Skellerup (SKL) Fundamentals

[Muse]

....Fuel for both sides of the debate in those excerpts I think...

...There is evidence of a step change in business operations. But 'Waterfalls down' sounds like a continuous process. I wonder how much 'water' is left at the top of the 'Skellerup falls' feeder lake?

SNOOPY

Good balanced post snoopdog. I certainly don't believe an uplift in performance from either a rising business cycle or stemming from an improved business model with operational enhancements to be mutually exclusive. It would be difficult to find a company immune from macroeconomic factors or its share price unimpacted by interest rate sentiment.

But the joy in reading through Skellerup's management discussion & analysis is the focus and attention paid to operational performance and building a better business. It would be a worry if on the back of these improved results if all management had to say was how strong demand was, which outside of making a better & more entrenched product is often outside a company's control. FY21 saw a particularly large step up in financial performance - not just in absolute dollar terms but in a margin & return on capital & equity sense - and the MD&A was replete with solid business & operational enhancements that no doubt contributed to the solid result:

Industrial
* Increased marketshare in potable & waster water. Loved this (summarised) line from the AR: "water applications continue to be the largest slice of Industrial revenue. Our capability to change formulations to meet increasingly demanding standards has been & will remain key to ongoing growth"
* Phasing out legacy low margin products & replacing them with higher margin SKUs, particularly in the USA. New DEKS roof & sealing products released in Australia.
* "...understanding needs & designing products that perform a common thread across the industrial division. This approach helped drive significant growth for our roofing & marine foam products in FY21. This approach will generate significant growth for our vacuum systems business in FY22 as we launch two new key products to the market". Vacuums had until recently consisted of system sales but Skellerup had its first product fitment sale with OEMs in FY21.
* re overall Industrial performance: "growth in sales achieved without any overall increase in indirect costs

Agri
* "Throughout FY21 we continued to improve our processes to meet a 9% increase in demand without significant capital investment nor increase in operating costs. We have further plans to increase capacity for relatively low investment"
* "Process improvements generated gains that helped offset increased raw material & transport costs. Indirect costs were well managed."
* Re: dairy: "Operational process & efficiency gains through business process, operating levels, mechanisation, & system improvements.....Low capex investments increased production volumes & reduced lead times were implemented and more are planned"
* Europe & Asia fastest growing regions in FY21 - aided by the successful integration of Silcear acquired year prior...we expect to continue to grow this product range."
* Re footware: range standardisation & rationalisation resulting in efficiencies

Systems & Capabilities
* Over 700 new products were released in the last two financial years
* Expansion into new geographies most notably Europe
* 3 ERP system upgrades (below)
* Project Vanilla: upgrade of Wigram's platform - "simplifying and adopting a standarised business process and tools, enabling access to more insightful information, a more secure environment, and better business outcomes"
* Project Tika: information platform upgrade for two other industrial division businesses
* Wigram volume up 10% only requiring 2% increase in staffing. Vcauum systems up 38% with no increase in staffing, Jiangsu Footware up 14% with no increase in staffing.
* Re Jiangsu (china) - "during FY21 we made a series of process improvements...reducing generated discharge levels by 66%, installation of a water circulation & recycling system reducing water usage by 55%, and invested in systems to improve the collection & disposal of emissions generated from our manufacturing process"
* Re packing waste: "in FY21 eliminated cardboard packing of vacuum pumps by bolting pumps to pallets...not only improving environmental outcomes and reducing cost, improving productivity and translating through to improved economic benefits for shareholders"
* Corporate: costs up $3m. Half of this a one off expense relating to a provision made for the costs of defending against a warranty claim made against a business sold in 2008. I would have thought the ERP costs will have contributed to a good whack of the balance (but no specifics I saw provided), and otherwise balance of the increase were well deserved performance bonuses
* A 7.6% improvement in emissions intensity when measured in tonnes of output per $1m in revenue


This is a heck of a lot of underlying, fundamental business improvement for one year. While there were references to the state of demand in particular markets I was heartened to read and see more references to what management are actually doing to improve the business.

It's clear to me Skellerup is not a Barfoot & Thomson - with revenues & earnings rising on the back of growing volumes & rapidly rising prices, and then getting whacked on the way down and starting from square one. Skellerup has changed the nature of the widget they sell, improving its stickability and providing it with a moat, and concurrently done a hell of a lot of work on the business itself.

There's no doubt cylicality is and will always be at play. Within Industrial, its Deks business will be impacted, as well its vacuum systems (however they are making such inroads with new OEM sales that could grow faster than the underlying change in conditions). WIthin Agri it has an exposure to the dairy sector which would be my immediate concern, but the company strongly maintains that particular exposure is leveraged to volumes and not price. And within the replacement cycle for dairy I believe customers will have the ability to defer if dairy prices happen to be in the tank, which could see some year to year volatility, but hopefully a timing/catchup issue.

The thing I like about Skellerup is that it has such a diversified portfolio of exposures - a huge range of end market applications in diversified sectors, and diversified by geography. That gives me some comfort as the various sectors will thrive while the underlying economics in others are poor. What is common across them all is Skellerup seeking to provide OEMs with difficult to replace sticky technical products, offering aftermarket services and secondary sales. They've got a lot of ambition in how they've engaged with customers and proactively developed new products (700 in the last 2 years) so I have a lot of confidence they will grow marketshare in the future.

Bad analogy but what's happen with Skellerup over the years is sort of like how a sailboat interacts with the wind. The wind will always be temperamental, so they shifted the boat to where the wind is more consistent, streamlined the hull, and built a bigger sail.

