SCT - Scott Tech

[Under Surveillance]

SSH notice from Fisher Funds today; they've sold completely to JBS.

[Snoopy]

As usual when the AGM is held in Dunedin, the Otago daily Times covers it well.

http://www.odt.co.nz/news/business/3...rol-scott-tech

So how to forecast future profits for FY2016? This excerpt from Chris Hopkins AGM address is significant.

-----

Superconductivity

This covers the activities undertaken by our business, HTS-110, based at Lower Hutt. Two key market segments that continue to show promise is the hard disk drive sector and mobile NMR (Nuclear Magnetic Resonance imaging). Most of the hard disk drive manufacturers in the world, including Seagate, Hitachi and Western Digital, are utilising our magnets in their development of new generation hard disk drives. Once through the development phase we expect significant volumes will be required for their production facilities.

In addition, our mobile NMR systems continue to gather interest with advanced trials at pharmaceutical companies and scientific laboratories. With improving sales, cost containment and improving margins, we expect a positive contribution in the year ahead.

-----

p50 of the Annual Report shows High Temperature Superconducting Revenues increased from $1.817m (FY2014) to $2.059m (FY2015). This was apparently enough to start covering costs. Not a big deal in the overall picture. But important in the sense that HTS-110 will no longer be a drag on the company.


Also this from Hopkins:

-----

Americas

The Americas remain our largest end market for our equipment and technologies. Total sales through RobotWorx, which was acquired in May 2014, are at levels nearly twice of that when the company was purchased. (edit from AR2015 p11 - Robotworx sold 187 robots, which was an increase of 58% on the prior year). We are progressively adding Scott management and capability to our American operations as well as building relationships with manufacturing companies looking for automation partners. Opportunities continue to arrive on a regular basis as US manufacturing rebounds with a thirst
for automation and robotics.

-----

Looking on p49 and p50 of the annual report, NPAT from 'Americas Manufacturing' has gone from $328k to $1.807m. With interest rates set to rise in the US, I am not sure we will see such a strong contribution from Robotworx in FY2016. Robotworx was acquired on 14th May 2014. So only 3.5 months of Robotworx results were consolidated into the FY2015 results. p45 of AR2014 states that NPAT from Robotworx for FY2014 was $492k. This means the rest of the SCT business in the USA must have lost money in FY2014.

$0.328m - $0.492m = -$0.164m

Again from p45 FY2014

"Had these acquisitions (edit- very largely Robotworx) been effected at 1 September 2013, the revenue of the Group from continuing operations would have been approximately $67 million, and the profit for the year after taxation and non controlling interests from continuing operations would have been $3.25 million."

From the income statement for FY2014:

Total comprehensive income is attributable to: Members of the parent entity + Non controlling interest was $2.925m. So we can conclude the Robotworx profit for FY2014 was:

$3.250m - $2.925m = $0.325m

One more point of note is the acquisition of MAR in Australia. The total cost of acquisition was $14.224m (AR2015 p45). Included in AR2015 p46 is the (from 31-01-2015 statement that for the period owned the contribution from NPAT by MAR was $165k.

Further down the same page it states that

"Had this acquisition been effected at 1 September 2014, the revenue of the Group from continuing operations would have been approximately $80 million, and the profit for the year after taxation and non-controlling interests from continuing operations would have been approximately $6 million."

Total comprehensive income is attributable to: Members of the parent entity + Non controlling interest was $4.764m. So we can conclude the full year MAR profit for FY2015 was:

$6.000m - $4.764m = $1.236m

All this stuff is 'grist' for the 'forecast mill'.

SNOOPY

[Snoopy]

SSH notice from Fisher Funds today; they've sold completely to JBS.

Yet another buy high sell low escapade for Fishers. Glad to see them gone personally - I think they are terrible managers of financial assets. But this is a very good omen for the remaining investors. Doing the opposite of what Fishers do is usually very successful.

SNOOPY

[Snoopy]

So what about FY2013?

