SCT - Scott Tech

[Under Surveillance]

Thanks for the report, Snoopy.

Did the AGM presentations and aftermatch function give you confidence the board/CEO know what they're doing? The comments on the robot for dairy sheds suggest they are bunnies as to the fundamentals as to the dairy season, after many years developing the robot, and I wonder whether they are grounded as to realities elsewhere. It's all very well buying businesses left right and centre, but the sole buy of recent years which is obviously a good one seems to me to have been Rocklabs (a cracker).

[Snoopy]

Hope I haven't blown the faith US. Here is another angle on valuing SCT, based on dividend payments alone.

It is not an easy job to value a share with a patchy earnings history. As a long-term investor I am always interested in the dividend yield over the business cycle as a return that is very tangible. In mom and pop investor terms, this is the cash in bank account received by the long-term investor.

I favour looking at ten years of operating result history. This is a compromise between averaging out over the business cycle and dropping payments from so long ago that they are no longer indicative of today.

For Scott Technology, I have added together all of the dividends paid in each current financial year ended 31st August. In annual terms from FY2011 looking backwards the dividends paid out were as follows:

6.0, 1.8, 0, 4.4, 4.4, 0, 9.5, 10.2, 8.5, 2.9

That comes out to a grand total of 47.7cps over ten years. I should note that the per-share earnings have been retrospectively adjusted to reflect the number of shares on issue today. Significant changes in the number of shares without the addition of any cash earning business unit were as follows:

1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
3/ A 1:8 bonus issue on 4th December 2003
4/ A 1:8 bonus issue on 8th December 2002

Assume a Scott Technology share price of $1.65, and an average annual over the business cycle cash payout of 4.77cps

4.77c/$1.65= 2.89% net = 4.1% gross

That compares favourably with term deposit rates in this current low interest rate environment. Therefore I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline for any less than $1.65, for no improvement in cash return. For me $1.65 has become the bottom line indicative price that I would consider selling at.

Scott Technology is unusual on the NZX: A high technology company that makes a profit and pays a good dividend. Notice I said ‘makes a profit’ not ‘makes a consistent’ profit. Despite diversification over the last seven years, Scott Technology has a patchy earnings and an inconsistent dividend record.

My favoured way to look at a company with ‘inconsistent dividends’ is to try and take an overview over a full business cycle. I choose ten years as a reasonable full business cycle to consider.

Starting with the December 2010 full year dividend, shareholders have had the option of participating in a dividend reinvestment plan. This has increased the liquidity of shares and incrementally increased the capital of the company. But it also has had the effect of diluting earnings per share. Because we live in 2014, I find it necessary to discount prior year dividends per share to take account of this. Also taken into account are:

1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010

In tabulated form my adjusted dividend data is calculated as follows:

Financial Year	Dividend Declared	Adjustment Factor	AdjustedDividend	Rocklabs Addition
2015(est)	8.0	1.0	8.0
2014	10.0	41.122/44.009	9.3
2013	8.0	40.689/44.009	7.4
2012	7.0	39.721/44.009	6.3
2011	5.25	31.322/44.009	3.4
2010	1.00	28.475/44.009	0.6
2009	0.00	N/A	0.00
2008	9.00	24.964/44.009	5.1	0.16
2007	0.00	N/A	0.00	0.16
2006	4.0	24.964/44.009	2.3	0.16
Total			42.4	0.48

That comes out to a grand total of 42.9cps over ten years.

4.29c/0.7= 6.1cps (gross)
6.1c/$1.65= 3.9% gross

That compares favourably with term deposit rates in this current “low interest rate” environment. Therefore, I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline. The earnings of the automated milking system and even the meat industry robotics are not reflected in the earnings/dividends that I have quoted. Think of SCT as a bank debenture quantum interest return, complete with a series of free lottery tickets in the emerging technologies I have described. That’s why I believe SCT is –still- the best technology investment on the NZX

SNOOPY

[Snoopy]

Thanks for the report, Snoopy.

Did the AGM presentations and aftermatch function give you confidence the board/CEO know what they're doing?

