Skellerup (SKL) Fundamentals

[Snow Leopard]

Sold out completely today.

Bought more CBL with the some of the proceeds.

So now need to sell something else to continue with Plan A.

While not a spectacular share if they actually achieve moderate growth and keep paying a divvy then it is not a bad share to own.

Best Wishes
Paper T

[Beagle]

For what its worth I reckon that's very good selling PT. Go buy yourself a good steak and give yourself a pat on the back.

[Snow Leopard]

For what its worth I reckon that's very good selling PT. Go buy yourself a good steak and give yourself a pat on the back.

Lunch was actually Ayam Goreng dan Jus Mangga.

Selling out of a very definite uptrend is not something I would suggest anybody does lightly.

Best Wishes
Paper Tiger

[Snoopy]

Just what business is Skellerup in? Skellerup is New Zealand’s largest industrial rubber supplier and exports to more than 30 international markets. From the FY2014 annual report:
“The Skellerup group markets develops and manufactures highly technical polymeric products and vacuum pumps. These products are distributed worldwide for a variety of specialized –industrial-AND-agricultural- products.”

Skellerup product development involves materials, product design and sales staff working together as a team.

Skellerup Industrial uses this ‘team approach’ to solve ‘niche industrial’ problems. One product, “Ultralon” foam, is being used for orthotic insoles. But Ultralon is also used in leading makes of ski boots like Atomic, Fischer, Scarpa and Scott.

The Masport pump for liquid waste is mounted on truck and trailer units all across the USA . Skellerup’s ‘Masport’ dominates that market in the shale and Hydrocarbon industry.

The ‘Flexflow’ rubber chute system, after six years of development, is now specified by BHP in their Pilbara region developments. Flexflow allows sticky yet abrasive iron ore extract to be moved with much reduced downtime. Future applications for ‘Flexflow’ could include bauxite, gypsum and coal. These three examples aren’t giant markets, but part of a wide small market niches serviced well. Skellerup’s customer focussed team approach mean they are very strong across a series of what are in global terms minnow (but profitable) markets.

Skellerup’s Agridivision manufactures and distributes products for the global dairy industry, OEMs and dairy sector distributors. Skellerup is the second largest dairy rubber supplier in the world. Delaval of Sweden claims a 50% share of the dairy market equipment globally and turnover of $NZ1.5 billion (all industry products). By contrast, the turnover of the Skellerup Agridivision in FY2014 was $80m. That means Skellerup is likely second by a long way, yet still ticks the ‘major player’ box.

Conclusion: Requirement satisfied

Skellerup is organised into two principal divisions:

1/ Agri: manufactures and distributes milking liners, tubing, filters and feeding teats. It also sells dairy vacuum pumps and other agricultural products, notably rubber footwear. Skellerup is the second largest manufacturer of dairy rubberware in the world. The new dairy rubber-ware manufacturing facility at Wigram is the base for future growth. 60% of Agridivision sales are now outside of NZ. Markets targeted for future growth are Brazil, India, China and Russia as these nations gear up to meet pent up home market demand. Growth prospects come from the ability to customise short runs of products based on Skellerup's intimate knowledge of their rubber raw materials and how it reacts with dairy animals. Given Skellerup make all their production tooling 'in house', there is no better company to design products that are lighter and more ergonomic to use. The Skellerup market presence through 'Argi' is definitely major.

2/ Industrial: manufactures technical polymers for construction, infrastructure, automotive, mining and general industrial applications. This division also sells industrial vacuum pumps. The static revenue performance of the industrial division over recent years does not give an accurate picture of the potential for this division. The near simultaneous collapse in iron ore and oil prices after 2013 hit this division hard with 50% of Industrial Division sales going to iron ore mining companies in Australia and petroleum companies in the USA. Fast forward to FY2017 and the iron ore and oil industries make up just 20% of sales. 50% of sales today are from potable water and waste water projects.

