Skellerup (SKL) Fundamentals

[Snoopy]

I have updated my valuation using the latest five years of 'rolling data'. FY2019 has been the first year that dividends have not been fully imputed. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off. And the reason for not fully imputing those dividends, because of the outperformance success of Skellerup's overseas subsidiaries that do not generate earnings in NZ Dollars, is hardly a negative. Although detractors might say Skellerup should be doing more of their manufacturing in New Zealand. Given the escalation in global trade tensions, I think being geographically diversified with your manufacturing plants is probably a good idea. Even if, unlike Scott Technology (as another example of a NZ based, but internationally spread exporter), the overseas manufacturing facilities are not multipurpose. Skellerup can't choose in which overseas plant they manufacture their widgets!

The calculations to work out the equivalent gross figure for FY2019's unimputed dividends, those paid in the FY2019 financial year, are 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)

5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2015	5.0c+3.5c	6.94c + 4.86c	11.80c
FY2016	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
Total			65.76c

Averaged over 5 years, the dividend works out at 65.76/5 = 13.1c (gross dividend).

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

13.1 / (0.075) = $1.75

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

Top of Busines Cycle Valuation: $1.75 x 1.2 = $2.10
Bottom of Busines Cycle Valuation: $1.75 x 0.8 = $1.40

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.10 (the upper end of my expected range) would not be unusual. The fact they are trading at $2.14, just before a 5.5c dividend is paid, puts them within the top bound of my expected trading range on an ex dividend basis. The 'growth premium' from the half year has gone. From an historical perspective I believe this is justified. Skellerup have yet to earn their 'consistent growth stripes'.

Skellerup's underlying performance has caught up with their market valuation. I felt a touch of pride when I read about the 40 Maserati Quattroporte limousines bought for the Port Moresby APEC conference (the ones that Jacinda refused to ride in), knowing that each one had a Skellerup drive coupling faithfully transmitting all that 'torque' below the floor, while our leaders 'talked' above. But is such growth in the PNG market sustainable?

I have done very nicely out of SKL over the last three to four years. My average purchase price is $1.30. But I won't be topping up at $2.14. Good company. But for me the risk/reward equation is not proven to be 'market outperforming' from here. Lots could go right and lots could go wrong. But I have faith in the direction of management and governance. When I saw the photo of Chairman Liz Coutts in the HY2019 inside cover, I thought she had a touch of the wise look of the late great Stephen Hawking about her. And that can't be a bad thing for a science lead company!

I have had a quiet look at the annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2015	5.0c+3.5c	N/A c + 4.86c	4.86c
FY2016	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
FY2020	7.5c (50% I) + ?c	8.96c + ?c	8.96c
Total			67.78c

Averaged over 5 years, the dividend works out at 67.78/5 = 13.6c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

13.6 / (0.075) = $1.81

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: $1.81 x 1.2 = $2.17
Bottom of Business Cycle Valuation: $1.81 x 0.8 = $1.45

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.35 (above the upper end of my expected range) are now overvalued by 10%. However an imminent dividend payment of almost 9c gross may be contributing to this. I intend to hold the SKL shares that I already own (they are not grossly overvalued after all). But I won't be looking to buy more at these levels.

SNOOPY

discl: hold SKL