Skellerup (SKL) Fundamentals

[winner69]

Snoops - the last paragraph on Dividend post you mention growth premium

From you numbers the implied dividend growth is only about 2.6% pa .... not much

Think I have sums right

[Snoopy]

Snoops - the last paragraph on Dividend post you mention growth premium

From you numbers the implied dividend growth is only about 2.6% pa .... not much

Think I have sums right

You are talking about post 1189? If that is so, your 'implied dividend growth' is too high - it should be 0%. And why is that?

It is because the 'capitalised dividend model' is based on 'zero dividend growth' - this is the essence of the model. That is not the same as saying the dividend will not change over the business cycle. I am modelling that in the future the dividend will go up and down in accordance with the dividends actually paid over the preceding five year period. But what I am saying is that at the end of that immediate past five year period, the same dividend paying pattern will repeat. Or put another way, the average dividend paid over the last five years will be exactly the same as the dividends the 'capitalised dividend model' is forecasting for the next five years.

Now if you look again at the table of dividends paid by Skellerup over the last five years in post 1189 by comparing interim and final dividends over 5 years, then you will see that both interim and final dividends are either staying the same or increasing. This does not fit with the capitalised dividend model assumptions. So it is likely the capitalised dividend model will give you an implied share price that does NOT reflect the dividend paying potential of Skellerup. This means as a single tool, in this instance, the capitalised dividend model is not very useful.

The reason I am persisting with the 'capitalised dividend model', is that I can use the share price as determined by 'Mr Market', and subtract from that the 'capitalised dividend value' to get a measure of the 'growth premium' that Mr Market is paying for Skellerup. I hope that clears things up a bit.

SNOOPY

[winner69]

You are talking about post 1189? If that is so, your 'implied dividend growth' is too high - it should be 0%. And why is that?

It is because the 'capitalised dividend model' is based on 'zero dividend growth' - this is the essence of the model. That is not the same as saying the dividend will not change over the business cycle. I am modelling that in the future the dividend will go up and down in accordance with the dividends actually paid over the preceding five year period. But what I am saying is that at he end of that immediate past five year period, the same dividend paying pattern will repeat. Or put another way, the average dividend paid over the last five years will be exactly the same as the dividends the 'capitalised dividend model' is forecasting for the next five years.

I assumed from your post the no growth value today is $2.57 but at $5.70 the market has created a ‘growth premium’ which you said was ‘a lot’ and I did a sum and said that implied growth of that premium was 2.6% pa

We probably misunderstood each other again


Whatever SKL.great company and I look forward to what you come up with from your next task

[Snoopy]

I assumed from your post the no growth value today is $2.57 but at $5.70 the market has created a ‘growth premium’

Your assumption is 100% correct

Which you said was ‘a lot’ and I did a sum and said that implied growth of that premium was 2.6% pa

We probably misunderstood each other again.

The only calculation I did was $5.70 - $2.57 = $3.13. I called that $3.13 a 'growth premium'. But I did not attempt to explain it any more than that. It is just the premium, once a fair value of the existing dividend stream is removed, that Mr Market is prepared to pay, - the result of a simple subtraction. It only makes sense if, as an investor, Mr Market believes that SKL is worth more than its historical dividend payment capability. I am not disagreeing with Mr Market. I think he is onto something. But what I want to know is: "Is Mr Market being 'over-exuberant' or 'under-exhuberant' on SKLs prospects?"

Mr Market is obviously looking at SKL growth into the future to justify a total SKL share price of $5.70. But how far into the future is Mr Market looking? I don't know. I make no assumptions about that. I am just reporting the $3.13 growth premium that 'is'.

SNOOPY

[Snoopy]

'MDRT' is the answer to the question:

"If all profits for the year were put towards paying off the company's debts, how long would that take?"

My rule of thumb for the answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

	FY2017	FY2018	FY2019	FY2020	FY2021
Bolt on Acquisitions	New Wigram factory opens		Nexus Foams (NZ) & 35% of SimLim (USA)	Silclear (UK)	Projects Vanilla & Tika IT upgrades
Cash & Cash Equivalents: {A}	$6.022m	$9.681m	$9.639m	$13.617m	$15.673m
Non Current Borrowings:	$41.777m	$40.400m	$46.215m	$41.300m	$24.000m
add Current Borrowings:	$0.0m	$0.0m	$0.0m	$0.830m	$0.409m
equals Total Borrowings: {B}	$41.777m	$40.400m	$46.215m	$42.130m	$24.409m
Total Net Borrowings: {B} - {A}	$35.755m	$30.719m	$36.576m	$28.513m	$8.734m
Net profit declared {C}	$22.110m	$27.277m	$29.063m	$29.064m	$40.175m
MDRT ({B} - {A}) / (C}	1.6 years	1.1 years	1.3 years	1.0 years	0.22 years

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. Skellerup are in the most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. There is a lot to like in this picture. I have no qualms about giving Skellerup a 'pass' on the MDRT front.

