SCT - Scott Tech

[Snoopy]

A slightly cheeky offer in the mail has arrived for some SCT shareholders.

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UNSOLICITED OFFER BY ZERO COMMISSION NZ LIMITED
It has been brought to our attention that a company called Zero Commission NZ Ltd has written to
Scott Technology Limited (“Scott”) shareholders who hold less than approximately 1,300 shares in
Scott with a conditional offer to buy their Scott shares for $1.50 per share.
The Scott Board does not endorse this offer.
Zero Commission NZ Ltd made a request to be provided with a copy of Scott’s share register in
accordance with the Companies Act 1993 and this was provided to them, as we are required to do by
law.
The last share trade on 17 February 2012 was at a price of $1.66 per share.
We recommend that shareholders seek independent financial or legal advice if they are uncertain
about this matter or are contemplating selling their Scott shares. Shareholders are under no
obligation to accept the offer or to take any action in respect of it.
Scott is listed on the NZSX (code SCT) and shareholders are able to trade their shares through this.

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"Zero Commission NZ" is a vehicle owned by long time sharemarket investor Phil Briggs. You would have to think that Briggs has done his homework. If he thinks it is a good idea to buy SCT shares, then why would it be a good idea for you to sell to him? Be careful out there fellow shareholders.

SNOOPY

[Under Surveillance]

The Zero/Briggs offer will be made to around a third of SCT shareholders, I infer from the sizes of holdings shown in the last annual report (28% of holders then held less than 1,000 shares, collectively just over 1% of the total number of shares).
Having warned small holders off transactions with Zero/Briggs, SCT would do well to construct a scheme whereby it will buy back holdings of the size targeted by Z/B at a fair price, free of brokerage. Say 165, as of this moment.

[Snoopy]

The Zero/Briggs offer will be made to around a third of SCT shareholders, I infer from the sizes of holdings shown in the last annual report (28% of holders then held less than 1,000 shares, collectively just over 1% of the total number of shares).
Having warned small holders off transactions with Zero/Briggs, SCT would do well to construct a scheme whereby it will buy back holdings of the size targeted by Z/B at a fair price, free of brokerage. Say 165, as of this moment

I would argue that smaller SCT shareholders should enroll in the dividend reinvestment plan. That would be a way of building up their holding to a more significant level. Management has already done the best thing for them by putting this plan in place.

SNOOPY

[Under Surveillance]

That wouldn't make sense with either their robotics or appliance line businesses. SCT is a skill dependent business and it would take years, even decades to train up a Chinese workforce to replace what they have in Christchurch and Dunedin.

However, with the newly acquired electromagnet business and some of the more more 'standard product' coming out of Rocklabs in Auckland, perhaps moving some production to China might make sense.


SNOOPY

Snoopy, here is an item which gives insight into the nature of SCT's activities in China.

http://www.asianz.org.nz/our-work/ac...ott-technology

[Lizard]

Half year result out. First glance looks fair enough. Increased div, although would like to see more free cashflow behind it.

I finally bought a few the other day, despite meaning to put it off until closer to FY result, (due to the unusual forex gains in last years result that probably won't be repeated). It's one of the small pool of NZX shares I've never owned before. Mostly I just think they are in an interesting sector and still looking reasonably priced, with a history of divs.

[Snoopy]

Half year result out. First glance looks fair enough. Increased div, although would like to see more free cashflow behind it.

I finally bought a few the other day, despite meaning to put it off until closer to FY result, (due to the unusual forex gains in last years result that probably won't be repeated). It's one of the small pool of NZX shares I've never owned before. Mostly I just think they are in an interesting sector and still looking reasonably priced, with a history of divs.

Welcome aboard Liz. Cashflow with SCT is usually lumpy because of the big block nature of their projects. There is a significant chunk of 'other income' in this half year result which I can't quite pin down, but it seems this was in the last half year result as well.

Didn't like that comment about demand for appliance lines being non existant in Europe. SCT usually a leading indicator so the fall out from Europe in general could yet be far worse than we all fear.

