Skellerup (SKL) Fundamentals

[Sideshow Bob]

$51.9m NPAT this past year, so steady as she goes.....

https://www.nzx.com/announcements/420484

Skellerup guides for another strong year

25/10/2023, 12:36 pmMKTUPDTESpeaking ahead of today’s Annual Shareholders’ Meeting, Chair John Strowger provided initial guidance for Skellerup’s FY24 year.

Strowger said “Q1 results are mixed. The Industrial Division has traded in line with expectations and ahead of pcp. Agri Division sales are lower than expected due to international dairy customers reducing demand and inventory due to challenging market conditions. However, footwear sales remain solid.

For the full year we expect the Industrial Division to continue to grow both from sales of new products and more stable demand for existing products (following the destocking of the prior year). For the Agri Division we expect dairy sales to gradually increase as market conditions improve.

The global environment makes forecasting future results particularly difficult at the current time; Skellerup is not immune to market uncertainties. However, based on prevailing conditions and our current expectations in respect of how trading conditions and customer demand play out for the year, we expect FY24 NPAT to be in the range of $50 to $55 million. Our strategy of working closely with customers to provide engineered products that assure performance is the bedrock of delivering continued and sustainable earnings growth.”

[bull....]

The global environment makes forecasting future results particularly difficult at the current time; Skellerup is not immune to market uncertainties. However, based on prevailing conditions and our current expectations in respect of how trading conditions and customer demand play out for the year, we expect FY24 NPAT to be in the range of $50 to $55 million. Our strategy of working closely with customers to provide engineered products that assure performance is the bedrock of delivering continued and sustainable earnings growth.”

So feeling the slowdown eh is skl

RBNZ agree's with them

The agricultural sector is facing difficult economic conditions, because of low dairy, meat and forestry prices, high operating expenses and increased debt servicing costs.
Longer term, the sector faces uncertainty about the scale and timing of the costs of climate change, reports the Reserve Bank of New Zealand

https://www.scoop.co.nz/stories/BU23...challenges.htm

[Rawz]

a good read for the morning

https://justthebusinessjennyruth.sub...-strongest-and

[winner69]

a good read for the morning

https://justthebusinessjennyruth.sub...-strongest-and

Good eh rawz

As I’ve posted many times SKL one of the few NZ stocks which has grown its EVA (excess returns over its cost of capital) over the years …and rewarded by the market with increasing Market Value Added (market Cap less Equity)

No reason why they can’t keep it up.

[Ricky-bobby]

Thanks for posting chaps! Will have a read

[Snoopy]

I have had a quiet look at the FY2022 annual report. What does the announcement of the HY2022 dividend payment do for valuing the company based on capitalised payments?

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's, FY2020s, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2021 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2018	6.0c+4.0c	8.33c + 5.56c	5.56c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
FY2020	7.5c (50% I) + 5.5c (50% I)	8.96c + 6.57c	15.53c
FY2021	7.5c (50% I) + 6.5c (50% I)	8.96c + 7.76c	16.72c
FY2022	10.5c (50% I) + 7.5c (50% I)	12.54c + 8.96c	21.50c
FY2023	13.0c (50% I) + ?c (50% I)	15.53c + ?c	15.53c
Total			89.91c

Averaged over 5 years, the dividend works out at 89.91/5 = 18.0c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I consider a gross of 7% an acceptable return.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

18.0 / (0.07) = $2.57

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 Business Cycle Valuation: $2.57 x 1.2 = $3.08
Bottom of Business Cycle Valuation: $2.57 x 0.8 = $2.06

SKL shares finished trading at $5.70 last week (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.57 and a 'growth premium' of $5.70 - $2.57 = $3.13. $3.13 is a lot, but down from the overheated $3.71 from 30-09-2021.

I have had a look at the FY2023 annual report. What does the announcement of the HY2024 dividend payment do for valuing the company based on capitalised payments?

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As then chairman Liz Coutts highlighted in the FY2022 Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's, FY2020s, FY2021s, FY2022s, FY2023s and FY2024s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021, FY2022, FY2023 and FY2024 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2021 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

FY2023 P2/ 8.0c (50% imputed) = 4.0c (FI) + 4.0c (NI) = 4.0c/0.72 +4.0c = 5.56c + 4.0c = 9.56c (gross dividend)

FY2024 P1/ 14.0c (50% imputed) = 7.0c (FI) + 6.5c (NI) = 7.0c/0.72 +6.5c = 9.72c + 6.5c = 16.22c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	6.57c
FY2020	7.5c (50% I) + 5.5c (50% I)	8.96c + 6.57c	15.53c
FY2021	7.5c (50% I) + 6.5c (50% I)	8.96c + 7.76c	16.72c
FY2022	10.5c (50% I) + 7.5c (50% I)	12.54c + 8.96c	21.50c
FY2023	13.0c (50% I) + 8c (50% I)	15.53c + 9.56c	25.09c
FY2024	14.0c (50% I) + ?c (50% I)	16.22c + ?c	16.22c
Total			101.63c

Averaged over 5 years, the dividend works out at 101.63c/5 = 20.3c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I now consider a gross of 6% an acceptable return.

