Skellerup (SKL) Fundamentals

[Snoopy]

2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%

I see a 'steady margin' picture with a low year of FY2017 offset by a higher year in FY2014

Conclusion: Fail test

Net Profit Margin = Net Profit / Revenue

2016: $22.849m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.6%

I see a good margin lift from FY2016 to FY2018, with most of those gains being retained under the Covid-19 influenced period.

Conclusion: Pass test

SNOOPY

[Snoopy]

I open this post with a couple of quotes from the Panda which I think are both poignant and sobering.

Quote Originally Posted by Patient Panda
"not a great track record, don’t really own up to bad results and always optimistic for future only to contradict themselves with the result. Maybe Liz Coutts will be an improvement over Selwyn."

"Until they get some wins under their belt a PE of 14.7 looks very rich."

Over the past few years the majority of share price gains have been made up of PE expansion rather than a business going gangbusters. Just something to keep in mind for future risk weighted returns. The historic PE at 30-09-2015 was 11.6. Three years later and it is 15.6 (both with my adjustments).

One good result does not a trend make. The result was good but, as an investor, the likes of Buffett must always consider the multi year perspective. The performance of Skellerup isn't consistent enough to apply the Buffett multi year growth model reliably. This doesn't mean it isn't a good investment. It just means we can't use a technique like Buffett might use to value it.

Two years on and how things change. All four of the Buffett investment criteria are satisfied. That is not an invitation to invest in Skellerup of course. Passing the four Buffett criteria only gets a place at the Buffett evaluation start line. Two very important tests remain. For a start we must determine if Skellerup is too heavily indebted. Overleverage can push up ROE and that is not a good thing as the company could become unstable in a market downturn. Finally we must determine if the recent rise in the share price already reflects the value of future business improvements. No matter how good a company is at the operational level, it is still possible to pay too much for the shares.

'Good Company' + 'Paying too much for Shares' = 'A Poor Investment'

One thing that is certain is that the historical PE ratio has continued to expand. The share price is flirting with $3. If it gets there that will imply an historical PE ratio of 20, which in historical terms is quite a lot for a 'boring industrial'. Still Skellerup's Covid-19 resilience and their ability to keep paying dividends is impressive.

SNOOPY

[Snoopy]

A note of warning here. It can be extremely dangerous to rely on ROE as a stand alone indicator. A company can be very highly leveraged which artificially raises their ROE above what it would be if it was more prudently capitalised. But is this the case with Skellerup?

From the FY2015 interim report Balance Sheet:

Cash: $10.678m

Interest Bearing Loans and Borrowings: $2.900m

Net cash position: $7.778m

Skellerup has no term debt and a very strong positive cash position. This is very different from even a few years ago when Skellerup ran up quite a lot of debt. Granted the Christchuch earthquakes and resultant payout relating to their Woolston site has boosted the cash position for now. Some debt may creep back into the balance sheet once the new Wigram factory is built. Offsetting that will be efficiency gains from what will be a thoroughly modern factory. Nevertheless no term debt today is a very good reason to like this company.

'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

	FY2016	FY2017	FY2018	FY2019	FY2020
Bolt on Acquisitions		New Wigram factory opens		Nexus Foams (NZ) & 35% of SimLim (USA)	Silclear (UK)
Cash & Cash Equivalents: {A}	$9.510m	$6.022m	$9.681m	$9.639m	$13.617m
Non Current Borrowings:	$36.413m	$41.777m	$40.400m	$46.215m	$41.300m
add Current Borrowings:	$0.0m	$0.0m	$0.0m	$0.0m	$0.830m
equals Total Borrowings: {B}	$36.413m	$41.777m	$40.400m	$46.215m	$42.130m
Total Net Borrowings: {B} - {A}	$26.903m	$35.755m	$30.719m	$36.576m	$28.513m
Net profit declared {C}	$20.525m	$22.110m	$27.277m	$29.063m	$29.064m
MDRT ({B} - {A}) / (C}	1.3 years	1.6 years	1.1 years	1.3 years	1.0 years

In the case of MDRT it is really only the latest figure that matters. All other figures are historical, but I have included them anyway because I didn't do the calculations 'in period'. Historical figures do give a feel for how conservatively (or not) the business has been run in recent years. But having a good debt position last year is of no help if the debt has blown out this year. Fortunately debt hasn't blown out and 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 key bolt on acquisitions along the way. Growth is being pursued while debt, although low, is being repaid. 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

[winner69]

'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

	FY2016	FY2017	FY2018	FY2019	FY2020
Significant Event			First full year owning AbsoluteIT		JacksonStone Acquired
Cash & Cash Equivalents: {A}	$0.0m	$1.225m	$6.269m	$6.357m	$6.178m
Non Current Borrowings:	$18.500m	$18.500m	$36.000m	$33.000m	$36.000m
add Current Borrowings:	$2.500m	$0.0m	$0.0m	$0.0m	$0.0m
add Overdraft:	$0.870m	$0.108m	$0.0m	$0.0m	$0.0m
equals Total Borrowings: {B}	$21.870m	$18.608m	$36.000m	$33.000m	$36.000m
Total Net Borrowings: {B} - {A}	$21.870m	$17.323m	$29.731m	$26.643m	$29.822m
Net profit declared {C}	$22.849m	$19.635m	$26.154m	$29.233m	$28.969m
MDRT ({B} - {A}) / (C}	4.2 years	3.0 years	5.8 years	13.2 years	11.1 years