Sales growth at Rocklabs has been 19.8%, 48% and 56% over the last three calendar year comparisons. I am expecting slower growth in FY2013 ( +10%, or $3.5m of incremental sales) But due to the 'standard nature of products' I think Rocklabs will have high margins on these new earnings, as high as 50%. This equates to $1.7m of new NPBT.

The meat industry robots I believe will at last make some real money for SCT. Management have forecast sales to double and I am looking at a NPBT increase of $1.1m. That is calculated assuming a 10% margin..

The Appliance line production business I believe will make $0.5m in FY2013, up from nothing in FY2012. This is based on the amount earned by SCT when turnover in that division dropped to $15m ish in 2001.

I am predicting a fall in earnings from 'other automation' as resources are redirected to meat industry robotics. If turnover halves to $2m (still up 100% on FY2011) then NPBT will fall by $0.2m here.

So to summarize:

Profit Increment = 0.72x ($1.7m+$1.1m+$0.5m-$0.2m) = $1.6m.

Of course we have to remove from that the one off exchange rate gain that will probably not be repeated.

$1.6m - 0.72($0.846m) = $1.0m.

That sums to a forecast FY2013 profit of $6.1m + $1.0m = $7.1m

However, unlike the last two years this profit is all real and repeatable. A 16% gain YOY is not be be sneezed at. However I don't see the share price gaining 16% as the PE based on last years results is already a heady 18.5 (sp=$2.50). Time for that PER to come back a bit to better reflect potential forward growth, I believe.

Always interesting to look back to see how good a forecaster you were. Actual adjusted profit was $5.384m for FY2013. While I predicted further growth for Rocklabs, actual 'mining' revenue decreased from $34.0m to $28.8m.

So removing my $1.7m forecast before tax profit increment for Rocklabs:

$7.1m - 0.72($1.7m) = $5.9m

Given Rocklabs sales actually decreased in FY2013 (the above assumes level sales YOY), the probable decrease in the profitability of Rocklabs seems the main source of my forecasting error. My prediction about the share price coming back from $2.50 odd was correct though.

Fast forward to FY2016. Taking the base level profit of FY2015 (adjusted to $4.725m NPAT) how do I see things developing over the current year?

Amount	Description	Calculation
$4.725m	Baseline Profit FY2015
+$0.800m	Interest saved from recapitalisation	$1.132m x 0.72
+$0.194m	Interest earned from surplus capital	$9m x 0.03 x 0.72
+$0.226m	HTS-110 elimination of losses	$2.1m x 0.15 x 0.72
+$1.490m	Meat industry Robotics (incremental)	($15m-$1.201m) x 0.15 x 0.72
-$1.000m	Appliance Production Lines	Based of $13m sales, down yoy
+$1.075m	MAR sales annualisation adjustment (sales steady)	$1.236m-$0.161m
-$0.230m	Adjust profit between FY2014 acquistion year & FY2015 peak
$7.280m	Forecast NPAT Total

Other Assumptions:

1/ No change in the contribution of Rocklabs YOY.
2/ No benefit from decrease in exchange rate YOY. I am assuming that due to the weak mining and appliance line outlook some discounting will be required to acquire overseas work.
3/ No benefit from the new 'scale' that new capital was meant to bring. Benefits from scale should come. But I am not expecting any in the next twelve months.

In theory (assuming scheme of arrangement is approved by the court) there are now 74.8m shares on issue.

So NPAT eps for FY2016 will be: $7.28m/74.8m = 9.7cps

Last year the dividend was 8cps. So there is room to hold the dividend steady on the increased number of shares. Good for those pensioner shareholders (7.8% gross yield).

At $1.42, SCT trades on a perspective PE of $1.42/9.7 = 14.5

Given the hoped for growth potential with JBS as a partner, this sounds about right. However, the market will be watching to see some tangible benefit from the 'scalling up' of operations. That will take a couple of years to emerge, and one year for the market to price it in. Consequently I see little share price movement over the next 12 months.

Snoopy's recommendation: hold at $1.42, buy only on weakness.

