Skellerup (SKL) Fundamentals

[mondograss]

Thanks Percy, I was a bit in two minds but I have another use for the money at present so decided to sell too.

[macduffy]

Yes, a bit disappointing but the company remains profitable with a strong balance sheet and solid cashflows. I'll hold for now until I can find something better.

[percy]

I am being very tough this result season.Any company that disappoints is sold straight away.However, any company that produces a result better than I thought I will buy.
PGW, whose result is not until the 26th of Feb, is the one I am waiting for.I have been looking to add to our holdings,so it will be interesting.
I expect HGH, due next Tuesday,and SPK, next Wednesday will not surprise.

[Snoopy]

I have had a quiet look at the annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend 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 and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 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)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2015	5.0c+3.5c	N/A c + 4.86c	4.86c
FY2016	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
FY2020	7.5c (50% I) + ?c	8.96c + ?c	8.96c
Total			67.78c

Averaged over 5 years, the dividend works out at 67.78/5 = 13.6c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

13.6 / (0.075) = $1.81

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: $1.81 x 1.2 = $2.17
Bottom of Business Cycle Valuation: $1.81 x 0.8 = $1.45

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SKL shares trading at $2.35 (above the upper end of my expected range) are now overvalued by 10%. However an imminent dividend payment of almost 9c gross may be contributing to this. I intend to hold the SKL shares that I already own (they are not grossly overvalued after all). But I won't be looking to buy more at these levels.

I have had a quiet look at the half year annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend 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 and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 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)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2016	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
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
Total			69.49c

Averaged over 5 years, the dividend works out at 69.49/5 = 13.9c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability of Skellerup to quickly move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

13.9 / (0.075) = $1.85

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: $1.85 x 1.2 = $2.22
Bottom of Business Cycle Valuation: $1.85 x 0.8 = $1.48

My target accumulation price is 10% below 'fair value', and that equates to $1.67.

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?

SNOOPY

discl: hold SKL

[percy]

Pleasing business upgrade today.
I sold a few weeks ago,however I retain SKL on my watch list.

[Scrunch]

I was kinda expecting that they would have experienced some supply chain disruptions. I'm not sure if its good luck or good management that they haven't. From their update today:

"Key Points
o Skellerup facilities worldwide have been and continue to operate.
o Skellerup has and continues to advise and monitor its people to help them
protect themselves and families from the Covid-19 pandemic.
o Many Skellerup products are essential and non-perishable helping to ensure
safe food and water.
o Skellerup's businesses have to date not been adversely affected from
material supply chain interruptions and have been able to meet all customer
requirements.
o Skellerup expects end demand for some of its products may be impacted but
to date there are no material changes to our business or year to date
earnings for FY20. "

If they are basically trading on a similar trajectory to before, does this mean the majority of the circa 30% price decline recently can be put down to changing market risk premium's?

[percy]

I think SKL was good buying yesterday.
May be even better today.?

[Snoopy]

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?

Here is my take on the outlook for Skellerup from Mid financial year 2020.

Agricultural Division

The Agricultural division has performed very well with both Sales and EBIT up 5% in the just finished half year for FY2020. Recession or not, people still need to eat and farmers, in NZ at least, are actually doing OK, (behind their whinging about the Labour lead government coming waterway restrictions - that's OK farmers are allowed to whinge!). Skellerup is the second largest supplier of rubber-ware to the dairy industry worldwide, and around 60% of product manufactured in NZ is exported.

The NZ dollar decline will help farmers in the future too! However, there may be a few less 'Red Band' specialist forestry boots sold, offset by more sales of 'Skellerup Fire Fighter Extreme Boots' helping our firefighting friends in Australia.

Outside of NZ, the outlook for dairy is not ideal. From:

https://www.dairyaustralia.com.au/-/...port-final.pdf

"Dairy Global supply Situation Outlook

Milk production from key global dairy exporting regions has remained subdued. Seasonal and political headwinds in the European Union have seen milk production growth slow and US production remains sluggish."

"Australian industry Situation Outlook

Australian farmers have entered a season of record farmgate milk prices however milk production has continued to contract. High input costs and an ominous weather forecast for the balance of the year is weighing on sentiment and has seen an increase in culling."

It looks like NZ remains the bright spot for marketing 'Skellerup Agriproducts'.

Industrial Division

Industrials may be a bit more challenging. The main 'driveshaft coupling gig' is Skellerup's Italian Factory supplying the Chinese manufactured (for Chinese domestic consumption) "Mercedes Benz E-Class L" cars. Sales figures to the end of January 2020 are here:

https://carsalesbase.com/china-car-s...-benz-e-class/

CY2019 was a record year for this model in a year where auto sales in China were under pressure. January 2020 sales were a bit down and this was before the ramp up of the Coronavirus problems in China and subsequently Italy. Car sales in China are reported to be down 90% in February 2020. So we might be looking at a short term headwind here, even if the underlying demand for the Chinese made Mercedes product looks sound. In addition, major Automakers in Italy, including Fiat, Ferrari and Lamborghini have closed their factories in response to the Italian government’s orders on March 11th to close commercial activities for two weeks. To comply with the law, the Skellerup factory in Italy must have also closed, yet no announcement was made. I see the Skellerup share price started its recent steep decline on Mach 11th - co-incidence? According to the market update today offered by Skellerup,

"Skellerup facilities worldwide have been and continue to operate." Hmmmm....

The heavy truck market in the US (the prime application for Skellerup's Masport branded vacuum pumps) has slowed and is expected to remain subdued over 2020 and 2021. Skellerup's pumps find application in both the portable toilet and septic tank industry and also the oil and gas market. The pumps are made in China (there is a 'Trump tariff cost' here), then integrated within systems within the United States.

https://www.fleetequipmentmag.com/ac...very-tempered/

The Gulf division supplies rubber componentry to US based tap and shower makers. The cuts to US interest rates should stimulate the US housing market. But high construction costs will keep housing affordability at bay for many, so new build sales are likely to be limited to about 10% of the market.

https://knowledge.wharton.upenn.edu/...arket-in-2020/

Gulf also supplies rubber sealing components for wastewater and fresh water piping. Although not sexy, with ageing infrastructure worldwide, this is a componentry application with ongoing demand, particularly in the United States..

'Deks', based in Australia, produces sealing and waterproofing products for roofing, plumbing and civil/underground applications. Building approvals plunged 15%
in January 2020 after a 4% rise in December 2019.

https://tradingeconomics.com/australia/building-permits

"This marked the steepest decline in building permits since a 22.1 percent fall in December 2017, mainly due to a 35.5 percent slump in approvals for private sector dwellings excluding houses. In contrast, building permits for private sector houses rose slightly by 0.3 percent."

Given that the time between issuing a building permit and work starting is typically six months, the outlook for Deks does not look good for HY2021. But the outlook for the remaining financial year to the end of June looks reasonably buoyant.

In the council market, the aging water pipe infrastructure replacement business, particularly in New South Wales, provides a steady base for the business.

Skellerup themselves in their March 16th 2020 press release say:

"At this stage we continue to expect FY20 NPAT to be consistent with the result achieved in the pcp.”

Looking further out, I think we will see a decline in FY2021. But if you look at the detail of my capitalised dividend valuation model, this decline is already priced into my valuation.

SNOOPY

discl: hold SKL

[Filthy]

thanks Snoop!

[macduffy]

SKL is a prime example of the skittish mood of today's markets. Shareprice up over 12% today.