Now having reassured ourselves that the Buffett growth model is relevant to apply in this case. let's see what happens when we apply it.

One way to 'cheat' at the Buffett tests is to leverage up your business to such an extent that your ROE looks fantastic, but the debt taken on puts your business at unacceptable risk. How do we know if debts at a business are out of control? One way is to look at the 'Minimum Debt Repayment Time' or MDRT.

'MDRT' is the answer to the question:

"If all profits for the year were put towards paying off the company's debts, how long would that take?"

My rule of thumb for the answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

	FY2018	FY2019	FY2020	FY2021	FY2022
Bolt on Acquisitions		Nexus Foams (NZ) & 35% of SimLim (USA)	Silclear (UK)	Projects Vanilla & Tika IT upgrades	Talbot Technologies Ltd (NZ)
Cash & Cash Equivalents: {A}	$9.681m	$9.639m	$13.617m	$15.673m	$14.796m
Non Current Borrowings:	$40.400m	$46.215m	$41.300m	$24.000m	$40.000m
add Current Borrowings:	$0.0m	$0.0m	$0.830m	$0.409m	$0.0m
equals Total Borrowings: {B}	$40.400m	$46.215m	$42.130m	$24.409m	$40.000m
Total Net Borrowings: {B} - {A}	$30.719m	$36.576m	$28.513m	$8.734m	$25.204m
Net profit declared {C}	$27.277m	$29.063m	$29.064m	$40.175m	$47.813m
MDRT ({B} - {A}) / (C}	1.1 years	1.3 years	1.0 years	0.22 years	0.53 years

In the case of MDRT it is really only the latest figure that matters. But historical figures do give a feel for how conservatively (or not) the business has been run in recent years. Skellerup are in the second most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some useful bolt on acquisitions along the way. Growth is being pursued while debt has almost disappeared. There is a lot to like in this picture. I have no qualms about giving Skellerup a 'pass' on the MDRT front.

Now having reassured ourselves that the Buffett growth model is relevant to apply in this case. let's see what happens when we apply it.

SNOOPY

[Snoopy]

For the FY2021 edition of the Buffett growth model, I have recalculated these parameters as below.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	Average
Return on Shareholder Equity	14.7%	12.3%	15.2%	16.4%	15.7%	20.0%	15.7%
Dividend Payout Ratio	92%	88%	71%	83%	87%	68%	82%
PE Ratio at 30th September	11.5	16.6	15.7	15.2	19.9	29.1	18.0

The dividend payout ratio is based on the dividends actually paid out in the financial year under question - normally the final dividend for the previous year and the interim dividend for the current year, (not the dividends declared relating to the results of that year).

The number of previous years that I use to generate my data is a judgement call. The more years of data that you use, the better longer term picture you get. But over time a business evolves. So the longer series of data may be less representative of the business today, and going forwards. And it is the future that is of most interest when we are making future projections. FY2016 marked the start of a 'new era' for Skellerup. I quote from the Chairman's address in the FY2016 Annual Report.

"The FY16 year included a number of notable milestones. The most significant is the completion of the of the base build of our new facility at Wigram which has enabled us to commence the careful and gradual relocation of our Agri business from Woolston to Wigram."

"Another notable milestone has been the growth we have achieved in international markets."

I have elected to use my 'minimum period' of six years, to keep my Return on Equity, Dividend Payout Ratio and market rated PE position most relevant.

For the FY2022 edition of the Buffett growth model, I have recalculated three essential parameters as below:

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022	Average
Return on Shareholder Equity	14.7%	12.3%	15.2%	16.4%	15.7%	20.5%	22.4%	16.7%
Dividend Payout Ratio	92%	88%	71%	83%	87%	68%	75%	81%
PE Ratio at 30th September	11.5	16.6	15.7	15.2	19.9	29.1	22.3	18.6

The dividend payout ratio is based on the dividends actually paid out in the financial year under question - normally the final dividend for the previous year and the interim dividend for the current year, (not the dividends declared relating to the results of that year).

