SCT - Scott Tech

[Snoopy]

No doubt the board genuinely regrets the way the employee shareholders who still hold have fared with the value of their shares. When it comes to large shareholders, however, regret becomes obsession. The board is beside itself that large shareholders can’t sell down their holdings without knocking down the market price for SCT shares (meantime the existence of these overhangs itself places downwards pressure).

This obsession is, I think, at the core of the board’s motivation to cosy up with JBS in the proposed scheme, after large shareholders turned their backs on a regular rights issue and institutions didn’t want to deal, and the board had promised for months to be about to announce something. The JBS arrangement is set up for substantial holders, possibly including Oakwood Securities (Marsh) with 5.4 million shares and Urquhart estate with 3.4 million shares, to sell down or out at a guaranteed $1.39. No matter that Oakwood Securities rode their shares up to the mid $2.80s in early 2013, at which point large parcels might have been quit at a discount in a strong market. No matter that no-one forced the large shareholders to become so. No matter that no renounceable rights issue has been tried and failed.

U.S. at the investor roadshow, it was announced that Oakwood Securities are in. The Urquart Estate wants out - that is well known. The other crowd that wants out are Fisher Funds (probably). Fisher Funds inherited their holding as a result of buying out Tower Asset management. However Fisher's have not made up their mind - finally (I guess the voting paper isn't in). Reading between the lines I would guess Fisher don't really understand what they have got with Scott Technology, which is why they are ambivalent at best.

SNOOPY

[Snoopy]

I don’t fault JBS for pursuing the deal which the SCT board proposed to them. If the SCT board believe that $1.39 is fair, and will get 75% voting support, why should JBS offer more? If the SCT board believe that the deal will be get 75% without JBS limiting its flexibility when in control, why should JBS tie itself in knots?

This is not an instance where a big multinational has used stealth or force to ravish a NZ company, rather one where a mediocre board has solicited action, consented to it, and bent the company over.

Hot from the roadshow U.S. Stuart McLauchlan said the board were very disappointed with the $1.08 to $1.26 valuation. They went back to Northington's and said:

"Hey all of this R&D is for the new stream of growth businesses coming on stream."

Northington's rejected this argument. All the R&D was just a normal part of staying in business they said. So the valuation stuck. Remember that the board cannot force Northington's to change their opinion because then the valuation ceases to be independent. So this is why the board stuck the following 'qualifying' comments under note 39 of the directors recommendation.

"The directors believe that the Company has developed and will continue to develop intellectual property which may create future value that is not fully incorporated into the independent adviser's valuation range. If the Scheme of Arrangement is approved, the directors suggest shareholders need to be mindful of the Company's intellectual property and its possible value when considering their personal decision in relation to their shareholding in the company (for example in deciding whether to sell to JBS, hold or invest more by taking up the rights offer.)"

IOW the directors are saying the Northington valuation is a crock. It is just they can't come out and say it as bluntly as I can, for fear of upsetting the 'independent valuers' (Northingtons) that they engaged.

SNOOPY

[Under Surveillance]

U.S. at the investor roadshow, it was announced that Oakwood Securities are in. The Urquart Estate wants out - that is well known. The other crowd that wants out are Fisher Funds (probably). Fisher Funds inherited their holding as a result of buying out Tower Asset management. However Fisher's have not made up their mind - finally (I guess the voting paper isn't in). Reading between the lines I would guess Fisher don't really understand what they have got with Scott Technology, which is why they are ambivalent at best.

SNOOPY

Thanks Snoopy.
Clearly if Urquhart estate wants out it will vote for the JBS deal.
What does Oakwood being in suggest as to the way they will vote? Are they in to buy more at $1.39 (so, consistently, will vote for the deal), in to maintain their current holding (could vote either way), or in to put it up JBS (and vote against)?
Big volumes sold on market today, last day shares are cum div.

[Snoopy]

I see from Appendix 1 of the Northington report that JBS Australia has 11 processing facilities in Australia. From the presentation:

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Over the past two, JBS Australia and Scott have worked together installing an automated meat processing system for its lamb plant in Bordertown and elsewhere in Australia.

1/ The production line at Bordertown is running daily, at commercial line speeds (approx. 10 head of sheep per minute or approx. 8,000 per day). [Snoopy note: looks like two eight hour shifts per day]
2/ Rather than leading to redundancies, staff have been relocated to other parts of the plant, with consequent expansion in throughput.
3/Scott’s automation equipment is also operating at JBS’s Brooklyn plant (lamb) and beef plants at Dinmore and Beef City.

