone playing the (late) arbitrage game? If not I suggest that shareholder checks themselves into Rocklabs in Auckland. I am sure that Rocklabs would oblige with a 'free analysis', of the rocks in that shareholders head!

SNOOPY

[percy]

I see now someone is trying to offload some SCT shares at $1.35! Now that really is puzzling, even to me. Someone playing the (late) arbitrage game? If not I suggest that shareholder checks themselves into Rocklabs in Auckland. I am sure that Rocklabs would oblige with a 'free analysis', of the rocks in that shareholders head!

SNOOPY

Only 2000 shares for sale at $1.35.

[Under Surveillance]

No, I was right the first time (even if my reasoning was wrong). Most of the directors did in fact acquire shares under the DRP. Slothfully, they only notified this fact to the market today, nearly eight weeks after the event!. Perhaps unsurprisingly, the market took this well with SCT shares up again today.

SNOOPY

Well done, Snoopy. You were well ahead of an (un)informed market with that one! NZX today posted SCT's announcements, dated 19 January, that 4 of the 5 directors took shares under the DRP on 3 December @ 109. NZX should have received notice of these acquisitions within 5 trading days. But hey, 29 trading days isn't too bad; holiday season and all that, even a tut tut would be over the top.

[Snoopy]

SCT have world class intellectual capital. When they can harness that into sales and at how high a margin is where the uncertainty exists.

Interesting diversification into superconducting magnets for SCT. Angel investors selling down to make way for a company with a bit of business nous (SCT) to move in. But SCT will have control. A much riskier diversification that Rocklabs I think. Earnings positive from day one sounds good. But will the new acquisition be 'eps' positive after the upcoming cash issue? No one is answering that question!

SNOOPY