SCT - Scott Tech

[Bjauck]

I hope so as I have accumulated a couple of parcels at $2.20 and $1.65 over the last twelve months. Today's movement puts me 'back in the black' on those purchases. However, I should point out that by revenue, only 10% of Scott's business is done in New Zealand (AR2020 p11). So I wouldn't expect the SCT share price to correlate with the NZX.

SNOOPY

True. We should be grateful that they have retained a NZ listing when so many others have gone.

[Snoopy]

I didn't get around to making a profit forecast for FY2019.

Fast forward to FY2020. The way Scott's now operate, segmented results are declared in geographical areas. This makes it difficult if you are used to thinking of results in terms of what is happening to different global industries. I think it best to think of Scott Technology as having a base of earnings that does not grow from year to year, then superimpose on this picture the earnings growth from certain fast growing business units.

Taking the base level profit of FY2019,

FY2019 Profit Normalisation:

Most of these adjustments may be found on p39 of AR2019. I have:

a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives ($1.334m) and fair value losses on derivatives used as hedges ($1.216m) and the unrealised fair value losses on interest rate swap contracts ($0.346m) .
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m)= $9.464m



How do I see things developing over the current year FY2020?

Amount	Description	Calculation
$9.464m	Baseline Adjusted Profit FY2019
+$0.252m	Interest saved from lower interest intellectualbill	$0.350m x 0.72
+$1.649m	Meat Industry Robotics (incremental)	$10.994m x 0.15 [See Note (A)]
+$0.705m	Transbotics (incremental)	0.15 x $4.7m [See Note (B)]
-$0.500m	Appliance Production Lines	My post 800
+$0.630m	Mining	2 x $0.315m [See Note (C)]
-$1.458m	Loss of NZ R&D Grant (scheme expired)	0.72 x $2.026m
$10.742m	Forecast NPAT Total

With 78.311m shares on issue, this equates to an earnings per share figure of:

$10.742m / 78.311m = 13.7cps

At $2.20,SCT is trading on a projected PE of 220/13.7 = 16.0

Notes

A/ Meat industry Robotics Thanks to the expansion of the Scott Technology site at Kaikouri Valley in Dunedin, FY2020 represents the first year in which the meat industry robotics team have double the area to build their meat industry robotics projects. From my post 485, the aim is to supply 5-10 automatic robotic projects per year. The estimated value of a full production line is $12m to $13m, or some $6.5m for half automating a production line. Most growth looks to come from Pork (see Pork Primal System already drawn up on pages 27&28 of AGM2019 presentation) and Beef processing in FY2020, because the lamb market in Australasia is significanly automated already.

Seven half projects completed over FY2020 would produce revenues of: 7 x $6.5m = $45.5m. This represents an increase of:

$45.5m - $34.506m = $10.994m

From post 485, the margin on this increased turnover is approximately 15%. This allows us to calculate the NPAT incremental profit from the increase in meat industry turnover


B/ Automatic Guided Vehicles We know from slide 6 of the Forsyth Barr March 2019 Emerging Companies Conference that the EBITDA margin at Transbotics is 20%. Interest is not negligible and Depreciation and Amortisation at Technology companies can be high. So I am assuming a NPAT profit margin of 15%

Sales over the last five years at Transbotics have ranged from $US4.5m ($NZ6.9m) to $US11m ($NZ16.4m) over the years 2014 to 2108 (slide 30 same presentation (using exchange rate of $NZ1 = $US0.67). In the year that Transbotics came into the Scott fold (FY2018) the annualised sales rate worked out to be:

$NZ4m x (365/122) = $NZ12m

The AGV market has a target growth rate of 30%+ (slide 14, Scott Presents with Moelis November 2019 Slide Show). So I am estimating Tramsbotics revenue was 1.3 x $12m = $15.6m for FY2019 and 1.3 x $15.6m = $20.3m over FY2020, That equates to incremental revenue of $4.7m. The incremental increase in NPAT from that can be estimated as follows:

0.15 x $4.7m = $0.705m

C/ Mining

Hopkins noted in his AGM address that:

"we expect Mining to rebound significantly in 2020,"

"Opportunities for the Mining sector is primarily for Scott’s sample preparation systems but through recent developments, extends into field automation ,such as robotic refuel,robotic idler change and automated fire assay."