The number of previous years that I use to generate my data is a judgement call. The more years of data that you use, the better longer term picture you get. But over time a business evolves. So the longer series of data may be less representative of the business today, and going forwards. And it is the future that is of most interest when we are making future projections. FY2016 marked the start of a 'new era' for Skellerup. I quote from the Chairman's address in the FY2016 Annual Report.

"The FY16 year included a number of notable milestones. The most significant is the completion of the of the base build of our new facility at Wigram which has enabled us to commence the careful and gradual relocation of our Agri business from Woolston to Wigram."

"Another notable milestone has been the growth we have achieved in international markets."

I have elected to use a reference period of seven years, to provide a 'decent tail' to average across my Return on Equity, Dividend Payout Ratio results and the market rated PE numbers. I seriously thought about using just the last five years of results. If ROE continues to hold up, that indicates that Skellerup has gone to a new level in the utilisation of their factory equipment, and that should be reflected in my base estimate numbers going forwards. But I have elected to be a bit conservative and consider the full seven year history of 'the new Skellerup'.

SNOOPY

[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 modelling numbers that I have generated into the Buffett style ten year growth model.

For this model I am using:

a/ an ROE of 15.7% (the actual average of the last 6 years) AND
b/ a dividend payout ratio of 82% (the actual dividend payout ratio of the last 6 years).

I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax (at a rate of 28%) must be deducted from half of all future dividends, compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction column in my table (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

	SOFY
FY	Asset Backing	Operations Earnings	adjust OCI (*)	less Dividend	equals Retained Earnings	Unimputed Dividend Tax
2020 (historical)	0.916	0.150	0.011	(0.130)	0.031	(0.018)
2021 (historical)	0.942	0.205	(0.01)	(0.140)	0.055	(0.020)
2022	0.997	0.157		(0.128)	0.029	(0.018)
2023	1.026	0.161		(0.132)	0.029	(0.018)
2024	1.055	0.166		(0.136)	0.030	(0.019)
2025	1.085	0.170		(0.140)	0.030	(0.020)
2026	1.115	0.175		(0.144)	0.031	(0.020)
2027	1.146	0.180		(0.148)	0.032	(0.021)
2028	1.178	0.185		(0.152)	0.033	(0.021)
2029	1.211	0.190		(0.156)	0.034	(0.022)
2030	1.245	0.195		(0.160)	0.035	(0.022)
2031	1.280	0.201		(0.165)	0.036	(0.023)
2032	1.316	0.207
Ten Year Total				(1.461)		(0.204)

(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

With FY2032 projected earnings of 20.7cps, and using a PE ratio of 18.0 (actual average over the last 6 years), the expected share price for Skellerup in ten years time is:

18.0x 0.207 = $3.73

The net dividend return for shareholders over that time is $1.461 - $0.204 = $1.257 (as per above table)

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 sombre note on which to end this analysis, then so be it. Don't e-mail Warren Buffett and ask what he thinks, as I don't think there is any chance he will be on the Skellerup share register!

What Skellerup share price (P) would Warren need to buy Skellerup at to get his much touted 15% compounding return per year over the coming decade?

P(1+0.15)^10 = (3.73+1.26) => P= $1.23c

SNOOPY

discl: shareholder, with an average entry price of $1.33

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 question, I will plug the modelling numbers that I have generated into the Buffett style ten year growth model.

Key Model Inputs	Average over Seven Years
Return on Shareholder Equity	16.7%
Dividend Payout Ratio	81%
PE Ratio at 30th September	18.6

I have noted that the dividend going forwards is likely to be no more than 50% imputed. The reason why the Skellerup dividend is only 50% imputed today is that around 50% of profits (and 75% of revenues) are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax (at a rate of 28%) must be deducted from half of all future dividends (compared to if an equivalent fully imputed dividend was to be paid). I have adjusted for this in my calculation table by including an 'extra tax deduction column' (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

	SOFY
FY	Asset Backing	Operations Earnings	adjust OCI (1)	less Dividend	equals Retained Earnings	Unimputed Dividend Tax
2020 (historical)	0.916	0.150	0.011	(0.130)	0.031	(0.018)
2021 (historical)	0.942	0.206	(0.010)	(0.140)	0.056	(0.020)
2022 (historical)	1.00	0.245	0.010	(0.180)	0.075	(0.025)
2023	1.08	0.180		(0.146)	0.034	(0.020)
2024	1.114	0.186		(0.151)	0.035	(0.021)
2025	1.149	0.192		(0.156)	0.036	(0.022)
2026	1.185	0.198		(0.160)	0.038	(0.022)
2027	1.223	0.204		(0.165)	0.039	(0.023)
2028	1.262	0.211		(0.171)	0.040	(0.024)
2029	1.302	0.217		(0.176)	0.041	(0.025)
2030	1.343	0.224		(0.181)	0.043	(0.025)
2031	1.386	0.231		(0.187)	0.044	(0.026)
2032	1.430	0.239		(0.194)	0.045	(0.027)
2033	1.475	0.246
Ten Year Total				(1.687)		(0.235)

