Skellerup (SKL) Fundamentals

[winner69]

Great graph. Looks like a hockey-stick.

Oops - what does science tell us about hockey stick graphs?

Never mind ... lets just presume science is outdated and history does not repeat ...

BP posted this back in November last year about my chart that showed SKL PE had hit 30 (share price about $6.40) and was starting to how signs of falling

Updated chart below ....Share price today about $5 and PE 21 (on forecast earnings)

So profits increasing .... PE shrinking ..... not good for shareholders

If he PE today was by some chance the average pre-2020 of 15 the share price would be $3.60

[Rawz]

I dont know enough about SKL- what was the main reason for the P/E expansion?

1) Irrational exuberance?
2) Consistent growth and forecast growth?
3) Better margins?

or a combo of the above?

[winner69]

I dont know enough about SKL- what was the main reason for the P/E expansion?

1) Irrational exuberance?
2) Consistent growth and forecast growth?
3) Better margins?

or a combo of the above?

Probably better margins along with sales growth lead to consistent growth ....all boosted by exuberance (maybe not irrational but the love was obvious) .... took the share price from 2 bucks to mid 6's in a couple of years

[Snoopy]

BP posted this back in November last year about my chart that showed SKL PE had hit 30 (share price about $6.40) and was starting to how signs of falling

Updated chart below ....Share price today about $5 and PE 21 (on forecast earnings)

So profits increasing .... PE shrinking ..... not good for shareholders

If he PE today was by some chance the average pre-2020 of 15 the share price would be $3.60

Around 18 months ago I made similar musings on this thread Winner. We are pretty much at one with our highlighting the risks of 'reversion to the mean' of that PE ratio (see last paragraph of my quote below)

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?

Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year. Is this a joke? How can such a projected return every year for ten years - no less - be correct?

To understand this result, you have to realise that this is a mathematical model that will faithfully spit out a result from the data you feed it. So how good is the data the model is being fed? Notice that the projected earnings for FY2032 are 20.7cps, verses actual earnings for FY2021 of 20.5cps. IOW I am modelling earnings to be virtually flat after ten years, with years of lesser earnings in between! Is that a plausible scenario? From where we shareholders sit today, such a result would be extremely disappointing to be sure. Yet if we use the actual historic return on equity, averaged over 6 years, and the actual dividend payout ratio, then these are the kind of earnings we shareholders might expect.

This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong.

The second modelling assumption that is well out of whack with today's market (PE of 29) is that I am assuming a PE ratio of 18 in 2032. I did not pull that figure of 18 out of thin air. It is the actual historical average over six sample dates. Shareholders coming on board over the last couple of years (eps has grown 37% since FY2019) might like to reflect that most of their share price gains (SP +160% over the same period) have been due to 'valuation multiple expansion'. Growth in earnings has occurred. But the share price growth has way outstripped earnings growth. IMO the 'multiple expansion' that has driven so much of shareholder returns over the year or two in particular has now become a real risk factor that could sting shareholders if that PE valuation metric deflates. If that is a somewhat somber note on which to end this analysis, then so be it.

The key comment above from my above modelling is here:

"This modelling is suggesting that all of those productivity improvements at Skellerup over the last few years will 'revert to a mean' i.e. go backwards. Given Skellerup have announced further productivity improvements going into FY2022, this modelling assumption looks likely to be wrong."

Interesting comments by David Mair, Skellerup CEO, can be found in my post 1158. That feeds into the idea of whether a leopard can really change its spots.. Or are we Skellerup investors just in a dream before reversion to the mean? I wouldn't bet against David Mair for sharpening up the whole operational performance of Skellerup. You can't blame Mair for investors bidding up the share price to giddy heights. If you lose money on this one as a recent purchaser, I think you can only blame exuberant investors bidding up the share price - not Mair.

SNOOPY

[winner69]

You were spot on eh snoopy .... so far

Reinforces what my signature is basically saying ..... or putting it another way 'pay top dollar and future returns will be disappointing'

[Snow Leopard]

Can I have a little gloat here?

I bought back into SKL in mid-2020 (near the bottom) and as part of a portfolio rebalance sold some last October (near the top).

Currently they are my #7 holding at 7.64% of the portfolio.

I am happy to agree that it is difficult to justify the current SP but I do believe that from a long term view point they are worth keeping.

[Ggcc]

Wait till they get that alleged FPH contract near the end of this year. FY 23 will be and interesting increase again on NPAT and the SP. I feel that the view of the old skellerup is different to the new view hence the P.E ratio is quite high. They don’t just make gumboots (as of old) and in the health sector I am sure we will see many new contracts.

[winner69]

Good move by Skellerup

Skellerup adopts ESG World Platform

Makes SKL an attractive investment for a broader range of investors who love this ESG stuff ..... possibly new ones

https://www.nzx.com/announcements/395329

[Sideshow Bob]

Up 3.5% today....good price action ahead of Thursday's FY announcement??

[Sideshow Bob]

Skellerup reports another record result - NZX, New Zealand’s Exchange

Skellerup today announced record audited net profit after tax of $47.8 million for the year ended 30 June 2022, a 19% increase over the previous record result.
Highlights for the year ending 30 June 2022
• Strategy continuing to deliver substantial growth in earnings and returns to shareholders.
• Revenue of $316.8 million, up 13% on prior comparative period (pcp).
• Earnings before interest and tax (EBIT) of $66.8 million, up 18% on pcp.
o Industrial Division EBIT of $39.1 million, up 20% on pcp.
o Agri Division EBIT of $33.6 million, up 10% on pcp.
• Net profit after tax (NPAT) of $47.8 million, up 19% on pcp.
• Operating cash flow of $43.3 million, down 26% on pcp.
• Net debt of $25.2 million, an increase of $16.5 million on pcp.
• Final dividend of 13.0 cps (50% imputed) bringing the total
FY22 dividend to 20.5 cps (50% imputed) for the full year, up 21% on pcp.