SCT - Scott Tech

[Snoopy]

Some solid growth and backed by even stronger cash flow and balance sheet. 5.5c fully imputed final divvy

Half year surplus was a NPAT of $2.096m. Full year profit was $8.134m. So 2HY2016 profit was $6.038m.

$6.038m / 74.681m = 8cps

However, long term shareholders will know that SCT earnings tend to be lumpy. So the fact that SCT was able to reward shareholders with a juicy final dividend of 5.5c per share may owe as much to good luck as good management.

As for the exceptionally strong cashflow, I am picking the $40.369m injection of new capital from the cash issue might have had something to do with it! Take out that and cashflow is negative $6.125m for the year. However, with such a strong cash pile waiting for investment, an underlying negative cashflow is not a problem, for now.

SNOOPY

[Under Surveillance]

Half year surplus was a NPAT of $2.096m. Full year profit was $8.134m. So 2HY2016 profit was $6.038m.

$6.038m / 74.681m = 8cps

However, long term shareholders will know that SCT earnings tend to be lumpy. So the fact that SCT was able to reward shareholders with a juicy final dividend of 5.5c per share may owe as much to good luck as good management.

As for the exceptionally strong cashflow, I am picking the $40.369m injection of new capital from the cash issue might have had something to do with it! Take out that and cashflow is negative $6.125m for the year. However, with such a strong cash pile waiting for investment, an underlying negative cashflow is not a problem, for now.

SNOOPY

Grateful for the products of your rummagings, Snoopy.

If you check you'll find H1 NPAT was $1.948m [page 4 2016 Half Year Report], making H2 6.186M.

SCT earnings certainly do tend to be lumpy. There is lumpiness from year to year. And there is lumpiness within each FY. In each of the last 8 FYs, the biggest lumps within the year have fallen in H2. Indeed over the 8 years the average ratio of NPAT H2:H1 is 2.6:1. In FY 2016 the ratio was 3.2:1, and in FY 2015 4.3:1. The lowest ratio was 1.3:1, in FY2013. I offer no explanation as to why H2s are relatively so profitable year in year out (and I'm not sure that it matters for long term holders so long as the auditors are satisfied).

I think your comments on underlying cash flows being negative are a wind up. Paying off debt to zero is not an ongoing activity.

[sb9]

https://nzx.com/companies/SCT/announcements/291423

Bolt in another acquisition into mix from across the ditch...sweet!!!

[sb9]

Fellow SCT holder on the forum, any thoughts on recent weakness and big seller at current 195 level. I know general market sentiment is weak and also liquidity an issue for this scrip.

[Snoopy]

Fellow SCT holder on the forum, any thoughts on recent weakness and big seller at current 195 level. I know general market sentiment is weak and also liquidity an issue for this scrip.

It is interesting that 7000 shares at $1.95 is thought of as a 'big seller'. But for SCT it's true! SCT closed at $1.87 today, down 6.5% - but still cum a 5.5c dividend. To me $1.87 looks closer to fair value. It looks like the recent share price peak was $2.24. So at $1.87, we are down 17% from that peak. Nevertheless we shareholders are still showing a good gain for the year, even with the latest decline. The only company specific thing I can think of is the exchange rates. We are pretty strong against Oz which is where the most growth is. Getting high against the USD too. Of course SCT do hedge their contracts once won. So don't expect any flow through from adverse exchange rates in the near future. But sometimes markets look out further than that!

SNOOPY

[Snoopy]

As usual when the AGM (for 2015) is held in Dunedin, the Otago daily Times covers it well.

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

The Christchurch based 2016 AGM meeting, held at the Maces Road workshops, opened with the usual health and safety briefing, and the instruction "in the event of an earthquake sit tight." The usual apologies, the most notable being new board member Andre Nogueira, CEO of JBS North America and Australia, were made. Chairman McLauchlan introduced the rest of the board and senior staff and asked if any members of the media were present. 'Stunned silence' was the result: a disgrace for the NZ media in general I thought. So it looks like my own private report will be the only write up (bar regurgitation of the press release) that shareholders will get!

I won't regurgitate the press releases myself. Instead I will concentrate on the shareholder questions, the tour of the workshop by the site manager, and tit bits from the senior staff I spoke to over a glass of wine post meeting.