This reads as though Bordertown has 'full automation' and Brooklyn (lamb) and for Beef Dinmore and 'Beef City' (Toowoomba) are partially automated.

The JBS Australia Website lists the following processing sites:

Queensland: Dinmore, Beef City (near Toowoomba), Rockhampton, Townsville
NSW: Rivernia (rural NSW)
Victoria: Brooklyn, Cobram
Tasmania: Devonport, Longford
South Australia: Bordertown

Late in 2014, JBS acquired the 'Primo' group, specialising in smallgoods and bacon. Primo has two abbatoirs. One in Port Wakefield (South Australia) , and the other at Scone in the Hunter valley (NSW)

Nine of the above facilities process beef, and one pork. However JBS also processes lamb (Brooklyn) and goats.

A good lively presentation at the roadshow from Brent Eastwood, CEO of JBS Australia. It wasn't on the CV but he hails from Invercargill! So a true 'Southern Man' ,and a likeable guy.

I am still a little confused over how many meat processing plants (in the old freezing works sense) that JBS own in Australia. Go to http://www.jbssa.com.au and ten are listed. Yet under note 25 in the Scott's Scheme booklet there are eleven. But go to the map of Australasia in the JBS part of the presentation and there are fifteen, although that fifteen includes the recently acquired smallgoods plant in Carterton New Zealand. As Brent Eastwood was going through his slides he seemed to be updating numbers 'on the fly' as JBS's rapid growth in Australia oustripped the now historical graphic.

So: ten, eleven, fourteen - take your pick! For now I will stick with eleven as that is the number specifically stated in the Scheme booklet.

For future benefit purposes, I am going to say that one and one half of these 11 plants are now robotised, leaving 9.5 to go. A full robotised installation today (X-ray Primal & Grading, Middle, Forequarter and Hindquarter) will cost the customer (like JBS) $12m to $13m. Scott gives a 'payback guarantee' of 18 months. This payback is achieved via improved yield, because robotized cutting is more precise, and results in less waste that a 'human knife wielder'. Gains in productivity (because robots don't get tired) and fewer accidents (robots don't sue) are a bonus. JBS hasn't done enough trialling yet to know if the 18 month (1.5 year) payback will be achieved. But based on past experiece from other installations, I am guessing it will be.

So: 9.5 (no. installations in Oz to do) x $12.5m (average cost) = $120m that JBS will ultimately spend.

Annnual payback with everything up and running will be:

$120m /1.5 = $80m

JBS have indicated they will not be paying 'mates rates' for their installations, even if they become controlling shareholders of SCT (Do I believe that? I'll take the claim at face value for now).

So: Outlay $120m (a one off).
Savings over ten years $80m x 10= $800m

Net gain: $800m-$120m = $680m

Amount laid out to 'get to the top of the customer list' : $15.4m to $50.4m (depending whether 80% or 20% of share holders accept Scheme of Arrangement).

Worst realistic case return for JBS over 10 years (calculation slightly quick and dirty, because not all installations will be installed at year one, but then again neither will all the outlay be paid in year one- but still indicative) :

$50.4m(1+r)^10= $680m

r=29.7% compounding!

This is simply a staggering return on investment. No wonder JBS Australia are keen to seek a controlling position in SCT at what, in investment terms, is an incredible bargain basement price.

SNOOPY

[Snoopy]

A good lively presentation at the roadshow from Brent Eastwood, CEO of JBS Australia. It wasn't on the CV but he hails from Invercargill! So a true 'Southern Man' ,and a likeable guy.

A report on the Dunedin roadshow can be found here.

http://www.odt.co.nz/news/business/3...-grow-jbs-says

One thing that puzzled me was point 15 in the literature, the first point under the sub header:

Q"Why is the Scheme of Arrangement being proposed?"

A "...it could open up additional opportunities for the company for growth internationally."

Given Scott's success internationally already with the Australian Lamb Company (ALC) and JBS itself (in Australia and Brazil) and the Northern Co-operative Beef Company (Australia), Scott's didn't seem to have any problem getting meat industry work overseas right now. CEO Brent Eastwood,of JBS Australia, provided the answer:

"With JBS being the second largest food company in the world, everyone follows what we do." "When a corporate level food deal is done worldwide, the name JBS is brought up even when the promotors of the deal know that JBS is not part of it, because just the mention of the JBS name garners world attention, and therefore interest from industry rivals."