SNOOPY

[Lizard]

Thanks Snoopy. Yes, it is the lumpy nature of this type of business that usually keeps me away. However, have often thought that automation/robotics would eventually have to replace the "outsourced slavery" of a third-world Asia. There are increasing triggers in place to make that happen, although the pace of change is unpredictable and could be very slow.

A rise in automation has many consequences in terms of market winners and losers - and, as with all structural shifts or "game changers", there will probably be more money made in those companies able to achieve greater competitiveness of operations as a result rather than from those companies who carry the investment load of developing the technology. However, in SCT's case, they have established a niche and a range of core technologies, so I am hoping they are a fairly low risk entry to what could become a buoyant sector.

Of course it could still be that betting on high sector margins and growth in automation and robotics is as pointless as betting on a rise in green-energy has been. A love of science seems often a hindrance to sensible investment!

[Snoopy]

Yes, it is the lumpy nature of this type of business that usually keeps me away.

I have read through the eagerly awaited detail in my half-year report. There were a couple of surprises in there in the ‘segment information’ (p11).

Scott Technology splits their operations into ‘standard equipment’ and ‘automated equipment’ for accounting reporting purposes. This slightly annoys me because ‘standard equipment’ covers mining sampling equipment, meat processing robotics and now super-conductive electromagnets. I don't see the same market synergies in these that management do. Lumping them all together, in my view, does not give a good view of how SCT is doing on an operating divisional basis. Nevertheless reading between the lines one can get a reasonable insight as to what is happening.

On superconductors we learn (p2)
“A small positive contribution before reinvestment research and development was recorded by HTS-110 in this half year.”
This almost certainly means the superconductor division is losing money. However I am not too worried by this given:

1/ the relatively early stage of product development,
2/ the need to keep ahead of potential global competitors and
3/ other commercial applications that can be developed from the technology that exists already.

The other ‘standard equipment’ sales are largely delivered through joint ventures.

Robotics Technologies, the meat processing robotics venture with Silver Fern Farms, contributed a Scott Technology six-month share of profit of just $124,000. There was a nil contribution from the corresponding Australian meat robotic joint venture. Other joint ventures were ever so slightly negative with cumulative losses under $NZ100,000.

Al this means that ‘standard equipment’ profit is almost all attributable to ‘Rocklabs’. $3.57m for the half year from this business unit is over 80% of last year's full year result. Profit growth on the equivalent half-year result last year was over 100%! SCT directors must be so grateful that Rocklabs founder, Ian Devereaux, approached the company to become his succession plan.

Meanwhile over at ‘automated equipment’ (translation: ‘appliance manufacturing production lines’) a $422k profit on the equivalent half year has reversed this half into a $432k loss. Ouch! However I do note that there is over $6m of contract work in progress on the balance sheet (c.f. none in the equivalent period last year). This implies that for the full year, notwithstanding the poor outlook for Appliance Lines in Europe and America, I do expect ‘automated equipment’ to be near to break even for FY2012. The fact that SCT have sent their head of appliance systems on secondment to China, where the inquiry level is good, suggests they are very serious about moving this part of the business back into profitability.

OK, time for me to stick my neck out. Barring some disaster at Rocklabs, I predict the full year net profit at SCT will be near to $7m. That would equate to a net profit of some 30cps and an historic PE of 5.5 (based on a share price of $1.65). Look for the SCT share price to track up to $2 by Christmas.

SNOOPY

[Under Surveillance]

There are 40.3 million shares out, Snoopy, which upsets your arithmetic. 200 by christmas would represent a PE of 11.4 (with 40.3 million shares issued). However, shares issued under the current DRP, and an assumed full year DRP, could take the December towards 42 million, with which the PE would be close to 12.
For mine 12 would be a fully appropriate PE for a company with SCT's record over the last few years, assuming the $7 million is in the bag.

[macduffy]

Joint Venture with XRF announced.

http://asx.com.au/asxpdf/20120427/pd...vgtbpr71z4.pdf

I don't hold either company but take a mild interest in XRF, a company that I wouldn't be surprised to see my old friend CPB have a crack at, some day!