I was pleased to hear that number one on CEO Chris Hopkins investment priorities was people. The Maces Road workshop was strangely silent, with even the site manager saying that the current workload was a little lighter than ideal. Nevertheless the AGM announcement of another new production line order worth $6m from North America will soon have things humming again. Working hours at Maces Road are from 7am to 3:30pm, with overtime if required finishing by 5:30pm. Special permission is reqiured from higher up the management chain if workers are required to be engaged for longer hours than that. I guess this generally means 'no traffic jams' for employees and the chance to get back home when their secondary school children return from school. Mention was made of the loyal but ageing workforce during the walkabout. Middle aged people are less inclined to view 'work travel', for site installations, as a bonus. So a real push is being made to reinvigorate the workforce with young blood. Mechatronics graduates, a combined electro-mechanical discipline that didn't exist until a few years ago are being targeted. Sometimes Scotts lose these people to the big OE, but often they come back. According to the Maces road manager, the staff reinvigourment program is working.

A shareholder commented on the lack of recognition of senior staff in the annual report. In other companies the senior managment got their picture and at least a small write up in acknowledgement. "Point taken" said Chairman Maclauchlan and resolved to fix it.

The main job in progress in the Maces Road workshop was a large order of presses for Indonesia, for manufacturing shipping pallets out of recycled plastic bags. Scotts are much more open to sub contracting these days, having not rebuilt their Maces Road staff up to previous levels attained before the last appliance market downturn. But really heavy engineering like this is done in Christchurch, because Christchurch won a worldwide tender to build these items. Yes, Christchurch was cheaper than China for the manufacture of eight identical units! I love the back story behind this particular 'heavy duty press' project. Apparently someone was busy stuffing plastic bags inside a sandwich toasting machine and cooking them (no I don't understand the mentality behind it either). The result was a slightly globby plastic brick, and the same person thought " I wonder if I can use this?" Fast forward to the shipping pallet industry. 'Globby platic' recycled bricks are fed into a stamping press and at the touch of a button, a plastic shipping pallet is produced. In the past pallets have been made of wood, tended to be 'one use', and carried the threat of 'bug incursion' in the wood from their country of origin. Plastic pallets do not contain a bug incursion threat and are reusable!

A shareholder questioned the 'no comment' on the annual report and addresses on the Milktech robotic milking system. CEO Hopkins replied that it was still in its development phase and taking longer to develop than expected. Little progress had been made over what has been a near 18 month hiatus, but conversely few resources had been committed during the year, with most creative attention being focussed at Meat Industry proicessing. Hopkins admitted one option was cancellation of the Milktech project. But he quickly added that all new ventures like this were constantly subject to the business case being re-evaluated and stacking up, so the final destiny of Milktech really is undecided.

Meat processing was unsurprisingly a big focus for shareholder questioning. A shareholder asked why, when around $40m worth of new capital raised, the head count in Dunedin - the home of meat industry robotics - had only increased by four people? Andrew Arnold, the chief meat industry development man, answered that during the year Scotts had built and delivered three X-ray and Primal Cutting Machines and four Middle Section machines. Yes he was happy with that output, a record for the company. And yes he had all the people he needed and the other resources he needed to keep output at that level. I found out later that the much touted expansion of the Kaikouri road workshop in Dunedin had not happened, and that the increase in staff was more likely to reflect a growth in office positions than on the floor development and manufacturing positions. Hats off then to Andrew Arnold and his team who achieved 'record meat industry sales', without the deployment of any of that new JBS cash or more staff!

I continue to be surprised as to how long the 'product development' to 'sales', 'meat industry robotics' timeline is. The X-ray Primal and Middle system announced at the AGM as an order for a New Zealand customer had been eight years in the making! Separate to that, the new Chinese partners in Silver Fern Farms have been out in New Zealand inspecting the SFF Finegand plant in Central Otago. After the tour, I was reliably informed they went back to pay particular attention to the automated lamb boning room! Despite being a partner with Scotts since the early days of meat industry robotics, SFF has been somewhat 'lazy in pace' in adopting this technology themselves. But with Chinese cash now bolstering the formerly stretched SFF balance sheet, readers can join the dots. The other partner with Scotts in Meat industry robotics that doesn't get much of a mention is 'NS Innovations', the joint venture with Northern Co-operative Meat Company of Australia. The problem here is that the champion for the technology inside the Northern Co-operative has left the business. So things have ground to a virtual standstill. This highlights how importance the personal relationships are, despite apparently compelling economics, in getting meat industry robotics projects off the ground. It is often the smaller unlisted sometimes family controlled firms that see the benefits and don't have the corporate bureaucratic systems to navigate that get this market leading technology installed first!