How did this market adaptation take place? In simple overall terms, much of what Skellerup does can be summed up by using rubber compound engineering to to keep liquids either 'in' or 'out'. When put in these simple terms you can see how existing rubber technology can be relatively easily adapted to other industries. Lessons learned in oil and gas transportation were directly applicable to the waste and potable water markets. Fundamental global trends of 'growing populations', 'changing weather patters (flooding more common)' , and 'ageing infrastructure in many developed cities' all produce a tailwind of opportunities that is less susceptible to the vicissitudes of commodity markets. A rubber seal is not the most expensive component of an underground piping system. But it is an absolutely critical components. So saving money on a seal is likely a poor risk strategy when the quality of the competition is unknown. Skellerup works closely with pipe manufacturers and this gives them a competitive 'moat' that potential competitors will find hard to breach.

So is Skellerup's presence in industrial rubber 'major' in a global context? Skellerup supplies critical rubber componentry for other industrial manufacturers. Few would know that Skellerup manufactures all the drive shaft couplings in their Italian factory for the Mercedes Benz E class cars that are made for the Chinese market , for example. Yet no-one would call Mercedes Benz a minor player in the luxury Chinese car market. I think being a manufacturer of world class componentry qualifies Skellerup as 'major players', albeit in their own specialised niche of rubber products.

To summarize,

1/ Strong and deep relationships not just with manufacturing partners but also final end users, AND
2/ Industrial standards and approval processes that provide a barrier to entry for competitors, AND
3/ Adapability of rubber technology across industries opening up organic growth opportunities

provide solid reasons to expect that Skellerup will continue as a strong player in the niche markets where they choose to operate.

Conclusion: Pass Test

SNOOPY

[Snoopy]

Time to update the eps figures from a five year perspective

2011: ($29.560-$0.265-$9.360)m/ 192.806m = 10.3cps
2012: ($34.493-$1.663m-$10.229)m/ 192.806m = 11.7cps
2013: ($26.631-$0.871-$7.595)m/ 192.806m = 9.4cps
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps

Conclusion: Fail test

2013: ($26.631-$0.871-$7.595)m/ 192.806m = 9.4cps
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps
2016: ($29.099+$0.800+$1.275-$8.429+0.28*$0.145)m /192.806m = 11.8cps
2017: ($31.435-$2.507-$9.300+0.28*$0.025)m /192.806m = 10.2cps

Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs.
d/ Result for FY2017/FY2016 adjusts for not including a $25,000/$145,000 cost from relocation expenses respectively, by adding back the 'after tax' effect of not having incurred these costs.

Conclusion: Fail test

SNOOPY

[Snoopy]

Time for a FY2015 perspective update:

2011: $19.935m /$110.325m= 18.1%
2012: $22.600m /$121.372m= 18.6%
2013: $18.165m /$124.673m= 14.6%
2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%

Conclusion: Requirement satisfied

2013: $18.165m /$124.673m= 14.6%
2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%
2016: $22.786m /$155.855m= 14.6%
2017: $19.635m /$159.247m= 12.3%

Conclusion: Fail test

SNOOPY

[Snoopy]

An update on perspective from the FY2015 financial year

2011: $19.935m /$193.593m= 10.3%
2012: $22.600m /$207.313m= 10.9%
2013: $18.165m /$189.496m= 9.6%
2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%

The above is a fairly flat looking margin trend. But with inflation near zero, margins are largely holding up.

Conclusion: Requirement satisfied

2013: $18.165m /$189.496m= 9.6%
2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%

After a grudgingly but nevertheless slowly persuasive increase in net profit margin in recent years, FY2017 has reversed all the good work. The last time profit margins were this low was in FY2010! I guess shareholders will have to hope that FY2017 was a rogue transition year?

Conclusion: Fail test

SNOOPY

[Snoopy]

Skellerup meets all the criteria of being a Warren Buffett style growth company. This growth is largely overseas. So Skellerup have proved that they can work outside of the ‘New Zeland box’. Skellerup has done this through the development of offshore-based manufacturing sites and distribution channels.

Subsidiary Gulf industries in Australia have access to manufacturing facilities in Vietnam. The famous Red label Skellerup gumboots, and their more upmarket and specialized Quatro brand cousin, are designed in New Zealand. But manufacturing is done in low cost China.

In 2014 Skellerup bought ‘Thermoplastic Foam Industries’ as a distribution platform for the wider group Skellerup products within. Australia. Likewise in 2007, Skellerup bought ‘Turenedi’ in Itaily as their beachhead into Europe. Fully owned US subsidiary “Canewango” does a similar job in the Americas.

