Skellerup (SKL) Fundamentals

[Snoopy]

I am using the table below as a tool for predicting FY2021 income. The input figures are taken from the Segment Information in the half year report.

	Agri Division	Industrial Division	Total Divisions	Tax as Declared
1/ EBIT	$10.092m	$9.919m
Liabilities	$11.414m	$34.989m	$46.403m
% Liabilities	24.6%	75.4%	100.0%
2/ less Apportioned Finance Cost	($0.312)	($0.956m)	($1.268m)
Revenue	$44.214m	$78.850m	$123.064m
% Revenue	35.9%	64.1%	100%
3/ less Apportioned Corporate Cost	($0.723m)	($1.290m)	($2.013m)
4/ equals Divisional EBT	$9.057m	$7.673m	$16.730m
5/ less Tax at 28%	$2.536m	$2.148m	$4.684m	$4.626m
6/ equals Divisional NPAT (as calculated)	$6.521m	$5.525m	$12.046m

Notes

a/ There is an error of $68,000 in the tax paid over the half year. This is because not all income tax is paid at 28% (Skellerup's international facilities are domiciled for tax purposes in different countries and are under different tax regimes) and there is some variation in tax payment timing. Nevertheless I consider this error too small to correct for.

SNOOPY

[Snoopy]

I am using the table below as a tool for predicting FY2021 income. The input figures are taken from the Segment Information in the full year report.

	Agri Division	Industrial Division	Total Divisions	Tax as Declared
1/ EBIT	$25.405m	$30.862m
Liabilities	$16.069m	$35.990m	$52.059m
% Liabilities	30.9%	69.1%	100.0%
2/ less Apportioned Finance Cost	($0.798)	($1.784m)	($2.582m)
Revenue	$93.609m	$157.932m	$251.541m
% Revenue	37.2%	62.8%	100%
3/ less Apportioned Corporate Cost	($1.407m)	($2.376m)	($3.783m)
4/ equals Divisional EBT	$23.200m	$26.702m	$49.902m
5/ less Tax at 28%	$6.496m	$7.477m	$13.973m	$10.767m
6/ equals Divisional NPAT (as calculated)	$16.702m	$19.225m	$35.927m
Net Profit Margin (NPAT/Revenue)	17.8%	12.2%

Notes

a/ There is an error of $3.206m in the tax paid over the full year. This is because not all income tax is paid at 28% (Skellerup's international facilities are domiciled for tax purposes in different countries and are under different tax regimes) and there is some variation in tax payment timing. I don't have sufficient information about tax bills in differing overseas jurisdictions to correct for this.

SNOOPY

[Snoopy]

Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the numbers into the Buffett style ten year growth model.

For this model I am using an ROE of 15.0% (the actual average of the last 5 years) and a dividend payout ratio of 84% (the actual dividend payout of the last 5 years). I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax must be deducted from dividends compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction assuming all dividends going forwards are 50% imputed.

	SOFY
FY	Asset Backing	Operations Earnings	add OCI (*)	less Dividend	equals Retained Earnings	Unimputed Dividend Tax
2020 (historical)	0.916	0.150	0.011	0.130	0.031	(0.018)
2021	0.948	0.142		0.120	0.022	(0.017)
2022	0.970	0.146		0.123	0.023	(0.017)
2023	0.993	0.149		0.125	0.024	(0.018)
2024	1.017	0.153		0.129	0.024	(0.018)
2025	1.041	0.156		0.131	0.025	(0.018)
2026	1.066	0.160		0.134	0.026	(0.019)
2027	1.092	0.164		0.138	0.026	(0.019)
2028	1.118	0.168		0.141	0.027	(0.020)
2029	1.145	0.171		0.144	0.027	(0.020)
2030	1.172	0.176		0.148	0.028	(0.021)
2031	1.200	0.180
Ten Year Total				1.333		(0.205)

(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

With FY2031 projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price today of $2.95, the expected compounding annual return 'i' can be calculated from the following equation.

$2.95(1+i)^10 = (2.84 +1.13) => i=3.01%

This projected 3.01% return is a net return per year. The equivalent gross return is 3.01%/0.72 = 4.18%. While this kind of return looks attractive, compared with term deposit interest rates under 2%, I don't believe it is sufficient for Warren to be interested in buying into Skellerup. What we have here is a very good company, but one that is what I would term 'fully priced'. The fact that I am predicting the share price in ten years time ($2.84) to be slightly lower than the share price today ($2.95), despite solid incremental operational growth says it all.