Unlike other Christchurch AGMs, Senior management and directors were in no hurry to rush away and catch the last flight back to Dunedin. It turns out they were staying in town for a dinner to commemorate the retirement of Rocklabs General manager Ross Garrick, himself down from Auckland for his last AGM as an employee. This speaks volumes for the camaraderie of the board and the senior management team. The JBS boys too, on the board, have fitted right in to the SCT friendly but no nonsense business culture at board and senior management level. Everyone seems to get on and the vibe was overwhelmingly positive for the future. Good to see.

SNOOPY

[sb9]

Thanks for your reporting of ASM snoopy, did read the presentation docs, looks very positive.

[Marilyn Munroe]

The chairman or managing director(can't remember which) during their presentation said they are increasingly being asked if their lamb processing technology can be adapted to handle cattle or pigs

Boop boop de do
Marilyn

PS: Nibbles afterwards were of the usual high standard

[Snoopy]

The chairman or managing director(can't remember which) during their presentation said they are increasingly being asked if their lamb processing technology can be adapted to handle cattle or pigs

Boop boop de do
Marilyn

Interesting you should mention this Marilyn. I was curious as to why the transition from the 'automated lamb boning room' to the 'automated beef boning room' is taking so long. Both are four legged ruminants, with four legs and a 'middle section'. A lamb is 'so big' so the machinery to handle it is 'so big'. A calf is 'sooo big'. So all you have to do is to design machinery 'sooo big' to match right?. I figured this out in my shower one evening. So I was surprised that all those boffins at Scott Technology in Dunedin apparently couldn't see it. But it turns out things are not quite so simple.

The problem is that lambs are strung up and processed as a 'whole animal', while cows and pigs are hung up and priocessed as 'half animals'. My guess is that this is because:

1/ of the physical size difference of the different kinds of carcases, and the practicality of human handlers being able to 'handle' the sheer size of the 'assembled' and 'dismembered' product. AND
2/ for 'packing reasons'. Transport half carcases of beef means that the same truck can transport far more animals in much less space.

The whole point here is that picking up and processing a 'cow carcase' is not the same as just scaling up the same job on a 'lamb carcase'. Where does the robot hold it? How is the carcase balanced when it is being handled? The good thing is, when these questions are answered for beef cattle, it shouldn't take nearly as long to adapt the robotics to pig processing. Pigs are also processed in halves.

I think only prototype testing for beef is scheduled for the FY2017 financial year. So I don't have any great expectations for the further expansion of 'meat industry robotics' in FY2017. The prize when Scotts do finally figure out the 'automated beef boning room' will be very large though. Apparently there are studies out there that show that with accurate cutting to avoid waste, and direction to achieve exactly the right cuts of meat, the potential increase in value of each individual beef caracse will be as much as $13 per animal! Think of those big meat plants in Australia where thousands and thousands of beef cattle are slaughtered each year and you can see why JBS are now on board with Scotts!

SNOOPY

[percy]

Interesting you should mention this Marilyn. I was curious as to why the transition from the 'automated lamb boning room' to the 'automated beef boning room' is taking so long. Both are four legged ruminants, with four legs and a 'middle section'. A lamb is 'so big' so the machinery to handle it is 'so big'. A calf is 'sooo big'. So all you have to do is to design machinery 'sooo big' to match right?. I figured this out in my shower one evening, so I was surprised that all those boffins at Scott Technology in Dunedin couldn't see it. It turns out things are quite so simple.

SNOOPY

This post must be this year's Share Trader "Classic of The Year."
I will not comment further about thinking of boners while in the shower, for fear of being banned.!!.lol.