Skellerup (SKL) Fundamentals

[winner69]

It is informative to 'track back' through the annual reports and see what growth plans they announced to the auditors as the goodwill on the books was assessed annually. Shareholders can find this information under the 'Intangible Asset' section of the Annual Report.

Revenue assumptions

FY2014 take

"Revenues have been forecast to moderately increase over the following five-year period in line with the Group’s strategic business plans to develop
and introduce new products, in addition to continuing to support and grow the Group’s existing global customer relationships."

FY2015 take

"The revenue growth percentages range from 3% to 20% on average per annum over the five years across the individual cash generating units."

FY2016 take

"The revenue growth percentages range from 3% to 20% on average per annum over the five years across the individual cash generating units."

FY2017 take

"The revenue growth percentages range from 2% to 15% on average per annum over the five years across the individual cash generating units."

Looking out from June 30th 2015 and June 30th 2016, there were some pretty bullish growth assumptions built in. Looks like the new Chair Liz Coutts may have reigned in those expectations a bit. But they are still backing themselves. A 15% revenue growth compounding over five years is:

1.15^5 = 200%

That is a 100% increase in business from the base determined five years previously. For sure it is gunna happen this time?

SNOOPY

Only one 'cash generating unit' is assumed to grow at 15% pa - other units less

Which one is that?

[Gonzo]

my forbar adviser reckons SKL will get taken out by some foreign thieves

[BlackPeter]

my forbar adviser reckons SKL will get taken out by some foreign thieves

Not very likely. Nobody can steal a listed company ...

What he probably means is that somebody could buy them off NZ owners - and this only works if the NZ owners are either wise or stupid enough to sell.

Whatever it is - nothing wrong with foreigners making an offer. If the offer is accepted it is the fault of the people selling ...

[Snoopy]

Only one 'cash generating unit' is assumed to grow at 15% pa - other units less

Which one is that?

Given the overall level of increase in revenue is much smaller than 15%, and given that all the geographical segment revenue is pretty much static (Annual report Note 1b) except for 'other', it might be something Skellerup has acquired in a developing market. Maybe they intend to sell 115 pairs of gumboots in Vietnam this year, up from 100 last year?

SNOOPY

[winner69]

Snoops me old mate

The Note on Intangibles listd the 4 Cash Generating Units.

Cash-generating unit with goodwill in $000
Gulf 32,937
Ambic 7,078
Deks 3,728
Stevens Filterite 431
Total goodwill 44,174

One of these CGUs has assumed revenue growth of 15% pa and one (probably only 1) has growth at 2% pa

Which one sells gumboats in Vietnam?

My guess the 15% growth unit is Gulf seeing that gets the biggest rave in the AR ....or it might be Stevens Filterite seeing it seems to be the smallest 'acquisition'

No doubt you have already sussed that the assumptions used to test goodwill are nothing to do with any assumed total company,division or geographical growth

[Snoopy]

Snoops me old mate

The Note on Intangibles listed the 4 Cash Generating Units.

Cash-generating unit with goodwill in $000
Gulf 32,937

http://www.skellerupholdings.co.nz/M...Industrial.php

"Gulf Rubber is an internationally recognised designer and manufacturer of a range of compressed and moulded thermoplastic elastomers. Products include pipe seals, diaphragms, washers, gaskets, customised rubber mouldings, check valves, O rings, disks and other components for a wide range of global customers in industries including automotive, industrial, mining pipe, valve and medical."

from p10, Annual Report 2013

-----

Gulf Rubber was acquired in 2006. Gulf Rubber encompasses design and manufacturing activities in Australia, New Zealand and Italy, and a sales and distribution facility in the USA. Located near Charlotte, North Carolina, Gulf US is at the heart of a significant manufacturing belt in the USA. Prior to establishing its US facility in early 2012, Gulf Rubber serviced its US customers from Australia. By setting up in a 2,000m2 climate-controlled warehouse, complete with quality control and metrology laboratory, Gulf US has created meaningful benefits for its industrial, appliance, plumbing and automotive customers.

This Gulf purchase included a valuable relationship with Ruthimex, a contract manufacturing partner based in Vietnam. The demonstrated ability of the Ruthimex operation has enabled the relationship to grow significantly over the past seven years to include products in the Deks roofing and plumbing products range and, most recently, from the manufacture of Ultralon foam products."

-----

Ambic 7,078

http://www.skellerupholdings.co.nz/Mobile/Agri.php

"Ambic is a world leading specialist in the development, production and distribution of dairy hygiene and livestock health management products. In particular, Ambic is the world's leading supplier of mastitis prevention and mastitis detection equipment"

Ambic was acquired by Skellerup in 2005.

Deks 3,728

http://www.skellerupholdings.co.nz/M...Industrial.php

DEKS designs and supplies sealing and waterproofing products for roofing, plumbing and civil/underground applications. Operating internationally, Deks has a strong market presence in Australia, North America, Asia and Europe and a growing presence in South America. DEKS brands are internationally recognised and have been sold throughout the world for more than 40 years.

Stevens Filterite 431

http://www.skellerup.co.nz/dairy-int...l/milk-filters

"a proud history of manufacturing only the highest quality milk filters to the global dairy market."

Manufacturing base: Featherston NZ

This link:

http://www.skellerupholdings.co.nz/Mobile/Agri.php

says they only service the Australasian market. So maybe they are in the middle of a plan to take 'Stevens Filterite' global?

Total goodwill 44,174

One of these CGUs has assumed revenue growth of 15% pa and one (probably only 1) has growth at 2% pa

Which one sells gumboats in Vietnam?