I think the board know what they are doing and are going down the path of a consistent strategy to build a leading Robotics business Under Surveillence. One thing I like about both the Robotworx and MAR businesses acquisitions is that existing senior staff are staying. In the case of MAR I got the impression they had built up a good rapport with management over some years. I also like the fact that both of these businesses are 'earnings accretive'.

The comments on the robot for dairy sheds suggest they are bunnies as to the fundamentals as to the dairy season,

In fairness Milktech is a joint venture with a couple of high profile real farmers. Possibly SCT's managment had a different timeline of expectation of progress than their fellow farmer shareholders!

after many years developing the robot, and I wonder whether they are grounded as to realities elsewhere. It's all very well buying businesses left right and centre, but the sole buy of recent years which is obviously a good one seems to me to have been Rocklabs (a cracker).

Rocklabs has certainly been the best of the diversification acquisitions, even if this year they have fallen on harder times. The high temperature superconductor business may end up being the worst. But I don't think you can expect a company like this to take no risks and get everything right.

My one doubt is that I come from a background where 'customer focus' has always been important. My impression is that SCT are more 'internal process focussed'. OK what we have here is a very specialised business. But I do wonder home much of the back workshop activity is to satisfy engineers dreams rather than building customer focussed systems on time and very importantly for shareholders 'on budget'.

SNOOPY

[ace5715]

As a note about the productions lines for Haier, the hot water cylinder project it's self was a sub contract to Fisher and Paykel, via their PML or Production Machinery Limited division. The washer cabinet line for China was also a sub contract to F&P.

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.

[Snoopy]

With Fisher and Paykel now owned by Haier Scott's will struggle to get direct sales from Haier who they have previously worked for.

As a note about the productions lines for Haier, the hot water cylinder project it's self was a sub contract to Fisher and Paykel, via their PML or Production Machinery Limited division. The washer cabinet line for China was also a sub contract to F&P.

Thanks for this clarification Ace.

In light of one of your previous posts on this thread (first quote above) you must be surprised at how Scott's have wangled their way back into servicing Haier, even if it is through a sub contract! Do you have any insight as to how have Scott's been able to achieve this, given that in the past PML would have surely handled this work in house? Are you subtley suggesting that the PML division within Haier's sudsidiary Fisher and Paykel Appliances is having their capability being run down?

SNOOPY

[Snoopy]

I think the board know what they are doing and are going down the path of a consistent strategy to build a leading Robotics business.

I am always on a quest to identify hidden advantages and assets. Chris Hopkins presentation showed a cumulative chart of patents granted by the year. It is not entirely surprising to me that most of these (21 out of a total of 30) are in relation to RTL (Robotic Technologies Limited), th joint venture with Silver Fern Farms. It is also of note that no patents at all have been applied for through NS Innovations, the joint venture through teh Northern Co-operative Meat Company in Australia.

The meat processing robot divisions have earned very little for SCT so far. But all patents have been expensed. You could argue that the patent portfolio is a latent profit bank kept off the books. If each patent had cost $25,000, that amounts to just over $0.5m of assets. Based on 44m shares on issue, that amounts to 1.1c per share that is not on the books.

That compares to a declared NTA of $47m/44m = $1.07 (based on 44m shares on issue)

SNOOPY

PS Other patents granted to date: Scott Milktech 4, High Temperature Semiconductors 1 (I am surprised it is that low), and Scott Engineering in general 3.

[Under Surveillance]

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

A $26 million raising strikes me as an impossible ask.
The SCT 2011 capital raising involved 7.9 million new shares offered at $1.20 each, with entitlements on a 1 for 4 basis, to raise $9.5 million.
You moot an early 2015 capital raising involving 22 million new shares at $1.20 each, with entitlements on a 1:2 basis, to raise $26 million.
The 2011 raising was on the back of FY 2010 NPAT of $2.8 million, and H1 2011 NPAT of $1.6M
An early 2015 raising would be on the back of the FY 2014 NPAT of $3.0 million, including H1 2014 NPAT of $0.8M.
Even a 2015 offer with entitlements on a 2:5 basis at $1.00 to raise $17M might be too ambitious.

[ace5715]

Thanks for this clarification Ace.