What Skellerup share price (P) would Warren need to buy at to get his much touted 15% compounding return per year?

P(1+0.15)^10 = (2.84+1.13) => P= 98.1c

Market movements in the SKL share price over the last few months demand another look at modelled returns for SKL shareholders.

With FY2031 Buffett modelled projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price on 09/01/2020 of $3.80, the expected compounding annual return 'i' can be calculated from the following equation.

$3.80(1+i)^10 = (2.84 +1.13) => i=0.44%

That is not a misprint. I am projecting an annual compounding return of less than one half of one percent per year over a ten year period. This is extraordinary. With major banks now offering a 'measly' 0.9% over a five year term, what my modelling is saying is that such a term deposit investment will be roughly twice as good as investing in Skellerup shares bought today! Could those bankers be 'good guys' after all?

Such a result has caused me to look deeper into the relevance of such 'Buffett modelling'. There are two areas where my model is diverging significantly from what is happening today.

1/ Return On Equity

The first point I note is that my modelled earnings per share for FY2021 of 14.2cps is a long way south of my incrementally modelled 'eps' prediction of 16.9cps (my post 920). In fact my 'Buffett modelled earnings' don't exceed my 'incrementally modelled forecast' figure until FY2029. What has caused this disparity? It is the return on equity figure of 15% that I have used in the Buffett model. If my incrementally modelled earnings come to fruition, and they are in line with Skellerup's own forecasts, then we are talking about a NPAT of $32.856m for FY2021. Based on EOFY2020 shareholder equity, this gives a projected ROE for FY2021 of:

$32.856m / $184.563m = 17.8%

The difference between 15% and 17.8% may not sound a lot. But compounded over ten years, that difference on, say $1000 of compounding equity, can be significant:

$1,000 x 1.15^10 = $4,046

$1,000 x 1.178^10 = $5.146

A 20% gain is significant. But we have to remember this is being accumulated over ten years. The incremental gain we are looking at for one year on a '20% in a decade' gain is:

(1+r)^10= 1.2 => r= 0.18 => an incremental return rate of 1.8 percentage points per year.

2/ Price to Earnings Ratio

If my incrementally modelled earnings come to fruition, then based on Friday's closing share price of $3.80, this means SKL is trading on a forecast PE ratio of:

$3.80 / $0.189 = 20

That doesn't sound too excessive for a well run company with earnings growing at 16.9/ 14.8 = 14% this year. But a PE of 20 will require similar earnings growth in FY2022. That may happen. But Mr Market is pricing in that it has already happened. A PE of 20 is a long way north of the 15.6 historical average. Perhaps such a re-rating is justified? Because so many of Skellerup's products fall under the 'essential ' moniker, they hardly experienced a Covid-19 downturn. So maybe an anti-shock PE premium lift to 20 is fair?

Summary

What we have here is a very good company, but one that is what I would term 'more than fully priced'. Of course that won't stop the share price going even higher in the short term. The fact that my Buffett modelling is predicting the share price in ten years time ($2.84) to be almost a dollar lower than the share price today ($3.80), despite solid incremental operational growth, says something. We are going to have to regard today's earnings as 'busting the historical norm pattern' and 'being permanently more efficient' to make an investment in Skellerup today make sense. We are also going to need that PE ratio of 20 to not reduce going forwards. I have to convince myself that 'things really are different this time' for my re-rating assumptions to be enduringly valid. And I know from past experience this is a dangerous investment track to go down.

Nevertheless Skellerup remains today as one of the few traditional NZX listed shares with genuine global growth opportunities. I have decided to keep my full holding for now, but keep a hawk's eye on any developments.

SNOOPY

[nztx]

Market movements in the SKL share price over the last few months demand another look at modelled returns for SKL shareholders.

With FY2031 Buffett modelled projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price on 09/01/2020 of $3.80, the expected compounding annual return 'i' can be calculated from the following equation.

$3.80(1+i)^10 = (2.84 +1.13) => i=0.44%

That is not a misprint. I am projecting an annual compounding return of less than one half of one percent per year over a ten year period. This is extraordinary. With major banks now offering a 'measly' 0.9% over a five year term, what my modelling is saying is that such a term deposit investment will be roughly twice as good as investing in Skellerup shares bought today! Could those bankers be 'good guys' after all?

