SCT - Scott Tech

[sb9]

Today's announcement re winning large contract with Rio Tinto is a bit of saviour for the sp.

[Snoopy]

Today's announcement re winning large contract with Rio Tinto is a bit of saviour for the sp.

I have thought for a long time that the actual jewel in the Scott Tech corona is Rocklabs. Rocklabs in Auckland is now responsible for the 'standard build' side of the Rocklabs business. Those tricky automation jobs are increasingly being farmed out among Scott's other sites. IMO, It is not a great thing to say:

"The project will be undertaken across multiple Scott manufacturing sites"

because that means those other multiple sites are not busy with their 'normal' alternative projects.

I also wonder what majority shareholder JBS think when they read from Scotts:

"we see the mining sector continuing to play an increasingly important role as a contributor to Scott's future growth."

I read that to mean Scott's are still having problems with the beef automation project, so resources are being deployed elsewhere. Also no announcement on the other jobs that were expected to be signed up last December, as outgoing CEO Chris Hopkins noted in his 28th November 2019 AGM address:

"For long term contracts ,we have approximately seven months of forward work ahead of us. This is less than target, however, several significant opportunities which we expect to secure in the next month, will take us to, and beyond,our target."

Was the Rio deal the only significant opportunity that came through? No doubt things are continuing to be tough in Europe. Sometimes what is not said in these 'trading updates' is more interesting than the actual announcements. I see a reasonable first half year being announced but with a poor outlook for the second half (notwithstanding the RIO job just announced). Long term I still 'keep the faith'. But I see a short term rocky road ahead when the half year results are out.

SNOOPY

[Snoopy]

I see a reasonable first half year being announced but with a poor outlook for the second half (notwithstanding the RIO job just announced). Long term I still 'keep the faith'. But I see a short term rocky road ahead when the half year results are out.

New CEO John Kippenberger is facing his first big test. Superficially I was disappointed with his March 19th COVOID -19 update:

"Scott’s first commitment is to the health and safety of its people. The company’s business is global in nature, with projects and teams operating around the world. Given the rapidly evolving situation around COVID-19, Scott Technology is in the process of returning employees back to their home countries where possible. In addition, the company is managing the impact of local Government constraints, most notably within Europe, which has seen businesses closed and communities in quarantine."

But then I remembered that Scott's is entirely dependent on its highly skilled people. If they can't look after their people through the down times, there is no way they can quickly build up their in company skills again when business starts climbing out of its trough. So while the immediate outlook for Scotts is not good, I think Kippenberger putting his people first 'gets it'. He understands the culture of the company, which is always a point to worry about when a new CEO is 'helicoptered in'.

The company debt position is relatively modest with a normal earnings profile. But I feel that Scott's may now want to reduce net debt to zero (apart from working capital requirements). It is normal for a new CEO to 'clear out any skeletons in the closet.' So it is possible JK will announce some modest capital raising initiative. Maybe a bond that will convert to shares at the discretion of the board a few years down the track? That would avoid equity dilution at today's low prices. It might be more logical to suspend the dividend. But that wouldn't go down well with the Dunedin grey rinse brigade that regularly pack out the AGM and rely on that divvy. If the divvy is maintained at some level, then JK will have passed his second company culture test.

In the medium term, having a dispersed workforce of adaptable highly skilled staff over multiple continents looks to be a winner in this new environment. There will be locals on the ground to do local jobs. And work can be farmed out and shipped in from 'overseas' to avoid any local capacity constraints. I plan to increase my holding again at some point. But I will wait until the end of April profit announcement so that I can better understand what is a fair price to pay.

SNOOPY

[BlackPeter]

SP just dropped to 90 cents.

PE starting to look friendlier - backwards PE of 7 and forward PE of, well - who knows, but I use at this stage 10, obviously based on an in reality unknown earnings number. I just halved what I assumed for this year in earnings before the dip. Could easily turn to zero though or below.

Clearly interesting industry - I assume that most useful applications involving robotics will come stronger out of this crisis than they went into it.

On the other hand:

SCT still trades at 1.8 times NTA. On that base is this still a pretty dear company, and I think that is what the market is telling us.

Debt load, while manageable (47.4% of assets last FY) looks ok for normal weather, but a bit less would currently clearly feel better.

Hard to say, but at this stage I might become tempted if & when the SP falls below NTA (assuming nothing pops up which might put the assumption of ongoing concern into doubt).

[Snoopy]

SP just dropped to 90 cents.

PE starting to look friendlier - backwards PE of 7 and forward PE of, well - who knows, but I use at this stage 10, obviously based on an in reality unknown earnings number. I just halved what I assumed for this year in earnings before the dip. Could easily turn to zero though or below.

I am in the 'zero or below' camp. Operationally I think we will still be positive for FY2020. But who is going to sign up to big ticket automation projects in the current environment? I think some of Scott's facilities will need to be severely scaled back. And that means redundancies, without cutting the skill base to the extent that you can't get the skills back. There is a very difficult balancing act here for Mr Kippenberger. In fact in a different time, I think he might put the whole European operation on the block! I think the synergies between Europe and what is going on in the rest of the company are dubious. Zero chance of that happening right now though.

New CEOs like to start with a clean slate, which is why I am picking 'restructuring'.

Clearly interesting industry - I assume that most useful applications involving robotics will come stronger out of this crisis than they went into it.

On the other hand:

SCT still trades at 1.8 times NTA. On that base is this still a pretty dear company, and I think that is what the market is telling us.

Debt load, while manageable (47.4% of assets last FY) looks ok for normal weather, but a bit less would currently clearly feel better.

Hard to say, but at this stage I might become tempted if & when the SP falls below NTA (assuming nothing pops up which might put the assumption of ongoing concern into doubt).