Based on my selected sought after 6.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

20.3 / (0.06) = $3.38

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 Business Cycle Valuation: $3.38 x 1.2 = $4.06
Bottom of Business Cycle Valuation: $3.38 x 0.8 = $2.70

SKL shares finished trading at $4.82 last week (above the upper end of my capitalised dividend valuation range). SKL has such a good growth record I am not seriously suggesting that 'capitalised dividend valuation' (which assumes no growth) is a satisfactory way to value the company. But an alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $3.38 and a 'growth premium' of $4.82 - $3.38 = $1.44. $1.44 is significant, but down from the overheated $3.31 from 28-11-2022.

SNOOPY

discl: hold SKL

[Snoopy]

Skellerup designs and manufactures critical components for OEM manufactuers. All such critical components incorporate rubberized material or foam as constituent parts. These components are often required to meet stringent food, drinking water, hygiene and safety standards. Skellerup's competitive advantage is to leverage their expertise in engineering, chemistry and manufacturing to create rapid product prototypes to tight specifications, that can nevertheless be manufactured cost effectively.

For effective management Skellerup products are grouped under two broad divisions: 'Agri' and 'Industrial'. Further broken down the 'product catalogue' looks like this:

1/ Dairy (Agri): Food grade rubber-ware componentry for the milking shed, including 'udder liners', tubing & filters for hygiene, and feeding teats for the calves. Skellerup are the number 2 supplier of maintenance milking equipment worldwide AND

2/ Specialist Footwear (Agri): The traditional 'Red Band' gumboots to look after our farmer's feet. In fact the gumboots are so well thought of that they find wider application in the fire, forestry and electrical installation industries. Skellerup are the recognised leaders in this market in New Zealand

3/ Transport (Industrial): Vacuum systems, seals, injectors, couplings and gaskets, utilised throughout the transport industry in applications as wide as Mack trucks to Maserati cars.

4/ Houses (Industrial): Suppliers of seals to leading manufacturers of taps, showers, plumbing, and HVAC equipment - even some kitchen appliances. Skellerup also market roofing product directly.

5/ Medical Health Hygiene Equipment (Industrial): Face masks, filters and seals for respiratory equipment, orthotics and prosthetics.

6/ Utility Infrastructure (Industrial): Seals for potable water and wastewater applications. Covers and lids for water fire and electrical services on streets. valves and seals for industrial applications (food, liquid and material processing).

7/ Sport & Leisure (Industrial): Foam boat decking, Foam used in ski and snowboard boots.

Skellerup products are either leading market players in their own right, or are partners with well known branded market leaders via their components in the manufacturing chain.

Conclusion: 'Pass Test'

Skellerup has been what I would term a 'slow bake success story'. There haven't been 'headline grabbing breakthroughs'. But they have baked in plans and incremental changes, that overall have created a much richer earnings pie. The industries that Skellerup have built their success with are well documented (see the post I am quoting above). So this year rather than just repeating WHAT Skellerup are doing, I am taking a leaf out of the book of CEO David Mair, who in his CEO annual report has become somewhat reflective, and talk about HOW Skellerup are doing it. From David's report:

"The key element in achieving corporate value is our unwavering focus on, and commitment to, understanding customer needs and using our:

i/ Deep material science expertice AND
ii/ Capability to combine materials AND
iii/ Ability to rapidly build and deliver prototypes AND
iv/ Possessing the ability to manufacture precision products in a scalable way.

This enables us to create new opportunities to grow Skellerup's business."

"A culture of continuous improvement is essential to motivate every employee to spend time working on improving the processes they are involved in, not merely a focus on outcomes."

"Our strong balance sheet offers Skellerup the flexibility to fund aligned acquisitions."

In summary, 'deep core material knowledge', 'continuous improvement' and 'capital to execute the ideas'. Another interesting statistic was that 14 of Skellerups top 20 customers were also in the top twenty five years before at EOFY2019. This shows that you don't always have to be driving for new business if you are in the habit of treating your existing customers really well. Budding CEOs I think could take many 'learning leaves' from the tree of Skellerup CEO David Mair.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2018: ($37.918-$1.123-$10.641)m /192.806m = 13.6cps
2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps


Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022 results adds back an after tax $0.400m/$0.319m/$0.274m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps
2023: ($66.987+$2.113-$16.046+$0.477)m/196.072n = 27.3cps


Notes:

a/ Results for all years have had foreign exchange currency gains removed ( FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m, FY2023 $2.113m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022/FY2023 results adds back an after tax $0.400m/$0.319m/$0.274m/$0.477m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'PASS TEST'.

SNOOPY

[Snoopy]

Return on Equity = Normalised Net Profit After Tax / Shareholder Funds at End of Financial Year

2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%

Conclusion: 'Pass Test'

Return on Equity = Normalised Net Profit After Tax / Shareholder Funds at End of Financial Year

2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%
2023: $53.501m/$225.436m= 23.7%

Conclusion: PASS TEST

SNOOPY

[Snoopy]

Net Profit Margin = Normalised Net Profit / Revenue

2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%

I see a good margin lift from FY2018 to FY2022 with just a small dip on the year Covid-19 hit.

Conclusion: 'Pass test'

Net Profit Margin = Normalised Net Profit / Revenue

2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%
2023: $53.501m/$333.537m= 16.0%

I see a good margin lift from FY2019 to FY2023 with just a small dip on the year Covid-19 hit. Inflation of 7% over FY2023 required a rise in net profit margin from 14.9% to (1.07x14.9%=15.9%). Actual margin achieved over FY2023 was 16.0%, so the job was done.

Conclusion: PASS TEST

SNOOPY