That 11.1 years is a bit of a worry

[percy]

SKL projected eps.
................................2020.............. .......2021........................2022.
Market Screener..........15cps....................15cps.. ...............,,,16cps
eps growth..................................0%........ ................6.67%
Craigs........................14.96cps............ ....15.10cps.................16cps
eps growth..................................0093%..... ...............5.9%
Current PE ratio is 19.5 which looks rather high for less than 1% eps growth in 2021 year and just over 6% in 2022 year. ie current PE ratio is over 3 times 2021/2022 eps growth rate.
Looks to me as though the current share price has a lot of forward growth priced into it.Yet it is extremely doubtful this growth will eventuate.
Take care.

[Southern Lad]

'

	FY2016	FY2017	FY2018	FY2019	FY2020
Significant Event			First full year owning AbsoluteIT		JacksonStone Acquired
Cash & Cash Equivalents: {A}	$0.0m	$1.225m	$6.269m	$6.357m	$6.178m
Non Current Borrowings:	$18.500m	$18.500m	$36.000m	$33.000m	$36.000m
add Current Borrowings:	$2.500m	$0.0m	$0.0m	$0.0m	$0.0m
add Overdraft:	$0.870m	$0.108m	$0.0m	$0.0m	$0.0m
equals Total Borrowings: {B}	$21.870m	$18.608m	$36.000m	$33.000m	$36.000m
Total Net Borrowings: {B} - {A}	$21.870m	$17.323m	$29.731m	$26.643m	$29.822m
Net profit declared {C}	$22.849m	$19.635m	$26.154m	$29.233m	$28.969m
MDRT ({B} - {A}) / (C}	4.2 years	3.0 years	5.8 years	13.2 years	11.1 years

Snoopy, I’m confused by the result of your ({B} - {A}) / {C} calculation. For FY20, if net debt is $29.822m and net profit is $28,969m, how do you get 11.1 years profits to pay off the debt?

Looking at the FY20 results, I see your net profit figure is before tax. The need to pay tax even if dividends aren’t paid presumably should presumably factor into the calculation somewhere.

[Snoopy]

That 11.1 years is a bit of a worry

You are a bit quick off the mark Winner. That figure is for AWF Madison, because I pinched the table format I wanted from my equivalent post on that thread. The table you are looking at, when you looked at it, was still a 'Work in Progress'. The post will be finished when I put my 'shouty SNOOPY signature' at the end of it. I have taken to doing my calculations on line these days rather than destroying a bit of paper beforehand and then writing the results up. So even I don't know what the result is when I post. I guess it is the 'sharetrader' equivalent of watching sport live! Exciting eh ;-)

SNOOPY

[Snoopy]

Snoopy, I’m confused by the result of your ({B} - {A}) / {C} calculation. For FY20, if net debt is $29.822m and net profit is $28,969m, how do you get 11.1 years profits to pay off the debt?

Check back at my post 863 now. It should all be fixed.

Looking at the FY20 results, I see your net profit figure is before tax. The need to pay tax even if dividends aren’t paid presumably should presumably factor into the calculation somewhere.

Except for the above bit that was OK when you looked at it. It was an NPAT figure and you are quite right, the tax paid does come off the profit before you calculate MDRT.

SNOOPY

[Southern Lad]

Check back at my post 863 now. It should all be fixed.



Except for the above bit that was OK when you looked at it. It was an NPAT figure and you are quite right, the tax paid does come off the profit before you calculate MDRT.

SNOOPY

Cheers Snoopy - makes more sense now and it now passes the Southern Lad Test No. 1: Do the numbers make sense when you apply the 'what do I expect the answer to be' before I delving into the detail of the calculation test. I appreciate the big effort you put into the in-depth analysis that you regularly share with us.

[Ggcc]

SKL projected eps.
................................2020.............. .......2021........................2022.
Market Screener..........15cps....................15cps.. ...............,,,16cps
eps growth..................................0%........ ................6.67%
Craigs........................14.96cps............ ....15.10cps.................16cps
eps growth..................................0093%..... ...............5.9%
Current PE ratio is 19.5 which looks rather high for less than 1% eps growth in 2021 year and just over 6% in 2022 year. ie current PE ratio is over 3 times 2021/2022 eps growth rate.
Looks to me as though the current share price has a lot of forward growth priced into it.Yet it is extremely doubtful this growth will eventuate.
Take care.

I agree take care. The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.

Off topic I know l, but I have been looking at buying a new house and just inquired about a relatively nice house in a relatively nice area of Napier. $1.2 million for the house.......... I was like geez???? The agent asked where I was situated and mentioned houses around my area were going for close to 1 million and some above as well. A year ago I was told $880 tops. So, in relation to SKL. People are prepared to pay more for something that seems overvalued to others, for what seems a secure dividend and some including myself are not prepared to pay so much for Their “investment”.
It just seems like one giant bubble ready to pop.