Notes

(1) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

(2) Sample calculations for FY2023:

Operations Earnings = $1.08 x 0.167 = $0.18
Dividend = 0.18 x 0.81 = $0.146
Retained earnings = $0.180 - $0.146 = $0.034
50% Unimputed Dividend Tax @28% (shareholder perspective only) = $0.146 x 0.5 x 0.28 = $0.020
Asset backing (subsequent year): $1.08 + $0.034 = $1.114

-----------

With FY2033 projected earnings of 24.6cps, and using a PE ratio of 18.6 (actual average over the last 7 years), the expected share price for Skellerup in ten years time is:

18.6 x 0.246 = $4.58

The net dividend return for shareholders over that time is $1.687 - $0.235 = $1.452 (as per above table)

Using a market share price today of $5.65, the expected compounding annual return 'i' can be calculated from the following equation.

$5.65(1+i)^10 = ($4.58 +$1.45) => i= 1.0065

This represents a projected return of 0.65% per year, for the next ten years (!)

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 24.6cps, verses actual earnings for FY2022 of 24.5cps. 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 7 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 FY2023, (AR2022 p9, consolidating 3 operating sites in Auckland into one low energy site), this modelling assumption looks likely to be wrong.

The second controversial modelling assumption is that today's PER of 22.3, will reduce to a PE ratio of 18.6 in 2032. But I did not pull that figure of 18.6 out of thin air. It is the actual historical average over seven years on my 30th September sampling dates.

Shareholders coming on board since FY2016 (which some regard as the re-imagining of Skellerup into the modern group we see today) which had normalised earnings of 11.8cps (post 655) to 22.4cps (post 1186), a rise of 90%. Over that same time period, using my 30th September reference date shows the share price has risen from $1.37 to $5.38, a rise of nearly 300%. This means that most of the spectacular gains made by shareholders over this time have come from 'earnings multiple expansion' and not 'earnings expansion'. There is a real risk factor here that could sting shareholders if that PE valuation metric deflates back towards historic levels.
modelling

What Skellerup share price (P) would Warren need to buy Skellerup at to get his much touted 15% compounding return per year over the coming decade?

P(1+0.15)^10 = ($4.58 +$1.45) => P= $1.49c

SNOOPY

[Muse]

So where to from here Snoops re: your shareholding? Hold, sell, combo?

[Snoopy]

So where to from here Snoops re: your shareholding? Hold, sell, combo?

The only thing I can say for sure is, I am in a better position this year....

Using a market share price today of $5.65, the expected compounding annual return 'i' can be calculated from the following equation.

$5.65(1+i)^10 = ($4.58 +$1.45) => i= 1.0065

This represents a projected return of 0.65% per year, for the next ten years (!)

....than I was one year previously:

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 , every year.

Ah well, I did warn myself, I guess :-(.

SNOOPY

[Snoopy]

I wasn't very happy with the numbers that came out of my Buffett analysis (Iteration A). Tending to it day to day on my share farm, my SKL shares are akin to a 'healthy growing porker'. But take it to market and it looks like I am sitting on an overpriced SKL pig.

For the FY2022 edition 'second iteration' of the Buffett growth model, I will change my assumptions to assume that the last five years of company results represent the 'new paradigm' in which SKL operates I have recalculated our three essential parameters as below:

	FY2018	FY2019	FY2020	FY2021	FY2022	Average
Return on Shareholder Equity	15.2%	16.4%	15.7%	20.5%	22.4%	18.0%
Dividend Payout Ratio	71%	83%	87%	68%	75%	77%
PE Ratio at 30th September	15.7	15.2	19.9	29.1	22.3	20.4

The dividend payout ratio is based on the dividends actually paid out in the financial year under question - normally the final dividend for the previous year and the interim dividend for the current year, (not the dividends declared relating to the results of that year).

The number of previous years that I use to generate my data is a judgement call. The more years of data that you use, the better longer term picture you get. But over time a business evolves. So the longer series of data may be less representative of the business today, and going forwards. This iteration B uses just the last five years of results.

SNOOPY