SCT - Scott Tech

[Snoopy]

Percy wrote on the Methven thread
"SCT has also turned up. Must admit I am puzzled."

Percy, traditionally SCT has turned up early in the economic cycle. That is because they benefit from the lead time that an appliance manufacturer must build in to the launch of a new appliance production line. It is only when the new product is lauched that the consumer will start spending, But SCT gets paid a couple of years before that.

My guess is the upturn is because the US economy may be looking stronger in two years time, so SCT benefits now.

I am not so sure that this effect still holds as strongly, now only half of the company's business is in the traditional appliance line production area.

Of course the other way to look at this is to say the last 'downturn' (from $1.80 to $150) was caused by the JI Urquart Family Account substantial shareholder dumping around 4% of the company on market. With a big parcel like that and a relatively illiquid share, the price has no choice but to go down. I would argue that this last downturn was irrational. The recent price action is only restoring the share to where it should have been all along.

SNOOPY

[Snoopy]

From the RobotWorkx acquisition NZX announcement:

"The acquisition is for an initial consideration of US$5.4 million, funded by a combination of bank debt (US$4.5 million) and 646,301 shares in Scott (US$0.9 million) issued to the vendor. An additional 1,648,068 shares in Scott (representing further consideration US$2.3million) will be issued to be held under an escrow arrangement and to vest with the vendor over a period of three years if specified earnings targets are achieved. The shares have been issued at NZ$1.6157 per share, the volume weighted average price for the 5 days prior to settlement.

Closer examination of the SCT balance sheet (AR2014 p22) shows that the debt to acquire Robotworx and the Rocklabs property have resulted in substantial term and current debt being recorded.

Bank Overdraft	$6.258m
Current Portion of bank loans	$0.982m
Non Current Portion of bank loans	$7.442m
Total	$14.682m

Based on a normalised profit of $2.480m, this gives a minimum debt repayment time of:

$14.682m/$2.480m= 6 years

That is manageable, but certainly not low. What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!
I wonder what ex Chairman Graeme Marsh would say?

SNOOPY

[Snoopy]

What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!

Money borrowed is tax deductable. That means the after tax interest rate paid on overdraft by SCT is:

0.72 x 11.4% = 8.2%

At a share price of $1.70, SCT is on an FY2014 dividend yield of:

(2.5c+5.5c)/170 = 4.7% (net, after tax)

So the cost of paying you, an SCT shareholder, an annual dividend of 9c, will decrease your share of SCTs cash balance by (8.2/4.7) x 9c = 15.7c.

Shareholders get their 9c dividend in their bank account (great to have that in the right pocket), but to do that SCT have had to pull 15.7c out of you left pocket. Great eh?

SNOOPY

[Lizard]

Not so sure about this agm. Although it seems an exciting business, it is difficult to get a sense of profit growth in the immediate future. However, at some point, the exchange rates will be in their favour again and the underlying historic growth in sales may be reflected in some catch-up growth of the bottom-line.

[percy]

With SCT needing to come back to shareholders for more capital, I don't think you will see any sp growth for sometime.

[Snoopy]

With SCT needing to come back to shareholders for more capital, I don't think you will see any sp growth for sometime.

And yet the share price is up 1c today. Perhaps investors have not taken in that they will be reaching into their pockets for 'quite a few dollars' early in 2015? Or maybe a new mindset has taken over. Technology investors 'get' the latest expansion into Australia as part of a global strategy to conquer the robotics market in the Pacific rim? And maybe they like the fact the new acquisition is 'profit accretive' from day one?

SNOOPY

[Snoopy]

Chairman Stuart McLauchlan welcomed shareholders with an international political and economic perspective of where Scott Technology’s markets are headed. Following this, CEO Chris Hopkins highlighted the progress being made in different industry areas in which the company operates.

The star of FY2014 was ‘Appliance Line Manufacturing’. Seven production lines were shipped, four for installation in the USA. Two of these lines were parallel production lines. That allowed higher profit margins. Shareholders were shown a video of a hot water cylinder production line designed and installed for Haier in China. During the contract brief, it became apparent there were some design issues with the hot water cylinder. Scott Technology doesn’t advertise itself as product developer. Yet they do have this capability, and Scott’s were able to partner with Haier to both design and build a better product.

Meat line automation equipment continues to hold promise. The most prolific installations are beef boning units. Forty-six beef boning units are installed globally. Improvements to yield from a beef carcass are worth three to four dollars. Payback on such equipment is less than twelve months.

