SCT - Scott Tech

[Marilyn Munroe]

Snoopy said;

"I remember a legal case a few years ago when the trustees were severely criticised by the judicial system for having too many assets in 'safe' fixed interest investments,"

Mulligan (deceased) v Pyne Gould Guinness Trust Ltd & Anor [1998] 1 NZLR 481, is the case you were probably referring to.

Boop boop de do

Marilyn

[Snoopy]

Meanwhile the announced dividend reinvestment plan signals SCT are keen on banking capital. Since their bank debt is minimal, I wonder why?

Answers from SCT today. Management want more liquidity, which they think the extra shares bought via the DRP and the latest bonus issue will give them. They are also on the look out for acquistions which they would prefer to pay for without borrowings. If you have the capital, that is a preferable route to discounting the value of your existing businesses by paying for acquisitions with cheap shares. The discount offered on the DRP is generous at 10%. However, given the SCT dividend drought of the last few years I am leaning towards taking the cash myself.

SNOOPY

[Under Surveillance]

I'll be all in on the DRP. However, can't decide whether the extent of the discount, 10%, indicates naivety or desperation. Also, given the light trading of the share (frequently nil trades per day) and that the weighted average price for the DRP will be calculated over just 3 trading days, it would not cost the wide boys much to manipulate the average.

[Snoopy]

"Our underlying net profit after tax on operating results for the year was $3.9 million compared to $0.3 million in 2009. The underlying profit in 2010 was reduced by a tax adjustment of $1.1 million for a tax change on building depreciation that accumulates over the next 50 or more years but is required to be adjusted in the current year."

Just a correction here, after study of the Annual Report for 2010 that arrived today. The $3.9m figure quoted already includes the $1.1m one off tax adjustment. So $3.9m is the after adjustment underlying profit, not the $5.0m that I previously assumed. Also I neglected to take into account the recent 1:10 bonus issue when calculating underlying earnings per share (31.322m shares are now on issue). So actual eps for FY2010 was $3.890m/31.322m = 12.4cps. At $1.38 that means SCT is now trading on a PE of 11.1. For believers in the company that still looks modest. For the doubters that this level of profitability can be sustained I guess you could call that $1.38 share price fair.

I think that given SCT's history, the company probably must now 'earn some stripes' before the wider investing public is willing to consider promotion ( a rerate those shares). I still think a share price of $1.94 is achievable, but SCT may need another year of outperformance 'runs on the board' to get there.

[Snoopy]

I'll be all in on the DRP. However, can't decide whether the extent of the discount, 10%, indicates naivety or desperation. Also, given the light trading of the share (frequently nil trades per day) and that the weighted average price for the DRP will be calculated over just 3 trading days, it would not cost the wide boys much to manipulate the average.

I had assumed the 10% discount was to allow shareholders to depress the share price ( -7% to 10%) by selling out, without effectively losing that dividend cash. The discount probably has to be big because of the low liquidity of the shares, and to give some encouragement for shareholders to retain those shares. You make a very good point about the potential for share price manipulation in this proposed DRP scheme, "Under Surveillance". If the shares are manipulated down, perhaps I will put my hand up for the shares after all to avoid future earnings dilution of my holding.

SNOOPY

[Snoopy]

So actual eps for FY2010 was $3.890m/31.322m = 12.4cps. At $1.38 that means SCT is now trading on a PE of 11.1. For believers in the company that still looks modest. For the doubters that this level of profitability can be sustained I guess you could call that $1.38 share price fair.

More comments on the result from AR2010. p43 shows that revenues are now nearly equally shared between the up and down appliance supply line business ($21.5m) and mining industry equipment ($19.1m for the old Rocklabs). The meat processing industry revenue is a smaller and additional $4.9m, but if you believe managment is poised to 'breakout' this year.

Some of the soft share price action of last week might be because of our exchange rate firming. I don't believe the firming exchange rate will make any difference to SCT over the next 12 months. SCT have a history of fully hedging their Appliance Line profits once a contract is won and there is more than 12 months work in the pipeline from what I can see. In mining supplies SCT have what looks to be a superior product line. I like the portable Container Labs and the automated system option (leveraging SCT's automation technology) for analysing large numbers of samples.

As long as high commodity prices boost mining industry customer profits, I think Rocklab sales should remain buoyant

SNOOPY

[Snoopy]

given that the weighted average price for the DRP will be calculated over just 3 trading days, it would not cost the wide boys much to manipulate the average.

Last sale $1.40 => ex-dividend price of $1.36. Using N=PSxR/P and plan SP discount of 10%, maximum number of shares issued will be:

(31,322,369x 0.04)/(1.36 x 0.9)=1.02m shares

=> Current diluted PE (SP is $1.40) is 11.3x(31.3+1.0)/31.3 = 11.7. Also PE of new shares issued at a discounted $1.22 would be 10.2. A bargain or not? The answer to that question determines if the SCT DRP is for you!

SNOOPY

[Snoopy]

Last sale $1.40 => ex-dividend price of $1.36.

I should note here that I am assuming the SCT share price does not move until it goes ex-dividend, and then trades at the theoretical ex-dividend price for three days. The PE figures quoted will change if the share price moves.

SNOOPY

[Snoopy]

I should note here that I am assuming the SCT share price does not move until it goes ex-dividend, and then trades at the theoretical ex-dividend price for three days. The PE figures quoted will change if the share price moves.

60,000 (about one month's normal trading) shares sold at $1.20 yesterday, c.f. $1.36 being the theoretical ex-dividend price!

Using N=PSxR/P and plan SP discount of 10%, maximum number of shares issued will now be:

(31,322,369x 0.04)/(1.20 x 0.9)=1.16m shares

Very disappointing to see market manipulation like this. But I guess 'Under Surveillance' did warn us.

SNOOPY

[Voltaire]

60,000 (about one month's normal trading) shares sold at $1.20 yesterday, c.f. $1.36 being the theoretical ex-dividend price!

Using N=PSxR/P and plan SP discount of 10%, maximum number of shares issued will now be:

(31,322,369x 0.04)/(1.20 x 0.9)=1.16m shares

Very disappointing to see market manipulation like this. But I guess 'Under Surveillance' did warn us.

SNOOPY

Snoopy, from memory there is an express provision in the DRP statement from SCT that enables them to set aside the discount formula if there is clear evidence of manipulation of the share price over the determining period.

Given the volume of shares traded, if there is manipulation afoot it points to someone with a very substantial holding pulling the strings (in order for the associated gain in the number of issued shares to cover the loss on sale at $1.20).