Multiple Robo-prep installations are planned for FY2020. The addressable market for these is judged to be $20m to $50m per annum.(Moelis November 2019 Presentation , Slide 13). The largest installation so far was an automated Sample Preparation System for Pernoles, the second largest mining company in Mexico. This build took 5 months, largely at Scott's Sydney engineering base. MAR, now "Scott Australia' had a turnover of about $7.7m when acquired in FY2015. With organic growth that could be $10m today. If half of MAR's resources were assigned to this robo-prep project for 5 months, that would account for:

0.5 x 5/12 x$10m = $2.1m of turnover.

If we assume a 15% profit margin, this one project could have contributed: 0.15 x $2.1m = $0.315m of the group profit after tax. We can use this figure to judge the NPAT effect of an incremental two extra Robo-prep system sales on net profit.

D/ 'Robotworx' profit assumed unchanged.

E/ 'Alvey' profit assumed unchanged due to the continued uncertainty and flow on fall out from Brexit.

F/ 'HTS-110' Superconductor Technology Subsidiary assumed to be no longer a meaningful contributor to the group (it wasn't mentioned in the Annual Report).

G/ I have not made any allowance for costs relating to the closure of "DC Ross". However this is a 'one off' event that is unrepresentative of the ongoing operation of the business.

I always like to mark myself on my profit forecasting ability. So best to get this embarrassing exercise out of the way while everyone is on holiday so no-one reads it. The headline loss figure of Scott Technology of $17.503m is awful. But there is a lot of 'one-off' stuff in there that I like to normalise out.

In formation in the table below has largely been complied from AR2020, pp5, 35 and 36.

Declared Profit (Loss)	($17.503m)
add back Asset Impairment	$7.600m
add back Project Impairments	$6.295m
add back Restructuring Expense	$4.257m
subtract Gain on PP&E sales	($0.328m)
add back Foreign Exchange Derivative Losses (unrealised)	$0.082m
add back Fair Value Hedge Derivative Losses	$0.890m
subtract Foreign Exchange Gains	($0.450m)
subtract Fair Value Firm Commitment Gains	($1.086m)
subtract Foreign Exchange Derivative Gains (unrealised)	($0.146m)
subtract Interest Rate Swap Gains (unrealised)	($0.146m)
equals Normalised Profit	($0.535m)

During the period, $3.614m of Covid wage subsidy payments were made. I have elected, perhaps controversially, not to make a normalising adjustment for this. That is because it is in effect partially replacing an income stream that would have occurred if government imposed lock downs were not in place. I also believe that if another lock down period were to be imposed, then such supplementary payments would be available again. In previous years I haven't removed one off government supplied R&D grants from the income statement either, using similar logic.

Notwithstanding this, my profit prediction of $10.472m (normalised) was awful, even if I can claim my forecasting errors were Covid-19 related. So what on earth went wrong?

SNOOPY

[Snoopy]

How things have changed since the rights issue was banked. Scotts have spent it all and debt is back on the balance sheet again. To get some idea of the debt holding burden going forwards, we need to look back at what the net debt balance was at the three documented points throughout the year (beginning, middle and end)

	EOFY2018	EOHY2019	EOFY2019
Cash & Cash Equivalents	$12.473m	$0m	$0m
Bank Overdraft	$0m	($5.678m)	($4.737m)
Current Portion of Term Loans	($3.321m)	($3.996m)	($4.217m)
Term Loans	($4.088m)	($2.904m)	($7.450m)
Total Net Bank Debt	$5.064m	($12.578m)	($16.404m)

From the published full and half year balance sheets, there is no way to know the distribution of net debt throughout the year. However, we can calculate a linear approximated average that gives us an indicative net debt figure for the year from the table above.

Indicative Net Debt Over FY2019 = ( $5.064m- $12.578m - $16.404m) / 3 = -$7.996m {B}

The net interest paid over FY2019 was: $0.020m - ($1.715m - $0.518m)= -$1.177m (A)

So the net indicative interest rate paid was {A}/{B}:

$1.177m / $7.996m = 14.7% (still high though, but more believable!)

I was forecasting a reduced interest rate bill over FY2020. But did it happen? Let's see.