Criticisim welcome :-)

SNOOPY

[Snoopy]

You certainly are consistent in your dogged refusal to recognise the importance of keeping on the right side of market trends, Snoopy. "Selling into market strength" is just as foolish as the "buying into market weakness" that you were doing all the way down! I have plotted a few of your comments on the chart below and it is painfully obvious that you would have done far better keeping your money in your pocket, rather than averaging down as you did. Buying an obviously downtrending stock is not a good idea - and you provide a perfect example of what happens to anyone foolish enough to do this. Certainly you were able to reduce your average entry price, but all the time you were doing this, your capital was being eroded as you were adding to your SCT shareholding taking positions that, years later, are still under water.

You are selling a few now? The time to sell was when I did - way back in 2005 when SCT stopped rising and started falling. Currently, SCT is in an uptrend but hitting consistent resistance at around $1.42.

Snoopy, you made a huge gain on SCT - and gave nearly all of it back to the market. Having tripled your money in just 3 years, you have ended up with a 10 year average gross yield of just 5.6%. How? By holding on to (and buying more of) a downtrending stock.

You say that "you have to be prepared to hold shares across the ups and downs of the business cycle" and here we see a graphic illustration of the folly of doing just that.

Interesting to look back on this post by Phaedrus, castigating me for my SCT investment strategy. It is also interesting to see SCT in what is now 2015 on that resistance line of $1.42 -again. Not that I believe any of that T/A stuff of course :-).

So what has happened since that time? One thing that has varied a lot over the time I have held SCT shares (mostly because I have been steadily building up my holding) is the number of shares I have held. If I were to start from my median holding level on this share to date, my investment time-frame would start towards the end of this chart (EOCY2008). Since then:

1/ I managed to buy some more shares at 70c in April 2009 (at least Phaedrus would have approved of that - oh wait he wouldn't, things were still downtrending then).
2/ Then in March 2010 I got some shares at 0c (because of a bonus issue).
3/ Roll into 2011 and a proposed rights issue was announced at the end of March, although no price was announced at that time. So shortly afterwards I sold some SCT shares at $1.49 to free up funds for that coming issue.
4/ The issue price ended up being $1.20, a price which I was happy to reinvest at.
5/ With the price on a roll and the dividend yield reducing, I took some capital off the table at $1.80 and
6/ when it continued to rise, some more capital came out at $2.60.
7/ When the price came back and the yield improved I bought back some of those shares at $1.75
8/ and $1.51.
9/ Finally and most recently I subscribed to bought new shares at $1.39, just prior to the recent rights issue.
10/ I took up my rights in that issue as well. So I expect another parcel of shares at $1.39 in the new year.

Phew! This is quite a lot of activity for a 'buy and hold' investor (clue: Being a buy and hold investor doesn't mean you can't adjust your portfolio weightings when appropriate)! Nevertheless it all seems to have paid off, despite doing almost everything wrong from a trading perspective. Of course the fallacy with trying to trade SCT is that because of the very low liquidity, the theoretical exit and entry points on the chart are not achievable. This is because buying even a minmum sized parcel of shares would typically double or more the actual number of shares traded on the market and upset the supply demand balance that the chart showed. The only way I found to get the volume required was to buy or sell against the trend. This is why buying into weakness and selling into strength (the exact opposite of what traders do) has worked well for me here.

Come the new year my average entry price will increase to 83.2c. I have simplified my analysis slightly by assuming no dividends would have been paid from acquistions before those companies were part of SCT.
I have complicated by analysis by discounting the dividends based on the ever increasing number of shares available (because of bonus issues, rights issues and the DRP) over my median holding period (sum of dividends over 7.5 years: 44c). Using today's $1.42 offer price, my compounding return (r) is calculated as follows:

83.2(1+r)^7.5 =(142+44) => r= 11.3% (net) [15.7% gross, based on 28c tax rate]

That kind of return may not stand out over one year. But compounding over 7.5 years makes for a very satisfactory investment from my perspective.

