SCT - Scott Tech

[pg0220]

CEO loading up on market. He must think the SP is too cheap!

[sb9]

Big crossing this arvo....

4

1

2:03:01 pm

260

522,932

$1,359,623

Off market

[sanctus671]

"achieved revenues of $111.4 million for the six months to 28 February 2019, an increase of 65% on
the previous corresponding period (pcp) of $67.5 million. For this six month
period the company's operating EBITDA of $8.5 million increased 33% on the
pcp of $6.4 million while the net surplus before tax of $5.6 million was up
18%. "

Seems pretty good to me, but share price hasn't moved. Am I missing something?

[BlackPeter]

"achieved revenues of $111.4 million for the six months to 28 February 2019, an increase of 65% on
the previous corresponding period (pcp) of $67.5 million. For this six month
period the company's operating EBITDA of $8.5 million increased 33% on the
pcp of $6.4 million while the net surplus before tax of $5.6 million was up
18%. "

Seems pretty good to me, but share price hasn't moved. Am I missing something?

I think you need to see this in context. Most of their revenue and earnings growth has been by acquisition. Their income is as well very patchy - and even this "good" 1st HY produced less (in earnings) than half of last years full year income. I guess it is good to see that their EPS did grow compared to 1HY18 (from 4.2 cts in 1 HY18 to 6.6 cts in 1HY19) but this is still less than half of their FY18 total of 14.3 cts / share. They better have (again) a very good second half, otherwise their annual EPS is dropping. Ouch. Wrong direction.

And actually - this is the problem with this company. They do produce sexy technology (toys for the boys and girls) and they do have good revenue growth. However their EPS was over the last 5 years basically unchanged around 13 to 14 cts. No indication so far that this year will be different.

A number of softeners in the report as well:

Australasia manufacturing sales were up 6% although, due to heavy R&D spend and some project cost overruns, contributions were down. One project for the meat industry suffered longer than expected commissioning times. Two projects for the mining industry faced challenges brought on by deployment of new advanced technology which were underestimated and has had a significant impact on this period’s contribution. The new technologies add to our overall capability and have application into the future. While disappointing, problems with projects are to be expected from time to time. However, with the business now well diversified, these instances can now be absorbed by the Group.

This must be the majority of their projects suffering under challenges ...

Given this fact - why would anybody be prepared to pay more for this share? A PE of nearly 20 without earnings growth is not cheap.

[JayRiggs]

I think you need to see this in context. Most of their revenue and earnings growth has been by acquisition. Their income is as well very patchy - and even this "good" 1st HY produced less (in earnings) than half of last years full year income. I guess it is good to see that their EPS did grow compared to 1HY18 (from 4.2 cts in 1 HY18 to 6.6 cts in 1HY19) but this is still less than half of their FY18 total of 14.3 cts / share. They better have (again) a very good second half, otherwise their annual EPS is dropping. Ouch. Wrong direction.

And actually - this is the problem with this company. They do produce sexy technology (toys for the boys and girls) and they do have good revenue growth. However their EPS was over the last 5 years basically unchanged around 13 to 14 cts. No indication so far that this year will be different.

A number of softeners in the report as well:



This must be the majority of their projects suffering under challenges ...

Given this fact - why would anybody be prepared to pay more for this share? A PE of nearly 20 without earnings growth is not cheap.

Very good points BlackPeter.
I haven't looked at Scott Tech too much, but when I saw the HY report come out this afternoon, the headline numbers looked pretty good to me and my impulsiveness got the better of me, leading me to buy a small parcel without really doing any research!

True that the HY net profits was less than half of last year's full year profits, but it was very close and a big jump up in H1 compared to recent years.
And the profits have always been very heavily weighted to the 2nd half.
Looking at the H1/H2 profit splits from the last 3 years.

2016 ($000) %
H1 1,948 23.95%
H2 6,186 76.05%
FY 8,134
2017
H1 2,887 28.12%
H2 7,378 71.88%
FY 10,265
2018
H1 3,155 29.29%
H2 7,617 70.71%
FY 10,772

Assuming similar trend, let's say HY19 has 30% of FY profits, then FY19 net profits will be about $16.916m.
That would equal an EPS of 22cps based on current number of shares. Or maybe 21cps after DRP dillution. About a +40% increase in EPS.
Does that sound realistic?