To get some idea of the debt holding burden, we need to look back at what the net debt balance was at the three documented points throughout the year (beginning, middle and end)

	EOFY2019	EOHY2020	EOFY2020
Cash & Cash Equivalents	$0m	$0m	$7.745m
Bank Overdraft	($4.737m)	($8.975m)	$0m
Current Portion of Term Loans	($4.217m)	($2.679m)	($3.719m)
Term Loans	($4.088m)	($8.517m)	($7.466m)
Total Net Bank Debt	($16.404m)	($20.153m)	($3.440m)

From the published full and half year balance sheets, there is no way to know the distribution of net debt throughout the year. However, we can calculate a linear approximated average that gives us an indicative net debt figure for the year from the table above.

Indicative Net Debt Over FY2020 = (-$16.404m-$20.153m-$3.440m) / 3 = -$13.452m {B}

Now I get to the bit where I stuffed up last year. That was because I included the 'lease interest paid' with all the other interest paid. So I will take care to filter those lease interest payments out this time. Look under AR2020 section C5 to find the $0.662m adjustment

The net interest paid over FY2020 was: $0.191m - ($1.431m - $0.662m)= -$0.578m {A}

So the net indicative interest rate paid was {A}/{B}:

$0.578m / $13.452m = 4.3%

The net interest paid is a huge come down from FY2019. The interest saved is more than the $0.252m that I predicted (actual saving $0.905m). The new CFO, ex Pacific Edge, must have nailed down those Scott bankers. Good to see. But it doesn't help explain where my 'projected profit' disappeared to.

SNOOPY

[Waltzing]

reading it....before we get in the pool...

"everyone is on holiday so no-one reads it."

[Waltzing]

interesting posts.. reading more... pool can wait.. all afternoon... cant travel anywhere... still got a whole year and a bit to read ...

[winner69]

Snoops - you deserve a medal for just trying to make sense of the convoluted Scott accounts and presentations

Even them saying Underlying EBITDA of $3.7m - down from $20.0m last year - doesn't seem to make sense.

Pretty shocking result eh but SCT seem to be becoming a market darling these days so things must be different this time

[Jerry]

I had Scott for some years and it seemed a good bet with new technology for automating assembly lines in manufacturing and agricultural uses. It gave divs and increased in value until a large (Brazilian?) outfit bought a controlling interest. Divs reduced and share price went down and heeding Percy's wise words about getting out when private equity gets in, I sold out. Not been sorry.

[Snoopy]

My profit prediction of $10.472m (normalised) was awful, even if I can claim my forecasting errors were Covid-19 related. So what on earth went wrong?

Here is my 'piece by piece' answer to the what went wrong question.

A/ Meat Industry Robotics

FY2020 represented the first year in which the meat industry robotics team had double the area to build their meat industry robotics projects. However my projected $10.994m increase in turnover for this division for FY2020 actually translated to a $5.493m fall in turnover.

The turnaround from my projection translates to a NPAT loss from my projection of:

-0.15 x ($10.994m - -$5.493m) = -0.15 x ($16.487m) = -$2.473m

(From post 485, the margin on repeat installation meat industry turnover is approximately 15%.)

The FY2020 meat industry total turnover of $29.013m represents:

$29.013m / $6.5m = just over 4 'half systems' (most installations are not full go to whoa automation).

In reality there may have been only three because this industry classification also includes installation of 'Bladestop' band-saws. 'Bladestop' sales are highly profitable which is just as well, but made in Scott's Australian base, not Dunedin. AR2020 p69 records sales of $6.8m to JBS, with the majority of that total being Bladestop saws. The expansion of meat industry production line manufacturing capacity at Dunedin's Kaikouri valley site looks to have been ill timed!

B/ Mining Industry Support

Departing CEO Hopkins noted in his AGM for FY2019 address that:

"We expect Mining to rebound significantly in 2020,"

Mining sales actually rebounded by:

$33.006m / $30.324m = +8.8%

The largest automated installation so far completed is an automated Sample Preparation System for 'Pernoles', the second largest mining company in Mexico. This build took 5 months, largely at Scott's Sydney engineering base. Since this contract was won, a further two similar builds have been announced for Rio Tinto Australia. MAR, now "Scott Australia' had a turnover of about $7.7m when acquired in FY2015. With organic growth that could be $10m today. If half of MAR's resources were assigned to a robo-prep project for 5 months, that would account for:

0.5 x 5/12 x$10m = $2.1m of turnover.

If we assume a 15% profit margin, this one project could have contributed: 0.15 x $2.1m = $0.315m of the group profit after tax.

