Skellerup (SKL) Fundamentals

[Muse]

There are a lot of shares currently over priced! I’m holding this one because they are releasing consistent results and think they will continue to do so. I Kinda look at them like Delegat’s, give it a couple of years and they will be in mid teens dollar share value if they keep on this path.

I think SKL have benefitted a lot from robust dairy prices. One worry (for SKL) is the ongoing rise in carbon prices and how it could impact the medium/long term sector, both here and overseas if they get roped into having to take on more liability. And also people switching away from dairy to alternative products. but milk prices looking great for short term activity.

Also note your comment re delegats. Great company one of the few to make proper money out of wine! Good vertically integrated company - own their own vineyards, production, brand and distribution. has been and will continue to be in my portfolio.

[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.

We Skellerup shareholders have certainly had a good year. But 'good' is a word that must always have context. I find it useful to have a 'measuring stick'. Scott Technology is such a stick. Different in that it sells complete packages and not components. But the same in that both companies rely on Intellectual Property and trusted staff that can turn that knowledge into profits.

	Skellerup	Scott Technology
Operational Sector	Manufacturing	Manufacturing
Total Employees	813	622
Manufacturing Hubs	NZ, Australia, Europe, North America, Asia	NZ, Australia, Europe, North America, Asia
Share Price 27-11-2021	$6.06	$3.37
Market Capitalisation 27-11-2019	$1,183m	$267m
Capitalised Dividend Valuation per share (2017.5 to 2021.5)	$2.25	$1.27
Declared earnings (FY2021)	$40.175m	$9.527m
Normalised earnings (FY2021)	$40.243m	$11.146m
Normalised eps (FY2021)	20.5c	14.2c
Normalised eps growth over 5 year period (FY2016 to FY2021)	+72.3%	+18.3%
Historical PE (FY2021)	29.5	23.7
dps (paid during FY2021)	7c+6.5c	0c+2c
Earnings Payout Ratio (excluding DRP)	68%	14%
Gross dps (paid during FY2019)	8.96c+7.76c	0c+2c
Historical Gross Dividend Yield (using Share Price 27-11-2021)	2.76%	0.59%
Shareholder Equity (based on equity at EOFY2021)	$196.149m	$98.195m
ROE (based on equity at EOFY2021)	20.5%	11.4%
Sales (FY2021)	$279.615m	$216.234m
Net Profit Margin (FY2021)	14.4%	5.2%
Total Bank Debt (last balance date EOFY2021)	$24.409m	$10.920m
MDRT (Based on bank debt at balance date EOFY2021)	0.61 years	1.0 years

A 72.3% growth rate at SKL over a five year period equates to an averaged annual growth rate of:

1.723^0.2 = 1.115, or 11.5% per year.

Perform the same exercise on SCT and you get

1.183^0.2 = 1.034, or 3.42% per year.

This goes some way to explaining why SKL is sitting on a PE of 29.5 verses 23.7 for Scotts.

Some more observations:

a/ If you compare my quoted reference exercise from the FY2019 perspective, both companies have reduced their bank debt to something that is almost insignificant.
b/ ROE at SKL remains about double that at SCT, although both have improved.
c/ SKL coped with the initial Covid-19 hit better than SCT, because SKL mainly supplied essential components whereas SCT 'capital projects' were deferred. But SCT took the opportunity to 'right size' the business, losing around 200 staff compared to the FY2019 pcp.
d/ Net profit margin at SKL remains around triple that of SCT (c.f. pcp), although both have improved.

Another comparison of note is to see by how much the market price exceeds the 'capitalised dividend valuation' price. This difference is one measure of the 'growth premium' accorded to each company by the market.

SKL: Growth Premium = $6.06 - $2.25 = $3.81 => Growth Premium is 63% of share price
SCT: Growth Premium = $3.37- $1.27 = $2.10 => Growth Premium is 62% of share price

Depending on how you see the outlook for both companies, you might interpret these figures as showing both companies being equally overvalued ;-P

The one difference that does not show in these figures is the effect of the 'change of direction' for Scotts, under their new CEO. This is steering the company towards more standardised products, away from one off builds. It will take a couple of years for this change to flow through to margins, bar no more shock Covid-19 interruptions (gulp!)

