SCT - Scott Tech

[Snoopy]

https://nzx.com/companies/SCT/announcements/289790

Looks like the FY results are going to be great plus the guidance for future with these kind of announcements. The new owners JBS are onto a winning strategy here...

Sb9, Scott's have a habit of announcing positive news around annual result time. They mentioned the six extra extrusion and press systems for Range International. However, to my knowledge, Scott's have never specifically mentioned the two full production lines previously ordered before. This is odd, because I would have thought those two big production line orders would have been far more significant news than this latest 'add on' announcement. The Appliance Production Line business is expertise intensive and capacity intensive. Previously all of this work was done at Scott's Christchurh plant. Around ten years ago. IIRC, they took on too much work and had to subcontract a lot of it out. The result was good work, but almost no money for shareholders as all of the potential profits went to sub-contractors!

Roll forwards to today and the Auckland, Christchurch and Dunedin workshops are more flexible with job sharing for the wider group. But now Scott's have their factory facility in China, and possibly MAR in Australia to keep busy too. Thus while the announcement is positive, there are a couple of things I can say for certain:

1/ This announcement will have no impact at all on the FY2016 result, as the financial year has already closed off.
2/ Given the known lack of large project work in the pipeline before this announcement, there is no way to know whether this 'Range International' announcement will even create enough work for SCT to break even in the appliance business, let alone make any kind of profit. I would be looking for a far busier forward work book order than this!

I expect JBS wil if anything be mildly annoyed with this announcement. The big game for them is getting more meat industry robotics into Australia. Thsi announcement does nothing for them, except distracting Scott management away from JBS interests.

SNOOPY

[sb9]

Thanks for your detailed analysis and explanation Snoopy. Will wait and see for their commentary around FY results time next month.

[sb9]

For benefit of fellow Scott Tech shareholders, have emailed CFO re the FY results release date and prompt came back reply saying they're aiming for end of next week subject to Audit and Board formalities.

[Under Surveillance]

For benefit of fellow Scott Tech shareholders, have emailed CFO re the FY results release date and prompt came back reply saying they're aiming for end of next week subject to Audit and Board formalities.

Thanks sb9. "Late" probably translates to "Thursday", given the dates for the last 4 years: Thursday 8 October 2015, Thursday 9 October 2014, Thursday 10 October 2013, Thursday 11 October 2012.

[sb9]

https://nzx.com/companies/SCT/announcements/290792

Here are the results, some solid growth and backed by even stronger cash flow and balance sheet. 5.5c fully imputed final divvy, happy holder

[Snoopy]

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 'scaling 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.

Net interest charge for FY2015 was: $0.032m - $1.134m = -$1.102m
Net interest charge for FY2016 was: $0.299m - $0.773m = -$0.474m

Improvement year to year was $0.628m (vs forecast $0.8m +$0.194m =$0.994m (behind my forecast, maybe some extra costs in there to terminate existing loan facility early?)

No specific mention of HTS110 superconductive technologies. But annual summary says:

"we are starting to see early signs of commercialisation success with greater uptake of our developed technologies." So I am going to assume the elimination of the $0.226m loss as forecast was 'ballpark correct'.

I was predicting a 15% margin in meat industry robotics sales. Scott's share of the 50% joint venture with Silver Fern Farms (RTL) has produced a profit up $0.264m to $0.264m. Taking account the loss from the NSL Australia, the meat industry joint venture, this reduces to a profit gain of $0.250m. Actual result from the meat industry showed 'all revenues' up 256%, but off a low base. Note 26 in the results shows RTL revenue up from $0.293m to $9.689m, which is an increase of 3200%. Work farmed out by the joint ventures to the Scott Technology parent is not included in that combined joint venture $0.250m profit. Work done for JBS in Australia is not included either. So this is why 'real' meat industry revenues, across all of SCT, 'only' increased by 256%. Nevertheless that is substantially more than I was expecting, even if the increase in profitability with such a large increase in revenue may still be within the ballpark of my +$1.490m 'profit adjustment' prediction, based on a 120% increase in business. This could mean that

1/ My assumed 15% gross profit margin was too high (real margin closer to 8%). OR
2/ Some of the work being tackled is still 'work in progress' (part of revenue is not yet billed) OR
3/ Some of the work has been distributed around the new production facilities in Australia, which has increased my assumed production costs, and consequently reduced profits.

OR perhaps a combination of 1,2 and 3?