Such a result has caused me to look deeper into the relevance of such 'Buffett modelling'. There are two areas where my model is diverging significantly from what is happening today.

1/ Return On Equity

The first point I note is that my modelled earnings per share for FY2021 of 14.2cps is a long way south of my incrementally modelled 'eps' prediction of 16.9cps (my post 920). In fact my 'Buffett modelled earnings' don't exceed my 'incrementally modelled forecast' figure until FY2029. What has caused this disparity? It is the return on equity figure of 15% that I have used in the Buffett model. If my incrementally modelled earnings come to fruition, and they are in line with Skellerup's own forecasts, then we are talking about a NPAT of $32.856m for FY2021. Based on EOFY2020 shareholder equity, this gives a projected ROE for FY2021 of:

$32.856m / $184.563m = 17.8%

The difference between 15% and 17.8% may not sound a lot. But compounded over ten years, that difference on, say $1000 of compounding equity, can be significant:

$1,000 x 1.15^10 = $4,046

$1,000 x 1.178^10 = $5.146

A 20% gain is significant. But we have to remember this is being accumulated over ten years. The incremental gain we are looking at for one year on a '20% in a decade' gain is:

(1+r)^10= 1.2 => r= 0.18 => an incremental return rate of 1.8 percentage points per year.

2/ Price to Earnings Ratio

If my incrementally modelled earnings come to fruition, then based on Friday's closing share price of $3.80, this means SKL is trading on a forecast PE ratio of:

$3.80 / $0.189 = 20

That doesn't sound too excessive for a well run company with earnings growing at 16.9/ 14.8 = 14% this year. But a PE of 20 will require similar earnings growth in FY2022. That may happen. But Mr Market is pricing in that it has already happened. A PE of 20 is a long way north of the 15.6 historical average. Perhaps such a re-rating is justified? Because so many of Skellerup's products fall under the 'essential ' moniker, they hardly experienced a Covid-19 downturn. So maybe an anti-shock PE premium lift to 20 is fair?

Summary

What we have here is a very good company, but one that is what I would term 'more than fully priced'. Of course that won't stop the share price going even higher in the short term. The fact that my Buffett modelling is predicting the share price in ten years time ($2.84) to be almost a dollar lower than the share price today ($3.80), despite solid incremental operational growth, says something. We are going to have to regard today's earnings as 'busting the historical norm pattern' and 'being permanently more efficient' to make an investment in Skellerup today make sense. We are also going to need that PE ratio of 20 to not reduce going forwards. I have to convince myself that 'things really are different this time' for my re-rating assumptions to be enduringly valid. And I know from past experience this is a dangerous investment track to go down.

Nevertheless Skellerup remains today as one of the few traditional NZX listed shares with genuine global growth opportunities. I have decided to keep my full holding for now, but keep a hawk's eye on any developments.

SNOOPY

I'm watching you

Thanks for the updates snoops ..

[Ggcc]

$4.14 now. Where will it stop?

[Biscuit]

$4.14 now. Where will it stop?

Won't stop til it's over-priced .... which possibly it is already.

[BeeBop]

I think it isn't overpriced based on the brands and their future potential. Looking backwards, it is overpriced but I am suspecting that they may be coming into 'their time'.

[Scrunch]

I think it isn't overpriced based on the brands and their future potential. Looking backwards, it is overpriced but I am suspecting that they may be coming into 'their time'.

For all the current holders I hope they come in near, or above the top of the guidance range of $30-$35m. I think they are going to need to do that for the share price not to fall back on the upcoming result.

The downside possibility is that the result hits the bottom end of the guidance. This could be achieved if the 2nd half shows the same 9% growth that the 1st half did over the prior comparative period. However if SKL is now "only" about 9% more profitable than a year ago, is it really worth 60% more? If they are at the bottom end of the range stated a 10-20% fall is entirely possible.

Disc recently sold out at $3.90 as I think there's just a bit too much hype built into the current price. Still a good company but not at any price.

[Waltzing]

Detective Inspector SNOP on the job.

We are hoping for a bit of a miss. Previously held but its a pandemic stock and really far more defensive than one could have imagined.

Next time there is a crash this is one we want.

Sort out your crash stocks now. Crashes show you the best stocks for defensive positions.

[Biscuit]

Sort out your crash stocks now. Crashes show you the best stocks for defensive positions.

Inspector Jabberwocky, that's not a bad strategy. Some crashes are different to others though.