As for the waterfall comment, I made that only in reference to how it takes time for the OEM focus to fully take hold and be reflected in the financial results. They were still phasing out legacy products in FY21 and getting new OEM sales. Lots of efficiency improvements and Wigram throughput gains, and probably still some to be hand in future years, but diminishing marginal gains from here I would have thought. But these to me suggest the companies margins and ROIC will structurally higher now and in the future compared to 5 years ago, even if they dip from time to time or do not improve at the same rate historically (or just plateau).

I feel optimistic - FY22 is lining up to be a sensational year, most likely topping the superlative 2021 financial year - with management guiding 1H NPAT to be well up on the 1H2021. New SKUs, new geographies, the new vacuum pumps, the health & medical division, the wastewater deficit, etc...there are a lot of reasons to suspect that Skellerup will be a larger and more profitable business in the medium and long term even if the growth there isn't linear. They aren't particularly large in a global sense and have a great core capability to expand into adjacent OEM targeted industries.

[Snoopy]

The thing I like about Skellerup is that it has such a diversified portfolio of exposures - a huge range of end market applications in diversified sectors, and diversified by geography. That gives me some comfort as the various sectors will thrive while the underlying economics in others are poor. What is common across them all is Skellerup seeking to provide OEMs with difficult to replace sticky technical products, offering aftermarket services and secondary sales. They've got a lot of ambition in how they've engaged with customers and proactively developed new products (700 in the last 2 years) so I have a lot of confidence they will grow market share in the future.

My aim is to operate an investment portfolio where I don't have to worry too much about picking the ebbs and flows of different business cycles to stay on top of things. Skellerup, with their diversity of products and markets, certainly qualifies for its position in that kind of investment space.

The concept of working with customers to gain a competitive advantage that creates 'stickiness' in any sales deal is one I like. The 700 new products is quite startling and I see Skellerup have 813 staff. So that makes 813-700=113 staff who didn't come up with a new product over the last two years. With Skellerup's culture of constant improvement, and policy of trimming dead wood, I would certainly be looking over my shoulder if I were one of those people!

My 'problem', if you want to phrase it that way is that SKL has been such a successful investment for me I am a little overweight in SKL shares by value. But I have thought of a solution. I will regard Skellerup 'Agri' as one company and Skellerup 'Industrial' as another company, with the two segment branches 'joined at the top' to make a 'Skellerup Investment Fund'. So I really own two companies under a Skellerup umbrella, not just one :-)

SNOOPY

[Muse]

My aim is to operate an investment portfolio where I don't have to worry too much about picking the ebbs and flows of different business cycles to stay on top of things. Skellerup, with their diversity of products and markets, certainly qualifies for its position in that kind of investment space.

The concept of working with customers to gain a competitive advantage that creates 'stickiness' in any sales deal is one I like. The 700 new products is quite startling and I see Skellerup have 813 staff. So that makes 813-700=113 staff who didn't come up with a new product over the last two years. With Skellerup's culture of constant improvement, and policy of trimming dead wood, I would certainly be looking over my shoulder if I were one of those people!

My 'problem', if you want to phrase it that way is that SKL has been such a successful investment for me I am a little overweight in SKL shares by value. But I have thought of a solution. I will regard Skellerup 'Agri' as one company and Skellerup 'Industrial' as another company, with the two segment branches 'joined at the top' to make a 'Skellerup Investment Fund'. So I really own two companies under a Skellerup umbrella, not just one :-)

SNOOPY

Thinking of it as two companies probably not a bad solution to a disciplined portfolio approach. I was too much of a wuss to buy shares on the way up as I didn't want to hurt my paper returns (an investment impediment of mine I am trying to address) but otherwise would prefer to hold twice as many shares that I have. Do me up an offmarket share transfer form at $5.50 we can solve both our portfolio issues at the same time

[bull....]

yep im a holder to now , if they can do this result in a bad year and div yield pretty good too

sadly my holding is no longer. enjoy those who are still in.

[Charlie]

Im just a newbee, but in the last month , seems the lows are getting higher, after bein flat for 3 months and time for an up-rise push ???.
I can see this company making 20-30 % pa in SP rise . At least that is my hope.
Topped up a bit today just in case .

[Muse]

Im just a newbee, but in the last month , seems the lows are getting higher, after bein flat for 3 months and time for an up-rise push ???.
I can see this company making 20-30 % pa in SP rise . At least that is my hope.
Topped up a bit today just in case .

Skellerup a great company and has performed well but its share price ran really hard. Went ex div a bit ago and no news until its 1H FY22 result out. Earnings probably need to catch up for a bit to justify trading any higher than 6 bucks…not advice, just my 2 cents.

[Charlie]

Skellerup a great company and has performed well but its share price ran really hard. Went ex div a bit ago and no news until its 1H FY22 result out. Earnings probably need to catch up for a bit to justify trading any higher than 6 bucks…not advice, just my 2 cents.

Noted , !
thanks, have a great day today.

[winner69]

Said a while ago first half profit to be 'in excess of 10%' more than pcp ...... WOW, its going to be 18% more

[RTM]

You beauty ! And to think I was considering taking some profits on this one. Let the good times roll.....

"Skellerup announced today an upgrade to its guidance for its net profit after
tax (NPAT) for first half of FY22.

Chair Liz Coutts said "At our AGM in late October 2021 we highlighted that
demand remained strong across the Group and we expected NPAT for the first
half of FY22 to be in excess of 10% above the prior comparative period (pcp).
This demand was sustained throughout the first half particularly for our
potable water, marine, roofing and construction products. As a result, we now
expect NPAT for the six months ended 31 December 2021 to be circa $23
million, up 18% on pcp." "

[alokdhir]

Said a while ago first half profit to be 'in excess of 10%' more than pcp ...... WOW, its going to be 18% more

But I find it very surprising company choosing to report this in trading update so close to HY results date ...though I am excited as holder but still why not wait till the results date !!!