Skellerup (SKL) Fundamentals

[Patient Panda]

And that's why some were able to buy the stock at $1.25 - gee, I think that is how the market works?

1.25 a great buy in price, gives you 40% margin of safety (which you absolutely need in this case) on fair value / graham number.

but its not 1.25 anymore is it

[Balance]

1.25 a great buy in price, gives you 40% margin of safety (which you absolutely need in this case) on fair value / graham number.

but its not 1.25 anymore is it

Exactly my point - it was $1.25 because of all the negative sentiment created by the downgrades. That's why it went down to that level for those with a more positive view to grab a bargain (as it is turning out as of now).

[RTM]

Exactly my point - it was $1.25 because of all the negative sentiment created by the downgrades. That's why it went down to that level for those with a more positive view to grab a bargain (as it is turning out as of now).

Additionally, even with the downgrades, the dividends at ~1.25 were still ok, around 8c per year. So the cost of having to hold for those of us as interested in dividends as capital gain was minimal.

[Snoopy]

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

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
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.7cps

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]

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

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%
2018: $26.154m /$172.286m= 15.2%

Conclusion: Fail test

SNOOPY

[Snoopy]

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

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%
2018: $26.154m/$240.408m= 10.9%

I see a 'steady margin' picture with a low year of FY2017 offset by a higher year in FY2014

Conclusion: Fail test

SNOOPY

[Snoopy]

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

------

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.

I open this post with a couple of quotes from the Panda which I think are both poignant and sobering.

Over the past few years the majority of shareprice gains have been made up of PE expansion rather than a business going gangbusters. Just something to keep in mind for future risk weighted returns.

The historic PE at 30-09-2015 was 11.6. Three years later and it is 15.6 (both with my adjustments).

not a great track record, don’t really own up to bad results and always optimistic for future only to contradict themselves with the result. Maybe Liz Coutts will be an improvement over Selwyn.

Until they get some wins under their belt a PE of 14.7 looks very rich.

One good result does not a trend make. The result was good but, as an investor, the likes of Buffett must always consider the multi year perspective. The performance of Skellerup isn't consistent enough to apply the Buffett multi year growth model reliably. This doesn't mean it isn't a good investment. It just means we can't use a technique like Buffett might use to value it.

SNOOPY

[Snoopy]

I have updated my valuation using the latest five years of 'rolling data'. It is always a bit of a judgement call doing this. I have to ask myself if the data from FY2012 is still representative. In the case of PGW (as worked through on the PGW thread) I would say 'yes'. In the case of SKL I would say 'no'. I think the SKL growth plan is well enough bedded in to suggest that dividends will not regress to FY2012 levels. So what does dropping the FY2012 dividend payments and adding the FY2017 dividend payments do for my valuation?

Year	Dividends	Dividend Total
2013	5.0c+3.0c	8.0c
2014	5.0c+3.5c	8.5c
2015	5.0c+3.5c	8.5c
2016	5.5c+3.5c	9.0c
2017	5.5c+3.5c	9.0c
Total		43.0c

Averaged over 5 years, the dividend works out at 43.0/5 = 8.6c (fully imputed).

So based on a 7.5% gross yield, 'fair value' for SKL is:

8.6 / (0.075 x 0.72) = $1.59

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

At close to $1.50, I would put SKL as a reasonable 'accumulate' proposition, particularly as it is still cum the 3.5c dividend up until March 10th.

I have updated my valuation using the latest five years of 'rolling data'. Since we know the first dividend to be paid in FY2019 (which is the FY2018 final dividend) I have used that 'latest information' and dropped the first dividend paid in FY2014 from my five years of rolling data. However that dividend will for the first time not be fully imputed (55% imputed only). So the equivalent gross figure can be worked out as follows:

7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend) (A)

Year	Dividends	Dividend Total
2014	5.0c+3.5c	3.5c
2015	5.0c+3.5c	8.5c
2016	5.5c+3.5c	9.0c
2017	5.5c+3.5c	9.0c
2018	6.0c+4.0c	10.0c
2019	7.0c+?.?c
Total		40.0c

This gives a cumulative gross dividend of 40.0c/0.72 = 55.6c

We need to add to this the first dividend to be paid in FY2019 (A), expressed as a gross dividend:

55.6c + 8.5c = 64.1c

Averaged over 5 years, the dividend works out at 64.1/5 = 12.8c (fully imputed).

So based on a 7.5% gross yield, 'fair value' for SKL is:

12.8 / (0.075) = $1.71

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 Busines Cycle Valuation: $1.71 x 1.2 = $2.05
Bottom of Busines Cycle Valuation: $1.59 x 0.8 = $1.37

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that for SKL shares to be trading at $2.05 (the upper end of my expected range) would not be unusual. The fact they are trading above this at $2.15, suggests to me there is a growth premium built into the share price. What we have here is investors willing to pay a growth premium which from an historical perspective is not justified. Of course if the growth targets the company has set itself materialise, SKL could well be worth $2.15. I am a shareholder and have done very nicely out of SKL over the last few years. But I won't be topping up at $2.15. Good company. But for me the risk/reward equation does not stack up to be 'market outperforming' from here. Nevertheless I will be sticking with all my shares for now. Although I see them as 'overvalued', they are no more overvalued in my judgement than many shares in the market today.

SNOOPY

[Aaron]

Thanks Snoopy

[RTM]

Some good news. I hope these guys do really really well with their options.
In fact I hope they are worth $1,000,000 to DM.

SKL
24/10/2018 12:44
MKTUPDTE
PRICE SENSITIVE
REL: 1244 HRS Skellerup Holdings Limited

MKTUPDTE: SKL: Skellerup reports strong start to FY19

Speaking ahead of today's Annual Shareholders' Meeting, Skellerup Chair Liz
Coutts said trading for Q1 of the current year generated EBIT in excess of
10% ahead of the comparable quarter in the prior year.

Mrs Coutts said "We expect an improvement in profitability in FY19 with
increased earnings in our Industrial Division offsetting the recent softening
in international dairy markets and the uncertainty surrounding international
trade."

Skellerup also announced the introduction of a long-term incentive plan under
which share options will initially be issued to David Mair and Graham Leaming
(CFO) on 26 October 2018. Share options will be priced at the 20-day volume
weighted market price for the period 27 September to 25 October 2018. One
million (1,000,000) share options will be granted to Mair; Six hundred
thousand (600,000) share options will be granted to Leaming. The share
options will have a 2-year vesting period.

For further information please contact:

David Mair
Chief Executive Officer
021 708 021