Skellerup have shown their ability to reinvest profits at rates of return that far outstrip their cost of capital over many years. This more than makes up for what on paper today is an average dividend payer. IMO Skellerup is one of those below the radar NZX gems that if bought at the right price should prove a very rewarding investment.

SNOOPY

disclosure: New shareholder

I wrote the above based on the FY2014 perspective, and my how things have changed. From being in a position to pass 'all four' of the Buffett growth tests, the FY2017 Skellerup only passes one! The biggest surprise, and one that was not evident from a casual read of the published earnings was the very significant $2.507m foreign currency gain that made the headline FY2017 result look a lot better ( 'above guidance' [sic] ) than it really was. Of course this doesn't mean that SKL has necessarily become a dud investment. It just means that the 'Buffett Growth Model' will likely prove unreliable as a predictor, so a different valuation technique is required.

I refer readers to my post 614, using an alternative valuation technique, the 'Capitalised Dividend Valuation Method', based on an FY2017 perspective. I quote from the end of that post:

-----

Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.59 x 1.2 = $1.91
Bottom of Business Cycle Valuation: $1.59 x 0.8 = $1.27

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At $1.71 (the Friday close) and just ex a 6c dividend, I would regard SKL as 'ever so slightly overvalued', but still well within fair valuation bounds. I am a long term holder and consequently won't be either buying or selling based on any revelations from the results of the FY2017 financial year.

SNOOPY

[Snoopy]

2016: ($31.435-$3.412-$9.300+$0.025x0.28)m /192.806m = 9.7cps

Notes:

d/ Result for FY2016 removes the tax effect of not including a $25,000 cost from relocation expenses.

Just making an on line note to myself so that I don't get confused in the future when looking back over this:

1/ I don't believe that relocation costs are indicative of the ongoing picture of the Skellerup business. THEREFORE
2/ I should remove the relocation costs of $25,000 from this year's results for ongoing comparative purposes.
3/ If the relocation costs had not occurred, then NPAT for the year would be higher.
4/ The $9.300m tax bill for the year takes into account the $25k in relocation costs as a pre-tax expense. If this $25k cost had not happened, then the NPAT after tax for the year would be higher by the amount of extra tax not paid, as a result of the relocation costs not being incurred. This amount, which comes in as 'extra profit' calculates out, assuming a 28% tax rate, as:

$0.025m x 0.28

SNOOPY

[Snoopy]

I didn't realise this not first profit down grade this financial year

When announcing FY15 profit $21.9m they said well placed to further grow profits

At ASM before excited shareholders on 29 Oct it was going to be $24m-$26m

H1 results nit looking too good and on Feb 18 still ahead of last and guided $23m

And now jeez $20m-$21m

So from $26m to $20m in a few months

Wonder what next announcement in July will be like

Skellerup - always gunna to do great things

It is informative to 'track back' through the annual reports and see what growth plans they announced to the auditors as the goodwill on the books was assessed annually. Shareholders can find this information under the 'Intangible Asset' section of the Annual Report.

Revenue assumptions

FY2014 take

"Revenues have been forecast to moderately increase over the following five-year period in line with the Group’s strategic business plans to develop
and introduce new products, in addition to continuing to support and grow the Group’s existing global customer relationships." (actual overall revenue increase FY2015 to FY2014: 3.3%)

FY2015 take

"The revenue growth percentages range from 3% to 20% on average per annum over the five years across the individual cash generating units." (actual overall revenue increase FY2016 to FY2015: 4.1%)

FY2016 take

"The revenue growth percentages range from 3% to 20% on average per annum over the five years across the individual cash generating units." (actual overall revenue increase FY2017 to FY2016: -0.5%)

FY2017 take

"The revenue growth percentages range from 2% to 15% on average per annum over the five years across the individual cash generating units." (actual overall revenue increase FY2018 to FY2017: 14%)

Looking out from June 30th 2015 and June 30th 2016, there were some pretty bullish growth assumptions built in. Looks like the new Chair Liz Coutts may have reigned in those expectations a bit. But they are still backing themselves. A 15% revenue growth compounding over five years is:

1.15^5 = 200%

That is a 100% increase in business from the base determined five years previously. For sure it is gunna happen this time?

SNOOPY