I think NTA is the wrong measuring stick for Scott's. If all the people walked out the door what would be left at Scotts? The property that houses 'Rocklabs' in industrial Auckland is no doubt valuable. (As an aside maybe Kippenbereger will sell that off on a leaseback arrangement?). I think ex-Chairman Marsh still owns the Dunedin headquarters site - a warehouse on the road to nowhere? Scott's own some complicated machine tools that would require specialised knowledge to operate safely. Definitely niche assets that might struggle to make book value in a fire sale. There is a reasonable bank of global patents, which are not tangible, but would have liquidation value. But the value of the patents is much greater with the people skill base that knows how to exploit them.

I see the value in Scotts is best retained by 'keeping the team together'. But how long this can be done with only a trickle of future business in the pipeline is another matter.

The debt load is a bit of a shock, but how much of that is due to funding projects in construction, rather than genuine long term debt? We might find at half year result time, the debt looks much better.

SNOOPY

discl: Also interested in buying more, but will wait for the half year result now.

[BlackPeter]

I am in the 'zero or below' camp. Operationally I think we will still be positive for FY2020. But who is going to sign up to big ticket automation projects in the current environment? I think some of Scott's facilities will need to be severely scaled back. And that means redundancies, without cutting the skill base to the extent that you can't get the skills back. There is a very difficult balancing act here for Mr Kippenberger. In fact in a different time, I think he might put the whole European operation on the block! I think the synergies between Europe and what is going on in the rest of the company are dubious. Zero chance of that happening right now though.

<snip>

And you might well be right.

However - I still could imagine that companies with deep pockets are well happy to invest in the current situation (or soon thereafter) into automation of whatever they are doing. Robots don't get sick or infected and they don't need to isolate either ...

Fully (or mainly) automated manufacturing (and service) environments will be king in the current crisis. No (or less) dependence on sick or locked down humans.

More companies will want to enjoy this benefit next time (whether or whenever it comes).

I fully expect robotics to make worldwide a huge jump forward during and after this crisis. More robots looking after sick people. More robots looking after old people. More robots packing and delivering goods. More robots busy preparing and processing food.

The latter is SCT's domain - and while they are only a small player in a huge pond, they do have their market niche and should be in a good position to utilize the situation.

Anyway - just brainstorming. No doubt, there are plenty of risks around as well.

[Snoopy]

I still could imagine that companies with deep pockets are well happy to invest in the current situation (or soon thereafter) into automation of whatever they are doing. Robots don't get sick or infected and they don't need to isolate either ...

I agree with the above. The only problem would be those pesky customer company shareholders. Wanting to preserve cash in difficult times. A privately owned customer company would be able to get things rolling more quickly.

Fully (or mainly) automated manufacturing (and service) environments will be king in the current crisis. No (or less) dependence on sick or locked down humans.

More companies will want to enjoy this benefit next time (whether or whenever it comes).

I fully expect robotics to make worldwide a huge jump forward during and after this crisis. More robots looking after sick people. More robots looking after old people. More robots packing and delivering goods. More robots busy preparing and processing food.

The latter is SCT's domain - and while they are only a small player in a huge pond, they do have their market niche and should be in a good position to utilize the situation.

Anyway - just brainstorming. No doubt, there are plenty of risks around as well.

And useful brainstorming it is. I agree with your assessment of the wider picture, which is why I am keen to remain an SCT shareholder!

SNOOPY

[Snoopy]

discl: Also interested in buying more, but will wait for the half year result now.

We shareholders are in for a longer wait! Scott's now need another month (May 3rd) before their situation becomes clear.

https://www.nzx.com/announcements/351926

"As previously advised, the impact of COVID-19, particularly travel restrictions and access to customer sites, has affected Scott’s ability to implement, progress and commission a number of projects."

" the company is engaging with landlords in New Zealand and Australia for rent relief."

"While revenue is expected to recover as regional lockdowns are lifted and work recommences, Scott expects FY20 earnings to be materially impacted, as previously advised and as customers take stock of their own capital situations under COVID-19 and the broader economic environment. The Board and management are currently undertaking a review of the structure of the business to ensure it is well positioned for the longer-term economic recovery."

A $1.6m wage subsidy has been accepted to help 784 NZ staff.

$1.6m / 784 = $2,040 each (assuming all full time)

$2,040 / $586 per week = 3.5 weeks

Yet the government subsidy is meant to be for twelve weeks. Mass sackings to be instituted in a month's time?

SNOOPY

[CatO'Tonic]

https://www.odt.co.nz/business/some-...w-unpaid-leave

[Snoopy]

https://www.odt.co.nz/business/some-...w-unpaid-leave

What can I say? Except that new CEO JK looks to have handled this in a sub-optimal way.

Perhaps JK needs to learn that a glib Covid 19, 19th March update which states:

"Scott’s first commitment is to the health and safety of its people."

is not consistent with sending some workers home with absolutely no pay, while saying that:

-----

"the executive and broader leadership team at Scott had agreed to a pay cut."

" "It comes at a time when we’re working very hard ... we just thought it was the right thing to do to show empathy and understanding with the group."

"He would not say how much the pay cut was but that it was a "meaningful number" and "an absolute sign that we’re all in this together"."

-------

Tell us what the 'meaningful number' is! Other companies have done this. It is up to others to judge whether that number is meaningful or not - not you JK!

Reading between the lines, it sounds like we shareholders will be taking a 'dividend cut' of 100%, just like the worker referred to in the article. What is the bet that the cut to executive salaries is quite a lot less than that?

This article is particularly worrying, because Dunedin is Scott's back yard. If they can't get it right 'at home', what does that say for what is happening in Scott's staff in the USA and Europe?

SNOOPY