[BeeBop]

After many years of following this share, I finally bought in in January paying between 2.60 and 2.75 per share...a tiny parcel and even then it took days to fill. I want to hold them for the long-term....their share price has not moved for years. I like their strategy and am hoping that they can turn their output on.

[BlackPeter]

Assuming similar trend, let's say HY19 has 30% of FY profits, then FY19 net profits will be about $16.916m.
That would equal an EPS of 22cps based on current number of shares. Or maybe 21cps after DRP dillution. About a +40% increase in EPS.
Does that sound realistic?

Hard to say. Don't know enough about Scott Technology, but used to work for a long time in a quite comparable organisation (high tech project work, lumpy sales, international subsidiaries, similar size of the organisation).

We had as well always a much better second half than first half no matter when the FY ended (they shifted it during my tenure) - clearly an indication that the focus on achieving agreed end of year goals (or the bonus schema for the sales people ) had a lot to do with when the sales have been made and booked in.

To assess whether your assumptions are realistic we would need to know how "challenging" their current projects are and the causes behind these challenges. I don't. Lets hope its not "FBU style" challenges. We would need to know as well their sales funnel - I don't either. And yes, we would need to know, whether they managed to shift some projects from last year into this, to make this a really good and bonus rich year (hence the better FY1) or what other reason they had for a better HY1 than last year.

So yes, if your model of a god given 30/70 earnings distribution is right, than SCT might be in for a really good year. What we don't know is - is it right and if yes, what are the reasons behind it? We don't know either whether this would be a one off or the start of a long overdue trend to rise the EPS.

Ah yes - and we don't know the agenda of the majority shareholder (meat processor JBS) which without doubt will guide the management team. I don't think that increased earnings would be their highest priority.

[Jerry]

Small tranches of SCT shares have been bought by directors and senior officers recently and Scott have bought Normaclass, a French based technology provider specialising in automated beef grading using machine vision.
https://www.nzx.com/announcements/333668
Their shares continue downwards despite these encouraging signs, but then, the market often seems to be contrary.

[BlackPeter]

Small tranches of SCT shares have been bought by directors and senior officers recently and Scott have bought Normaclass, a French based technology provider specialising in automated beef grading using machine vision.
https://www.nzx.com/announcements/333668
Their shares continue downwards despite these encouraging signs, but then, the market often seems to be contrary.

Not so sure ... I guess they are an interesting company doing stuff engineers like. I can sympathise. They bought as well a lot of additional revenue, but if you look at the earnings per share - they are flatlining now for a long time around 13 cents. PE around 19 with no (EPS-) growth at all.

So - it is clearly not a growth company (remember, its only EPS growth which counts for shareholders) and while their interests might be aligned with the interests of the majority shareholder (they are building tools for them) - for anybody else they are basically equivalent to a BB or less rated bond (they are neither a gentailer nor IFT) paying (at today's SP) in average 4.2% interest, which well may turn towards less or even nil when the next recession arrives.

While they are certainly worth something, there are many better dividend payers (if that's your thing) as well as much better growth games out in the market. And while they do have some sort of niche in meat processing - nothing they do is unique. Just put a handful of electrical and mechanical engineers together and give them enough money and they can do it as well.

Why should SCT's share price rise?

[sanctus671]

They have been acquiring a lot of companies to expand its global presence. Seems like a good thing long term assuming they did their due diligence before buying them. Revenues are steadily growing along with profits. As JayRiggs said, EPS growth should grow this year if historic revenue split is anything to go by. Of course, all depends on those "challenges" and how much of an impact that had. Ultimately I think robotics and automation is a huge industry that will only grow into the future. No other company on the NZX you can invest in for that as far as I am aware.

I can understand why the shareprice is going down though given the low yield with slower EPS growth than other companies. When I bought in, I did think Scott Tech had a lot of promise. By no means I am an expert so the declining shareprice does make me feel like I'm missing something. Hopefully things change in the coming years.

"Just put a handful of electrical and mechanical engineers together and give them enough money and they can do it as well.". That seems like a pretty ignorant statement, and same could be said for a lot of companies. Just because it could be done, doesn't mean a business would be willing to invest years of R&D to develop the same technology. That's why you pay a business that has already done it so you don't have to spend that money, time, and risk for R&D yourself.

Disc. holding and feeling salty because share price keeps going down