Appliance sector revenues were up 48%. That was a surprise. This is an increase from $13.606m to $20.137m. Sounds impressive, although I note this is well below the $28.828m of revenue from FY2014. I was assuming a $1m decrease in profitability for appliances over FY2016. But let's assume the actual result profitability was the same as last year.

No mention specifically on Machinery and Robotics (MAR) in Australia, so I will assume my steady as she goes annualised assumption is correct. I am also assuming it is 'steady as she goes' for Robotworx in the USA and the the Rocklabs business based from NZ.

Put all those corrections into my profit forecast table and what happens?

Amount	Description	Calculation
$4.725m	Baseline Profit FY2015
+$0.628m	Net Interest Improvement	(Actual Result)
+$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
$0.000m	Appliance Production Lines	Based on steady YOY profit result
+$1.075m	MAR sales annualisation adjustment (sales steady)	$1.236m-$0.161m
$8.144m	Total Estimated Actual NPAT Breakdown

Actual profit for the year was $8.134m (after tax). So I am picking I am not too far off base with those 'year to year' changes. There are 74.681m SCT shares now on issue. So historical 'eps' is

$8.134m / 74.681m = 10.9cps

At a share price of $2.10, SCT is sitting on an historic PE ratio of:

210 /10.9 = 19.3

Of course we need to recognise that all of this information is now historical. Nevertheless 19.3 means SCT is very much 'priced for growth'. The question now is, can SCT meet the market expectations for this growth? I think it is possible. But I also think the implied increase from the much crowed about upscaled meat industry robotics expansion is disappointing to date. The Mr Market value at $2.10 looks fair. I won't be either increasing nor decreasing my SCT holding on the basis of this result.

SNOOPY

discl: hold SCT

[sb9]

Thanks Snoopy for your detailed analysis.

[littletramp]

This is a whole new ball game compared to SCT of the past. They are cashed up, ambitious with regional and global expansion plans in place, rich in Intellectual Property and expertise, should enjoy currency tailwinds now and for the forseeable future, and the board/decison makers are showing vibrance in their governance and direction. IMHO SCT looks poised to become a significant force in a market sector with real scope in the modern world. A good start by the new management and from an investors perspective it was pleasing to see the dividend/ growth balance. Appreciate hearing any other opinions.

[Snoopy]

This is a whole new ball game compared to SCT of the past. They are cashed up, ambitious with regional and global expansion plans in place,

I might argue that 'cashed up' and 'with regional and global expansion plans in place' is a good description of Scott's position since it listed in the 1990s!

It is only in recent times, with the acquistion of Robotworx (USA) and MAR (Oz) that the balance sheet has been looking strained. Now fixed of course with the cash issue. Scott's need a strong balance sheet, because they need to be able to fund projects with a time lag from many months to one to two years between 'receiving an order' and 'delivery and payment'. In this business having access to plenty of cash is a necessity. 'Ambitious' I will grant you, although Scott's have been 'pushing the limits' in engineering terms right back to the early production systems days.

rich in Intellectual Property and expertise,

...with the key point being they now have the financial capital to leverage their intellectual capital. As you say though Littletramp, very dependent on having engaged skilled employees to push the barrow.

should enjoy currency tailwinds now and for the forseeable future,

That comment has been made before too. I remember the self appointed advisor to the Minister of Finance, Graham Marsh (ex SCT chairman) standing up at an AGM suggesting that GST should be variable and raised periodically to constrain consumer demand to give exporters some relief, rather than use the blunt tool of using higher reserve bank interest rates. The idea might have even worked. Yet the dollar just keeps going up. Scott's are somewhat insulated from currency these days by having capability in other non NZD home domiciled markets in which they operate.

and the board/decison makers are showing vibrance in their governance and direction.

So far the only home run hit by the board has been the Rocklabs acquisition. And my understanding is that Rocklabs found the SCT board, not the other way around. SCT have been involved in various other high technology ventures that, although technologically sound, (the automated milking system and superconductive electromagnets come to mind), have shown no return for shareholders as yet! However, fire a gun off in all sorts of directions and eventually you will hit the target. I would describe the board as more 'scattergun' than 'directional' in approach! Not that this is necessarily a bad thing.

Meat industry Robotics has been a pie in the oven 'long time cooking'. Whether when finally dished up to shareholders that pie contains gravy remains to be seen. It has been good for the employment of engineers though.

SNOOPY

[littletramp]

Appreciate the feedback Snoopy.