SNOOPY

[Snoopy]

Come the new year my average entry price will increase to 83.2c. I have simplified my analysis slightly by assuming no dividends would have been paid form acquistions before those companies were part of SCT.
I have complicated by analysis by discounting the dividends based on the ever increasing number of shares available (because of bonus issues, rights issues and the DRP) over my median holding period (sum of dividends over 7.5 years: 44c). Using today's $1.42 offer price, my compounding return (r) is calculated as follows:

83.2(1+r)^7.5 =(142+44) => r= 11.3% (net) [15.7% gross, based on 28c tax rate]

That kind of return may not stand out over one year. But compounding over 7.5 years makes for a very satisfactory investment from my perspective.

Financial Year	Dividend (Final + Interim)	No. Shares on Issue EOFY	Share Dilution Correction Factor	Adjusted Dividend (Summed)
2HFY2008	0c	28.277m	0.6218	0c
FY2009	0c+0c	28.475m	0.6262	0c
FY2010	1c+1.25c	31.322m	0.6888	1.55c
FY2011	4c+2c	39.721m	0.8735	5.24c
FY2012	5c+2.5c	40.689m	0.8946	6.71c
FY2013	5.5c+2.5c	41.422m	0.9043	7.23c
FY2014	(5.5c+2c)+2.5c	44.009m	0.9678	9.68c
FY2015	5.5c+2.5c	45.474m	1.0	8.00c
1HFY2016	5.5c	45.474m	1.0	5.50c
Total				43.91c (44c)

The above calculation was IMO necessary because Scott Technology has been acquiring companies (like HTS-110) for future growth that are currently unprofitable. This means the earnings base of the parent company is being diluted on a per share basis (at least for now). And this means that any share you hold today would not have received the headline value of the historical dividend, had you held the same share 'back then'. This retrospective earnings dilution is 'corrected for' with my adjustment factor.

SNOOPY

Note: This correction is nothing to do with a time value of money discounted cashflow analysis. DCF is another factor again which I tend not to use for simplification, because I don't need to know the actual future value of any investment. I just need to know if one investment is comparatively better than another.

[Snoopy]

Using today's $1.42 offer price, my compounding return (r) is calculated as follows:

83.2(1+r)^7.5 =(142+44) => r= 11.3% (net) [15.7% gross, based on 28c tax rate]

That kind of return may not stand out over one year. But compounding over 7.5 years makes for a very satisfactory investment from my perspective.

I need to add the postscript 'past returns are not necessarily indicative of future returns' to the above post.

In theory (assuming scheme of arrangement is approved by the court) there are now 74.8m shares on issue.

So NPAT eps for FY2016 will be: $7.28m/74.8m = 9.7cps

Last year the dividend was 8cps. So there is room to hold the dividend steady on the increased number of shares. Good for those pensioner shareholders (7.8% gross yield).

At $1.42, SCT trades on a perspective PE of $1.42/9.7 = 14.5

Given the hoped for growth potential with JBS as a partner, this sounds about right. However, the market will be watching to see some tangible benefit from the 'scalling up' of operations. That will take a couple of years to emerge, and one year for the market to price it in. Consequently I see little share price movement over the next 12 months.

'Little price movement over the next twelve months' still means a gross yield of near 8% though. As an investor that kind of return will not test my patience.

My investment strategy for SCT has not changed. The existing business justifies the yield. The growth from HTS-110 (superconducting technology) and the 'scaling up' of the meat processing robots comes for free. This is why IMO, SCT remains a compelling technology sector growth investment. Sadly though, we minority investors have had about 40% of our future growth pie simply handed over to JBS 'for free'. And that is very sad :-(!

OK not quite for free.

JBS put

(17,339,239+ 10,000,000) x $1.39 = $38m

of new capital into SCT. But $38m is still small change compared to the over $500m JBS will gain by rolling out SCT's meat processing technology across just JBS's Australian operations and operating them for ten years. I have previously expressed the view that SCT directors sold out small shareholders to JBS far too cheaply, and I hold to that. The counter argument is that without the $38m JBS cash injection, much of the meat processing IP would be wasted as overseas competitors caught up with SCT's world leading position. Never has 'executing the business plan' been more important for SCT than going forwards from here.

SNOOPY

[Under Surveillance]

I've found some of the views in your recent posts interesting, Snoopy. To the extent that I understand them, and they seem to matter, I accept most.

