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

[Ggcc]

Well I purchased a few shares so the price should drop now..........

[percy]

SP at $2.28 so all is well.
My divie is in my bank.
Did not get as much as I thought I would get.
Perhaps I should have brought more.?..lol.

[percy]

UK silicone products acquisition for GBP 3.3mil seems to be another worthwhile bolt on.
Pleasing that it will be immediately earnings accretive.

[percy]

Interesting to note SKL's share price [$2.30] strengthening on good volume.[339,790]

[Snoopy]

I have been looking at Skellerup as a 'measuring stick' on the Scott Technology thread. While not directly comparable in their customer target markets, there is an astonishing similarity in certain aspects of their operations. I thought Skellerup shareholders might be interested, particularly as these admittedly snapshot figures indicate that Skellerup is perhaps the slightly better buy on the market today.

	Skellerup	Scott Technology
Operational Sector	Manufacturing	Manufacturing
Total Employees	'nearly 800'	784
Manufacturing Hubs	NZ, Australia, Europe, North America, Asia	NZ, Australia, Europe, North America, Asia
Share Price 29-11-2019	$2.34	$2.30
Market Capitalisation 29-11-2019	$456m	$178m
Capitalised Dividend Valuation per share (2015.5 to 2019.5)	$1.81	$1.65
Declared earnings (FY2019)	$29.063m	$8.604m
Normalised earnings (FY2019)	$29.233m	$9.464m
Normalised eps (FY2019)	15.1c	12.2c
Normalised eps growth over 4 year period (FY2015 to FY2019)	+36.0%	+15.1%
Historical PE (FY2019)	15.5	18.9
dps (paid during FY2019)	7c+5.5c	6c+4c
Earnings Payout Ratio (excluding DRP)	83%	82%
Gross dps (paid during FY2019)	8.5c+6.6c	8.3c+5.5c
Historical Gross Dividend Yield (using Share Price 29-11-2019)	6.5%	6.0%
Shareholder Equity (based on equity at EOFY2019)	$178.392m	$111.852m
ROE (based on equity at EOFY2019)	16.4%	8.5%
Sales (FY2019)	$245.792m	$225.093m
Net Profit Margin (FY2019)	11.9%	4.2%
Total Bank Debt (last balance date EOFY2019)	$46.213m	$16.404m
MDRT (Based on bank debt at balance date EOFY2019)	1.6 years	1.9 years

Having said I think Skellerup is the slightly better buy, I don't consider either as 'cheap'. A 36% growth rate at SKL over a four year period equates to an averaged annual growth rate of:

1.36^0.25 = 1.08, 0r 8% per year.

On an historic PE of 15.5, that 8% four year historical annual growth rate seems to support such a valuation. Others on this forum have suggested that in this world of low interest rates, we should adjust our expectations of PEs and they should be higher. Personally I believe that because of global trade wars and tariffs on goods there should be no such adjustment for manufacturing companies.

SNOOPY

[Scrunch]

Recognising its a work in progress - the dps for skellerup doesn't look right.
Since 2011 SKL has been paying two dividends a year. Most recently its been 2016: 3.5(100%)+5.5(100%), 2017: 3.5(100%)+6.0(100%), 2018: 4.0+7.0(55%), 5.5(50%)+7.5(50%). I'd be very surprised if they didn't at least maintain the dividend payment in 2020. My guess would be 5.5 and 8.0 for 2020.

[percy]

Ratios.
...................................PE............. ................dps......................yield
SKl............................15.64.............. .............13cents................5.56%
SCT............................20.34.............. .............8 cents.................3.48%

[Snoopy]

Ratios.
...................................PE............. ................dps......................yield
SKl............................15.64.............. .............13cents................5.56%
SCT............................20.34.............. .............8 cents.................3.48%

Thanks for those numbers from your broker Percy. They are slightly different from mine, and I think I can explain why.

1/ I think the profit figures used to calculate PE are last years 'headline profits'. Normalisation doesn't change the SKL profit figure much. But with SCT the profit figure jumps by 10% - a very significant change.

2/ The dividends look to be the two most recently paid dividends, not the dividends actually paid during the FY2019 year. In the case of SCT, the final dividend for FY2019, actually paid in FY2020, was cut from 6cps to 4cps. I thought about treating dividends this way. But in the case of SCT we were told that a couple of projects had incurred cost overruns. These were pioneering projects and the lessons learned should improve the profitability from similar projects installed in future years. So I have decided that the dividend consequences of these cost overruns are probably not representative of what will happen in future years. The dividends I have used for both companies represent the final dividend for FY2018 and the interim dividend for FY2019 added together.

3/ The dividend yields look to be lower than mine, so I suspect they are 'net dividend yields'. By going gross, the dividend yield looks relatively better for SCT because, the two SCT dividends I am using are fully imputed, whereas the two SKL dividends are not. However, like SKL now, I do not expect SCT dividends to be fully imputed into the future.

In summary, I think I will stick to my numbers. But in any instance I don't think it affects my conclusion.

SNOOPY

[percy]

Interim result was a disappointment to me.
Sold my holding at $2.33.