Scott's have already applied for resource consent to extend their Dunedin operation. Whether this will be granted, due to possible affects on the Kaikouri valley stream behind the existing building is uncertain. Funding permitting, the plan is to upscale meat industry robotics so that it can supply 5 to 10 systems per year rather than the one or two it does now. Apparently next to Rocklabs, the fully developed meat industry robotic technology is now the most profitable part of the business.

The Robotworx (Scott USA subsidiary) experience in palletising and distribution robots is viewed as a possible profitable meat industry add on.

Scott's have an internal rate of return management planning target of 15% return on capital per annum for all investments.

SNOOPY

[Snoopy]

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.

Some musings from the presentation on the current state of the appliance business.

A fridge selling for $300 fifteen years ago still sells for $300 today. So Appliance makers globally are under huge cost pressures. In Europe alone, three manufacturers have disappered completely over the last few years.

After the GFC, and the accompanying housing downturn, most appliance manufacturers had their lines turning over at only 30% capacity. In tight times, the first thing to be cut is capital expenditure. The only time capital expenditure is not cut in hard times, is when government legislation demands new environmental standards, necessitating new product design and manufacture. Big Appliance players normally work on 120 to 130 day payment terms, tough for smaller contracting companies like Scotts. Nevertheless, the 30-40% deposit on order is helpful to cashflow at the front end of any project.

However, a new order has been received just recently. So that means Appliance manufacturing lines in FY2016/2017 will likely be in better shape than in FY2015 position.

SNOOPY

[Snoopy]

Thanks Snoopy.
Clearly if Urquhart estate wants out it will vote for the JBS deal.
What does Oakwood being in suggest as to the way they will vote? Are they in to buy more at $1.39 (so, consistently, will vote for the deal), in to maintain their current holding (could vote either way), or in to put it up JBS (and vote against)?
Big volumes sold on market today, last day shares are cum div.

I am guessing as to Oakwoods position, apart from the fact they at least want to maintain their current absolute number of shares. Being the largest holder (12%), it seems inconceivable that they were not consulted re the capital raising. especially as we know that both the Urquart Estate and Fisher Funds (both 7.5% holders) definitely were consulted. JBS CEO Brent Eastwood, at the Roadshow, said that not all large shareholders were leaving, which by deduction (given there are only three) means that Oakwood must be staying.

Meanwhile the SSH on the market today shows that 5.21% of shareholders have already buckled and sold to JBS, conditional on the Scheme of Arrangement being approved. That figure can't include either the Urquart Estate or Fisher Funds for their complete holdings at least. If the 5.21% are all small shareholders, we might be looking at around 25% of all shareholders wanting out completely. That means a total SCT capital raising of around $40m. This will wipe out company debt and then some. But given the somewhat patchy or at least unproven nature of recent acquisitions, is this too much money to trust the company with? Capital return anyone?

SNOOPY

[Snoopy]

Meanwhile the SSH on the market today shows that 5.21% of shareholders have already buckled and sold to JBS, conditional on the Scheme of Arrangement being approved. That figure can't include either the Urquart Estate or Fisher Funds for their complete holdings at least. If the 5.21% are all small shareholders, we might be looking at around 25% of all shareholders wanting out completely. That means a total SCT capital raising of around $40m. This will wipe out company debt and then some. But given the somewhat patchy or at least unproven nature of recent acquisitions, is this too much money to trust the company with? Capital return anyone?

A big jump in JBS acceptances today ( +3.982%) . However, it looks like this figure still does not include those two larger shareholders wanting out.

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For this disclosure,--
(a) total number held in class: 4,180,131
(b) total in class: 45,473,890
(c) total percentage held in class: 9.192%

For last disclosure,--
(a) total number held in class: 2,369,386
(b) total in class: 45,473,890
(c) total percentage held in class: 5.210%

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SNOOPY

[Under Surveillance]

On the matter of a return of capital, Hopkins volunteered this as a possibility during the Q&A session at the Wellington road show; a video of the session is posted on the SCT website.

[ScripMan]

Big jump in JBS acceptances announced today. How high is this going before Thursday?
Summary for JBS Australia Pty Limited
For this disclosure,—
(a) total number held in class: 9,663,115
(b) total in class: 45,473,890
(c) total percentage held in class: 21.250%