There seems to be the odd underlying assumption that isn't underpinned by public expressions of intention by JBS. One is that inherited dividend policy/recent dividend payments will be maintained. JBS seem to be looking for a return on equity of at least 15%, and if that is sooner achieved or exceeded by paying no dividends and reinvesting all NPAT, or by returns of capital, the interests of pensioner shareholders are unlikely to hold sway.

Executing the business plan will certainly be important, but presumably H1 2016 will be as good as done before the plan is formalised by a JBS dominated board. From what I can make out that board is to number 5, of whom JBS will appoint 3 including the chairman, the other 2 being independent of JBS. Of the 5 existing directors Batts is standing down, Hopkins is not independent, and one at least of Staynes, McLauchlan and Waller will be farewelled. If all 3 remain available presumably Oakwood, now holding 14.4% of non-JBS shares if it has maintained the number as at 17 September 2015, will play a major part in deciding who leaves to pursue other interests?

[Snoopy]

There seems to be the odd underlying assumption that isn't underpinned by public expressions of intention by JBS. One is that inherited dividend policy/recent dividend payments will be maintained. JBS seem to be looking for a return on equity of at least 15%, and if that is sooner achieved or exceeded by paying no dividends and reinvesting all NPAT, or by returns of capital, the interests of pensioner shareholders are unlikely to hold sway.

I was aware that JBS wanted to improve the profitability of SCT asap U.S.. I wasn't aware JBS had a specific 15% return on equity target. Where did you get that figure from?

I think at the roadshow either Hopkins or McLauchlan (can't remember which), mentioned they look for a 15% return on their new investments. But whether that has been a long established policy (I got the impression it was) or a new target hinted at by JBS, this I don't know. By way of an aside I look for an ROE of 15%+ from my own sharemarket investments (doesn't always happen), or at least the 'growth' ones. So I am very happy that the SCT board has a similar policy.

A 15% ROE does not mean that profits are automatically retained of course. You could still have a 15% ROE and pay out all profits as dividends. So I don't think pensioners in need of income have a particular need to worry, when you might argue that SCT will be 'overcapitalised' particularly when the scheme of arrangement goes through.

Executing the business plan will certainly be important, but presumably H1 2016 will be as good as done before the plan is formalised by a JBS dominated board.

Yes I think so. I would doubt if JBS can make much difference to company policy for a couple of years at the earliest. Having accepted an order for lamb processing robots from Alliance here in NZ, I don't think JBS can break that contract and tell Scott's to put those robots into JBS Australian operations instead. Further down the track though, I do see JBS Australia claiming the lions shares of meat industry robotics installations, while our own meat processors in New Zealand are hung out to dry.

From what I can make out that board is to number 5, of whom JBS will appoint 3 including the chairman, the other 2 being independent of JBS. Of the 5 existing directors Batts is standing down, Hopkins is not independent, and one at least of Staynes, McLauchlan and Waller will be farewelled. If all 3 remain available presumably Oakwood, now holding 14.4% of non-JBS shares if it has maintained the number as at 17 September 2015, will play a major part in deciding who leaves to pursue other interests?

I too am bit baffled at the board composition going forwards U.S.. Batts is stepping down after 60 years with the company to a retirement well earned. I understood that JBS will appoint two to the board (Eastwood and Alvares).

So the board next year will look like:

Stuart McLauchlan, Chairman (defacto JBS man now?, although nominally independent)
Chris Staynes, independent director
Mark Waller, independent director
Brent Eastwood, CEO JBS Australia
Edison Alvares, CFO JBS Australia

Of course that doesn't include Hopkins, but maybe being an 'employee' of Scotts he doesn't count?

I see that Staynes has some health issues:

http://www.odt.co.nz/news/dunedin/35...s-getting-life

So he may be forced to step down at some point? That would further tip the chairs in JBS's favour.

SNOOPY

[Sideshow Bob]

Where does the joint venture between Silver Fern Farms and Scott's sit? (Robotic Technologies). Does half of the profit through the joint venture go to SFF? Our does the JV just cover the development?