‘Rocklabs’ was 50% down on turnover year on year. Exploration has slowed globally. Nevertheless, the big producers like BHP and Rio Tinto are still producing. In FY2014, ‘Rocklabs’ supplied part of an ‘automated grade benefication’ iron ore plant. This was a first for the division. ‘Rocklabs’ are adapting to the new global mining environment.

‘Robotic Technologies’ is building a multi in country capability to expand what has up until now been a team servicing the world from just their Dunedin headquarters. Robotworx, based in Ohio USA, is sited in the heartland of American manufacturing. It is within 250 miles of 95% of the robotic industrial production lines in the USA. Australia will be similarly served soon.

Hopkins told shareholders the HTS-110 superconductivity project, recently bought 100% in house, is proving difficult to commercialize. The most serious impediment is the prime customer target base, overseas universities, are at cyclical lows in terms of the funding cycle. This I interpret as executive code for this business unit being in some difficulty.

A second installation of the cup-attaching robot for milking sheds has been completed. Milktech development was slowed by the cyclical nature of the milking industry. A seasonal industrial has reduced time for trialing.

Back to a more general overview of all the business units. 60% of industrial robots purchased in 2014 were purchased around the Pacific rim. Most of those were in China. This is driving a planned move to larger premises in China.

SNOOPY

[Snoopy]

A shareholder questioned the segment reporting under the broad umbrellas of ‘automated systems’ and ‘standard systems’. This has been the case since 2007 (when Rocklabs was acquired) and the business has become involved in many more industries since. In particular, there was no profitability disclosure in the industry information. CEO Hopkins noted that, yes Scott’s had moved into other industries. Nevertheless, operationally, they remained an ‘industrial robotics’ company. All work-sites could contribute to all projects. Moreover, work could be, and on occasion was, distributed across different sites. ‘Automated systems’ and ‘Standard systems’ was still a representative breakdown of how the company operates. Finally, Chairman McLauchlan noticed Scott’s work in ‘competitive markets’. That meant that further industry group disclosure might give more away to competitors than shareholders would gain.

A shareholder asked about potential patent infringement because of the expansion of business in China. CEO Hopkins noted that patents were becoming more respected in China. Hopkins added that the patent protection process meant that for a modest cost (some $2500) 2.5 years of global patent protection was available. During this time, Scotts could evaluate the importance of particular patents in different markets. Scotts would formalize their patents only in what they deem as important markets. Global protection could cost some $25,000. However, a patent for Australia and New Zealand might cost just $2,500. The total ‘patent protection bill’ for the year was of the order of $100,000. In addition, those patents in the meat industry joint ventures were jointly funded by Scott’s and their industry partners.

During the year, Scott’s claimed that a potential infringement of some meat industry patents occurred, not in China, but in Europe. This involves a Dutch company supplying equipment to a Danish company. Compensation is under investigation.

Over the years, there has been a rapid increase in the value of the Intellectual Property patent portfolio. All has been expensed and so is ‘off balance sheet’.

Scott considers that trademark protection was equally important as patent protection. Trademark protection is cheaper and easier to protect than patents.

SNOOPY

[Snoopy]

A shareholder questioned the segment reporting under the broad umbrellas of ‘automated systems’ and ‘standard systems’.

Just what is a 'standard system'? I have never been sure. Some clarity was shone on this in the CEO presentation. Under the 'Project Activities' slide we got:

Standard Equipment Revenue
Mining Sector Equipment	$10m
Mining(Reference Materials)	$2m
Australia Meat Equipment	$3m
Robots & Robot Cells -USA	$3m
China Manufacturing	$3m
Total	$21m

That ties in with the $21.239m of 'Standard Equipment' revenue on p49 of the annual report.

SNOOPY

[Snoopy]

SCT plans a cash issue for early 2015. The purchase of Machinery Automation and Robotics (MA&R) in Australia will be cash positive from 31st January 2015, the proposed deal date. The cash issue will pay for MA&R. It will also fund other purchases made over FY2014, the largest being Robotworx in the USA. Bank debt on the FY2014 balance sheet is listed as:

$6.258m + $0.982m + $7.442m = $14.682m

Add that to the $A13m ($NZ14m) acquisition bill for MA&R, and the potential size of the capital raising could be up to $30m. The current market capitalization of SCT is around $70m. So this proposed cash issue is significant: A 1 for 2 share offer at $1.20 would raise $26m. For potential new SCT investors, the coming rights issue looks to be a smart time to buy into the company at a good price! Since listing 0n the NZX in 1997, SCT has grown, but has had a dividend to earnings payout ratio of 70%.

SNOOPY