In light of one of your previous posts on this thread (first quote above) you must be surprised at how Scott's have wangled their way back into servicing Haier, even if it is through a sub contract! Do you have any insight as to how have Scott's been able to achieve this, given that in the past PML would have surely handled this work in house? Are you subtley suggesting that the PML division within Haier's sudsidiary Fisher and Paykel Appliances is having their capability being run down?

SNOOPY

Not surprised as they were sub contracting to PML, PML is actually growing and were full to capacity otherwise the jobs would of been done in house. Giving the job to Scott's I believe was about PML keeping control of the work and keeping the work in New Zealand and the work not being given to another supplier (not Scott's more than likely a European machinery supplier).

The other point to be made is that PML and Scotts while they have always competed for the same work from the various appliance manufactures have different skill sets and expertise. Scotts have had more recent hot water cylinder line experience as they did a very similar line for Dux Australia a year or so ago and Washer Cabinet lines have also been a strength of theirs, PML "specialise" in different machinery.

I don't see them getting direct work from Haier, only the work PML allows them to do as a sub contractor due to PML capacity restrictions. Certainly not suggesting that PML are being run down but there are only a limited amount of people you can employ with the skills to do the job. The job market for good mechanical designers, control systems engineers and mechanical fitters is very tight at the moment.

[Snoopy]

A $26 million raising strikes me as an impossible ask.
The SCT 2011 capital raising involved 7.9 million new shares offered at $1.20 each, with entitlements on a 1 for 4 basis, to raise $9.5 million.
You moot an early 2015 capital raising involving 22 million new shares at $1.20 each, with entitlements on a 1:2 basis, to raise $26 million.
The 2011 raising was on the back of FY 2010 NPAT of $2.8 million, and H1 2011 NPAT of $1.6M
An early 2015 raising would be on the back of the FY 2014 NPAT of $3.0 million, including H1 2014 NPAT of $0.8M.
Even a 2015 offer with entitlements on a 2:5 basis at $1.00 to raise $17M might be too ambitious.

Yes, well the ODT report on the AGM

http://www.odt.co.nz/news/business/3...g-acquisitions

quoted

"Craigs Investment Partners broker, Peter McIntyre, said a capital raising would ''test shareholder confidence''."

Going back to the Chairman's address where this capital raising was announced:

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"The transaction has a value of AUD$13 million, subject to final adjustment, and is expected to contribute to the bottom line from day one."

"The purchase will be funded by bank borrowings and the Board will consider a capital raising in 2015 to reduce the company’s borrowings following this proposed acquisition and the recent acquisition of RobotWorx in the US."

-------

I was thinking along the lines of Scotts of old, where there was a policy of no term debt. It is possible that now the company is more diversified they will consider that some long term debt is appropriate. So maybe my suggested capital raising amount is too high?

Still, I don't see the board 'considering a capital raising' then not doing it. MAR will cost $A13m ($NZ14m) overall. Robotworx cost $US4.5m ($NZ6m) in debt. So if SCT are going to just pay off that debt associated with those two purchases only (reading the Chairmans words carefully) , then "only" $20m in new capital will be required. I guess they could get away with raising $10m. Yet even $10m is quite a large capital raising for SCT judged in historical terms.

My conservatism on debt is being influenced by the profits Scotts have managed to squeeze from industrial robotics so far. To be frank I would judge the profitability of SCTs foray into robotics so far as marginal.

SNOOPY

[Snoopy]

The meat processing robot divisions have earned very little for SCT so far. But all patents have been expensed. You could argue that the patent portfolio is a latent profit bank kept off the books. If each patent had cost $25,000, that amounts to just over $0.5m of assets. Based on 44m shares on issue, that amounts to 1.1c per share that is not on the books.

I have just clicked that all the meat processing robot stuff is a joint venture. SCT only owns 50% of it. So the patent value offf the SCT books is only 0.55cps. I see CEO Hopkins AGM point though. However, way you look at it, $1.1m or $0.55m seems a paltry amount to pay to protect a product line with so much potential. Mind you, I don't suppose finding a lawyer in the Netherlands and going through the Dutch court system will come cheaply!

SNOOPY