Concluding the Comparison

Both companies are conservatively financed, which is always good in a world where business opportunities are uncertain. Scott's cut their dividend payout drastically to achieve this, but Skellerup did not have to. I see Skellerup as the more resilient earner. The growth story at Skellerup is around incremental improvement and bolt on acquisitions. Whereas at Scotts, growth is more around 'executing the Scott 2025 vision plan' (more repeat sales of modularised products). I see the Skellerup path as more certain (they have a great knack of retaining customers as development partners), whereas Scotts are being more affected by macro-economic events. But I think if Scott's can co-ordinate the growth in their diverse international 'centres of excellence', then it is Scott's that have the most growth potential over the next two to three years. Looking beyond that time frame though, it is hard to imagine that Skellerup will be bettered on the long term growth path. If Skellerup are overvalued, there is a case to be made that they are not significantly more overvalued than Scott's are. The bonus for Scott shareholders is that they are always on the verge of cashing in a figurative 'mega lottery ticket'. If Scott's automated beef boning room project can be nailed, then there are a good decade of highly profitable installation projects lined up in Australia and the USA to follow up. So far, the 'mega lottery ticket application' (of which the automated beef boning room is simply the current one) has not kicked in for Scott shareholders. But we always live in hope! Being a 'glass half full' person, I am calling Scotts as the better value investment on the market today. Yet as a long term holder, I would feel more comfortable with Skellerup in my portfolio. Yes the price is dear, for both. But good things tend not to come cheap!

SNOOPY

discl: hold SCT and SKL

[winner69]

The re-rating of SKL over the past few years has been stupendous


For many years prior to 2019 its PE averaged 14 - it is now about 30 - that's some re-rating.(see chart)

Staggering how much market value added has been added (market cap less shareholder equity)

AT June 2017 shareholder equity was $159m and is now $196m (no much increase as a large proportion of earnings are paid as dividends) but market cap has increased from $328m to $1,183m today -- and increase of $855m taking SKL market value added to just under $1 billion.

Question is can this continue - if the market remains in love with them no reason why it shouldn't

[BlackPeter]

The re-rating of SKL over the past few years has been stupendous


For many years prior to 2019 its PE averaged 14 - it is now about 30 - that's some re-rating.(see chart)

Staggering how much market value added has been added (market cap less shareholder equity)

AT June 2017 shareholder equity was $159m and is now $196m (no much increase as a large proportion of earnings are paid as dividends) but market cap has increased from $328m to $1,183m today -- and increase of $855m taking SKL market value added to just under $1 billion.

Question is can this continue - if the market remains in love with them no reason why it shouldn't

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 ...

[winner69]

Re-rating surely boosts shareholder returns

Say bought SKL 1/7/19 for $2.37 one has made $4.06 total shareholder returns (172% over just over 2 years)

The total return of $4.06 is made up of-

$0.88 from increased earnings or 22% of returns
$2.80 from being re-rated (higher PE ratio) or 69% of returns
$0.38% from dividends or 9% of total returns

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (reward for finally achieving some consistent results)

Classic case of what value investors look for ....... and eventually such investors have to decide when enough is enough from a value perspective and cash up

[Muse]

Re-rating surely boosts shareholder returns

Say bought SKL 1/7/19 for $2.37 one has made $4.06 total shareholder returns (172% over just over 2 years)

The total return of $4.06 is made up of-

$0.88 from increased earnings or 22% of returns
$2.80 from being re-rated (higher PE ratio) or 69% of returns
$0.38% from dividends or 9% of total returns

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (eward for finally achieving some consistent results)

Classic case of what value investors look for ....... and eventually such investors have to decide when enough is enough from a value perspective and cash up

I bet you could do a mean bridge graph for us winner - dividends, earnings growth, & uplift in multiple…

[Snoopy]

It makes a lot of sense to look at the earnings potential of companies - and then it is just the question of waiting for the market to turn from a voting machine into a weighing machine.

For what it is worth - DCF value (courtesy to ShareClarity) is $3.46 per share ... if I use 10 times average EPS, it would be $1.40 per share and if I use the unmodified Graham formula I would come up with $6.31 per share, but this would require SKL earnings to keep growing with nearly 10% forever - and, how likely is this for a company operating in a quite cyclical environment with all its industries quite close to the peak?

Whatever it is - I think there is a good case to make that SKL is currently overpriced,

discl: not holding :

Good question BP. The general answer is that in these times of impossibly low interest rates, I am looking to invest in shares which have a good dividend yield, but nevertheless have the ability to grow earnings. That way, as interest rates rise, I stand a good chance of the shares I own retaining their capital value. SKL shares are a good fit for this scenario in my view. Of course if this was my only investment criterion, then I could buy SKL shares at any price and my investment goal woudl be satisfied! Clearly there must be a price that. despite the favourable outlook for SKL shares, is too much to pay. So what price is that? Going through your valuations one by one.

a/ Shareclarity @ $3.46 I dived into the Shareclarity website to check out the assumptions behind this. It is based on a weighted average cost of capital of 9.2%. I know there are datafeeds and formulas that have produced this figure (all historical out of necessity). But if this is an assessment of future risk, then I disagree with that figure. I have used 7% in my 'capitalised dividend value' calculations as a yield, and I would tend to see that as an appropriate discount factor as well. The long run growth rate looks a little low to me too, at just 2.8%.