Gulf, via they contract manufacturing arrangement in Vietnam ;-P?

My guess the 15% growth unit is Gulf seeing that gets the biggest rave in the AR ....or it might be Stevens Filterite seeing it seems to be the smallest 'acquisition'

They made a point in AR2016 about securing the contract for driveline couplings for Chinese market Mercedes E Class vehicles.

http://carsalesbase.com/china-car-sa...-benz-e-class/

A total of 57,439 were made in China last year (2016). Sales to the end of August 2017 were already 74,816 with still four months of the year to go. So looks like SKL could be onto a winner here.

Before this contract the main driveline coupling success story was Maserati

http://carsalesbase.com/us-car-sales-data/maserati/

But as you can see total sales for all models were only 12.534 in 2016. So it is the Mercedes contract that has put Skellerup driveline couplings in a different league.

The AR2017 presentation p5 highlights the large infrastructure opportunities coming up in Auckland and Melbourne in particular

-----

• Government spending in NZ, AUS and US on infrastructure expected
‒ Auckland Watercare ~NZD 4.9bn, 10 years.
‒ Victoria Water ~AUD 5.6bn, 5 years.
‒

-----

So those growth projections could be for Gulf.

Yet, given we are talking 'revenue growth', that is easier to get from a small base. For this reason I am guessing the 15% revenue growth projection is most likely from 'Stevens Filterite' going global.

No doubt you have already sussed that the assumptions used to test goodwill are nothing to do with any assumed total company,division or geographical growth

The assumptions to test goodwill must be related to projected divisional growth surely? Because the goodwill was acquired as a direct result of the purchase of a certain division. And if that division doesn't meet its growth projections then goodwill might be, but not necessarily (if the price paid did not assume a very aggressive future growth strategy would be fulfilled), come up for impairment?

SNOOPY

[Scrunch]

2013: ($26.631-$0.871-$7.595)m/ 192.806m = 9.4cps
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps
2016: ($29.099+$0.800+$1.275-$8.429+$0.145x0.28)m /192.806m = 11.8cps
2016: ($31.435-$3.412-$9.300+$0.025x0.28)m /192.806m = 9.7cps

Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs and removes the tax effect of not including a $145,000 cost from relocation expenses.
d/ Result for FY2016 removes the tax effect of not including a $25,000 cost from relocation expenses.

Conclusion: Fail test

SNOOPY

Interestingly if a less accurate adjustment is made around the 2014 result (just removing the insurance income settlement and not adding back the warranty dispute costs) then the test is passed. The $1.6m add-back pushes the EPS up to 11.5c and if it wasn't made, the EPS would have been 10.7c. This falls between 9.7c and 11.1c meaning 2016 would be the only set-back.

[winner69]

The assumptions to test goodwill must be related to projected divisional growth surely? Because the goodwill was acquired as a direct result of the purchase of a certain division. And if that division doesn't meet its growth projections then goodwill might be, but not necessarily (if the price paid did not assume a very aggressive future growth strategy would be fulfilled), come up for impairment?

SNOOPY

Skellerup only report two divisions - Agri and Industrial (plus the Corporate Gravy Train)

The 'brands' we are talking about can belong to one or by the looks of it both. Part of the Notes say
Goodwill acquired through business combinations has been allocated to the business units acquired. Subsequent business reorganisations within the Group have resulted in some original cash-generating units (CGU) being combined with other Group businesses. In such circumstances, the original goodwill has been allocated across the combined cash-generating unit to determine fairly the recoverable amount against the value in use. In the prior year a business reorganisation resulted in the Thorndon and Ultralon Australia CGUs being combined with the Gulf CGU.


Next bit of your homework - There's more to Skellerup than just these brands (yes?) so how much you reckon these brands make up of total Skellerup revenues?

Point still is the 3% to 15% growth they assume as part of testing goodwill is till not necessary (or very unlikely) either expected divisional or company revenue growth

[Snoopy]

Interestingly if a less accurate adjustment is made around the 2014 result (just removing the insurance income settlement and not adding back the warranty dispute costs) then the test is passed. The $1.6m add-back pushes the EPS up to 11.5c and if it wasn't made, the EPS would have been 10.7c. This falls between 9.7c and 11.1c meaning 2016 would be the only set-back.

On p4 of AR2014 the wording with reference to the significant $1.6m one off charge, when talking about profit, was:

"despite absorbing the large $1.6 million net cost for settlement of a historical product claim."

This charge was not highlighted in the 'financial section' of the Annual Report for 2014 at all to my knowledge. This indicates management regarded it as just part of 'normal business'. The phrase 'less accurate' that you used Scrunch, when looking at the FY2014 result without this charge you could see as 'more accurate' from a management judgement view. The point I am making here is that these results are all 'judgement calls' to some extent. So Scrunch your 'less accurate' interpretation of the FY2014 NPAT result I would regard as neither more nor less accurate than mine.

In the case of passing the 'Buffett Tests', this change of judgement would not affect the results of T3 and T4. Applying the Buffett Growth model' requires that all of the tests be passed. So it makes no difference to my Skellerup valuation in this instance. However, I thank you for highlighting an alternative view.

SNOOPY

[winner69]

This is good news snoops

Speaking ahead of today’s Annual Shareholders’ Meeting, Skellerup Chair Liz Coutts said trading for Q1 of the current year was strong, generating EBIT in excess of 10% ahead of the comparable quarter in the prior year.

Mrs Coutts said “We expect an improvement in underlying profitability for the FY18 year ahead. However, experience tells us it is too early in the year, given the seasonal nature of our business for us to provide any further guidance.”

If