I had assumed an incremental two extra Robo-prep system sales on net profit over FY2020. While two major new builds were announced, most of the work on these would flow into FY2021. If 3/4 of this new work was deferred, then my projected net profit for FY2020 would have reduced by:

($0.315m x 2) x 0.75 = -$0.473m

C/ Appliance Production Lines

There was a large drop off in revenue from $45.489m in FY2019 to just $20.058m over FY2020. Referring to my post 800, this is indicative of a profit drop from something like $3.716m (reference year FY2004) down to something approaching $0.597m (reference year FY2009).

Over FY2019 the revenue generated was even more than the high reference year of FY2004. But more turnover at the high end does not necessarily mean more profit. Often short term subcontractors must be hired to top up the regular workforce. That is usually negative for profits.

My low end profit reference year of FY2009 had a 10% higher turnover than the $20.258m of turnover over FY2020. Referring back to FY2020, I think it is doubtful that any money was made manufacturing Appliance Line Production Systems. My estimate for 'lost profit' from the Appliances division is therefore the full -$3.716m

D/ Materials Handling & Logistics

I was budgeting on no reduction in business for this division. My post 649 suggests an underlying NPAT for Alvey was $8.470m in good times (FY2018). With Covid-19 in Europe and Brexit weighing heavily on demand for 'Material Handling & Logistics', I would suggest that at least half of this profit has disappeared over FY2020.

$8.470m/2 = -$4.235m

This kind of permanent loss in profitability in Europe is supported by the significant sackings reported in AR2020, page 5: 316-257 = 59 people or 19% of the workforce.

Loss of Profitability Summary

-$2.473m-$0.473m-$3.716m-$4.235m = -$10.897m

Compare that to the actual difference in normalised profit between what I predicted and what actually happened

-$10.472m - $0.535m = -$11.007m

Those two totals are very close. That means I am happy that my explanation of how things went so wrong in this post is plausible.

If you can understand what happened when things went wrong, it gives a good guide to assess where any 'recovery springboard' of results going forwards might bounce to. The positive announcements of new contracts so far only gives me confidence that FY2021 will be another year of consolidation. Unfortunately for shareholders that consolidation looks to be around breakeven. I predict a very tough FY2021 for shareholders. Looking out to FY2022, with Brexit resolved and Covid-19 declining, I do see things getting brighter.

SNOOPY

discl: Still a shareholder, in for the FY2022 recovery.

[Waltzing]

Complicated story, complicated stock. Reminds me we should have bought apple on the stock split.

looking ahead scare resources seem to be the way to invest. Water, solar power stations in deserts ect.

[Snoopy]

Complicated story, complicated stock.

Waltzingman, here is what I wrote two years ago after the acquisition of Alvey was confirmed.

If we add to this the underlying profitability of Scott Technology today, I get an underlying profitability for the combined ‘Scott’ and ‘Alvey’ group of:

$8.959m -$0.502m + $8.470m = $16.927m

This projection assumes no profit growth or decline from either company.

I do not expect the Scott Technology result for FY2018 to be this high, because Alvey will have only been owned for part of FY2018. Nevertheless I believe this figure is representative of the ongoing profitability of the group and should be used to assess value ahead of whatever the actual FY2018 result turns out to be.

With 74.681m shares on issue, Scott/Alvey should have ‘eps’ figures of:

$16.927m / 74.681m = 22.7cps

With a share price of $3.50, this means Scott’s is currently trading on a projected PE of:

$3.50/ 0.227 = 15.4

Note that this projection does not include the expected future ramp up of Meat Industry Robotics work to be done in association with major shareholder JBS. Compared to some of the sky high valuations on the market at the moment and with much growth to come, something around $3.50 is looking reasonable

The major ramp up in work with JBS has never happened. I think this is because the automated beef boning room project has never been completed. But even without that I was still thinking $3.50 is possible, providing the existing businesses operate to their potential at the same time.

Getting all divisions synchronised and doing well might be a pipe dream. But I still believe a share price of around $3 is possible within a year or two. The problem is earnings supporting that kind of share price certainly won't happen in FY2021. So SCT looks overpriced on that basis. But if you look further out there has to be a recovery, because the sort of projects that Scott's do are really needed! This is my basis for continuing to hold against a bleak immediate picture. Given the share market is always forward looking, we still might get some price action in CY2021. This is my basis for selecting SCT in this years 'beat the brokers' competition.

SNOOPY