Reducing that discount factor, assuming earnings two years out constitutes a representative correction, would increase the valuation by:

(9.2 x 9.2) / (7 x 7) = 1.73

That increases the DCF valuation to $3.46 x 1.73 = $5.98. Of course, the discounted cashflow bit of the valuation typically only amounts to 30-40% of the total, so that $5.98 would also include a higher residual growth rate, which I think is likely. Suddenly SKL at $6.06 looks 'in the ballpark'.

b/ 10 x average eps at 14cps = $1.40. That figure looks to biased towards historical earnings averages. I think we have 'stepped up' over the last year to a norm closer to 20c. A PE multiple of 10 sounds a bit miserable as well. Plus this valuation technique gives no allowance for growth.

c/ Security Analysis - Benjamin Graham formula original version

V = EPS x (8.5 + 2g)

where:

i/ V is the intrinsic value,
ii/ EPS is the trailing 12 month EPS,
iii/ 8.5 is the PE ratio of a stock with 0% growth and
iv/ g being the growth rate for the next 7-10 years.

I don't know what growth rate you were assuming BP. But working backwards from the numbers you gave me, I get:

631 = 20.5 x (8.5 + 2g) => g= 11.1%

That growth rate is not too far away from what SKL has actually achieved over the last 5 years.

Taking account of valuations a/ and c/, I think an SKL share price of 6 bucks is looking 'in the ball park'. Mr Market getting it right?

SNOOPY

[Snoopy]

Skellerup done well in growing earnings and paying decent dividends but 69% of shareholder returns has come from favourable market sentiment (eward for finally achieving some consistent results)

The thing I love about Winner's contributions to this forum, apart from his encyclopedic knowledge of NZ corporate history, are the accounting tech terms he occasionally throws in, to educate we 'investment gatecrashers' newer to the investment party game than him. This one I had to look up.

'eward': "A reward gained through electronic, internet or computer reported means, for which the recipient needs to make little or no effort."

Love it! I will take any 'ewards' I can get in my investing future!

SNOOPY

[Snoopy]

Whatever it is - I think there is a good case to make that SKL is currently overpriced, and this is what your analysis says as well. What I don't quite understand is - why are you still holding after you went through this exercise - don't you trust the Buffett methodology?

discl: not holding :

Like I have said before, the 'Buffett Methodology' is a mechanical process feeding in numbers generated largely without human input operator judgement. It is then up to you to make sense of what comes out at the end. Refer back to my post 1073:

https://www.sharetrader.co.nz/showth...l=1#post927468

I see actual earnings in FY2021 of 20.5cps, 'rising all the way' (sic) to modelled earnings of 20.7cps in 2032. How does that look to you (virtually zero growth for ten years)? No, I don't believe it either.

This modelling works on historical averages. The main factor that has produced such modest growth is the historical ROE average that I have used of 15.7%. Over FY2021 actual ROE was 20%. If I had used this figure then the compounding growth over ten years would have produced a much higher valuation. There is something to be said for using historical averages, because we know such figures have been achieved in the past. There is no 'wish factor' in using those figures for future forecasts. However, in this instance, the average is a substantial drop from the recent past. How realistic is that? Like all forecasts, believing the numbers does come down to a judgement call in the end. If I was a betting mutt, I would pick some 'reversion to the mean', because I know ROE numbers won't go up forever. But my gut feeling is that ROE won't reduce back to 15.7%.

So to answer your question, yes I do trust the Buffett Methodology in process. But I think in this instance, the ROE input factor in particular, has a question mark over it. If everything does 'revert to the mean' though, the Buffett Methodology as presented is a future prediction of what will happen.

SNOOPY

[winner69]

The thing I love about Winner's contributions to this forum, apart from his encyclopedic knowledge of NZ corporate history, are the accounting tech terms he occasionally throws in, to educate we 'investment gatecrashers' newer to the investment party game than him. This one I had to look up.

'eward': "A reward gained through electronic, internet or computer reported means, for which the recipient needs to make little or no effort."

Love it! I will take any 'ewards' I can get in my investing future!

SNOOPY

Better still oopy ....you can convert these ewards in to Fly Buys ....cool eh