Skellerup (SKL) Fundamentals

[winner69]

Skellerup still powering ahead

Full year profit guidance 10% or there abouts more than last year

Snoops, Blackpeter et all will be pleased

http://nzx-prod-s7fsd7f98s.s3-websit...554/294886.pdf

[RTM]

Skellerup still powering ahead

Full year profit guidance 10% or there abouts more than last year

Snoops, Blackpeter et all will be pleased

http://nzx-prod-s7fsd7f98s.s3-websit...554/294886.pdf

Yes...great to see. Nice jump in the dividend as well. I like manufacturing companies doing well, gotta be better for NZ Inc than building more facilities for retirement. Great news.

[percy]

An excellent result.

[macduffy]

Another of my long keepers doing well!

[Snoopy]

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
FY2019	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.

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 the 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!

SNOOPY

[RTM]

Appreciate the commentary Snoopy, my average buy is a few cents less than yours.
Neither buying or selling at current level, would like a few more tho if the price does drop at some stage.

[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 17.8% (the actual average of the last 9 years) and a dividend payout ratio of 62% (the actual dividend payout of the last 9 years).

	SOFY
FY	Asset Backing	Earnings	Dividend	Retained Earnings
2013	0.63	0.094	0.080	0.014
2014	0.65	0.115	0.085	0.030
2015	0.75	0.134	0.083	0.051
2016	0.80	0.143	0.088	0.054
2017	0.85	0.152	0.094	0.058
2018	0.91	0.162	0.101	0.062
2019	0.97	0.173	0.108	0.066
2020	1.04	0.185	0.115	0.070
2021	1.11	0.198	0.123	0.075
2022	1.19	0.211	0.131	0.080
2023	1.27	0.225	0.140	0.086
2024	1.35	0.241	0.149	0.091
2025	1.44	0.257
Total			1.13

With a 2025 year earnings of 25.7cps and using a PE of 12.6 (actual average over the last 9 years) the expected share price for Skellerup in ten years time is:

12.6 x 0.257 = $3.24

The dividend return over that time is $1.13 (as per above table)

Using a market share price today of $1.39, the expected compounding annual return 'i' can be calculated from the following equation.

$1.39(1+i)^10 = (3.24 +1.23) => i=12.1%

This return is a net return, before imputation credits. I haven't seen anywhere else on the NZX I can get a return so strong for so long. So for me investment in SKL at under $1.39 is a no brainer.

Appreciate the commentary Snoopy, my average buy is a few cents less than yours.
Neither buying or selling at current level, would like a few more tho if the price does drop at some stage.

It is interesting to look back on past predictions, and in particular the one above that I drew up four years ago. Yes I did consider this valuation 'invalid' a year later (because of a deterioration in business metrics) , but did not and still do not consider in invalid at the time I did it.

My prediction back then was earnings per shares of 17.3 for FY2019. Based on my modelled PE at the time of 12.3, this implies a projected share price today of:

17.3 x 12.3 = $2.18

My forecast gross dividend was 10,1c/0.72 = 14cps. The actual gross dividend paid over the year was 15cps.

At the half year result, CEO David Mair is predicting a net profit of $29m to $31m. Based on 192.806m shares on issue that equates to 15-16eps. With the shares currently trading at $2.14, this represents a FY2019 PE ratio of 13-14.

My share price prediction from four years ago was high, but only 2% high. If I was going to make an error it would be in that direction after I subsequently decided in 2016 that business conditions had deteriorated. For some who think it is impossible to forecast a share price four years into the future this is an extraordinary result. I prefer to think of it as vindication of what is a powerful valuation technique.

SNOOPY

[RTM]

Details of transactions and events giving rise to relevant event
http://nzx-prod-s7fsd7f98s.s3-websit...705/297648.pdf


“Details of the transactions or other events requiring disclosure:
From 21 August 2018 to 28 March 2019, ACC had the following aggregated on-market
transactions in Skellerup Holdings Ltd:
• Purchases of 2,739,690 shares for consideration of NZD $5,682,591.69
• Sales of 559,206 shares for consideration of NZD $1,164,231.98 “

Good to see ACC shareholding go up. Can anyone explain this to me tho,
Why are there purchases and sales ?
Given they were already >5%.... why can they make a
declaration in March 19 for Aug 18 to Mar 19 ?

[winner69]

Details of transactions and events giving rise to relevant event
http://nzx-prod-s7fsd7f98s.s3-websit...705/297648.pdf


“Details of the transactions or other events requiring disclosure:
From 21 August 2018 to 28 March 2019, ACC had the following aggregated on-market
transactions in Skellerup Holdings Ltd:
• Purchases of 2,739,690 shares for consideration of NZD $5,682,591.69
• Sales of 559,206 shares for consideration of NZD $1,164,231.98 “

Good to see ACC shareholding go up. Can anyone explain this to me tho,
Why are there purchases and sales ?
Given they were already >5%.... why can they make a
declaration in March 19 for Aug 18 to Mar 19 ?

Only need to disclose when they have a movement of 1% or more in their holding


On 21 August they had 5.465% and even though buying and selling since then they never went over 6.465% or under 5.000% (when they would have disclosed ceasing to be a SSH)


Obviously on March 28th they must have purchased enough to to go over that 6.465% so had to tell us


They probably have bough and sold and many days in this period ....would be a bit nonsensical to disclose every trade so the powers to be decided 1% movements would be enough


Clear as mud?

[RTM]

Thanks. Yes, that’s clear and makes sense.
Appreciated.