Skellerup (SKL) Fundamentals

[Snoopy]

I can do Tech Support via PM - guaranteed same year response

I just want to express my heartfelt thanks to all of you, both on the thread and by PM, who have offered to assist me tracking down a downloadable copy of the FY2014 annual report, which I now have. It was quite humbling to have so many offers of help, and not only from those on my side of the opinion fence.! I think 2021 is going to get very difficult from an investment perspective, as even what I have thought of as 'safe' investments become dangerously overpriced. They say knowledge is power, so I intend to keep sharing mine. And the more we share, the better investors we can all become.

Wishing everyone all the best for a rewarding 2021. I think we are all going to need it :-(

And now back to Skellerup.........

SNOOPY



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[CD_CHCH]

It's the least any of us can do Snoopy considering all the knowledge and research you freely share on this site, which really assists those of us who are less experienced and knowledgeable.

I for one really appreciate all you share and your posts - thank you and please keep up the good work.

[kiora]

My thoughts also CDCHCH. Thanks for sharing Snoopy
Snoopy puts my analysis to shame.
It always seems to be that I will be more thorough on financial results but need to regard paralysis through analysis

[Snoopy]

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'.

It is always a useful exercise to look at predictions compared with what actually happened.

Agricultural Segment EBIT rose to $25.405m from $22.792m, a rise of 11.5%. Given that the year on year half year rise was only 5% pre-lockdown, that means extraordinary gains were made in the second half. The revenue picture for the Agricultural division was $122.976m (HY2020) vs $128.413m (2HY2020), a rise of 4%. Since the profit rise was much greater than this, it implies that the statement:

"Operational process and efficiency gains (process, operating levels, mechanisation, inventory) at Wigram continue." (PR2020, slide4)

was not a set of empty words.

Contrary to what I expected "Growth in sales of dairy rubber-ware to international customers." was significant. The US market in particular was highlighted as strong (PR2020 p4, I note that strong second half profits co-incides with peak the US milking season). The USA now makes up 30% of Agri division revenue. (AR2020 p11). The NPAT gain for the year from dairy looks to be $1.5m (PR2020, slide 3).

Recent acquisition UK based 'Silclear' (only acquired on 1st November 2019) , which makes silicon tubes and fittings primarily used by the dairy industry separately boosted NPAT by $0.9m (PR2020 p4),. Total acquisition cost for 'Silclear' was $6.423m. Annualising the profit over the acquisition price, I get a return rate on this investment of:

$0.9m x (12/8) / $6.423m = 21%

This is an astonishingly good incremental acquisition for Skellerup.

Skellerup's previous acquisition of 'Nexus foams' (high performance foams and soft material for healthcare, electronics, construction and comfort applications} on 30th April 2019. Thus FY2020 (1st July 2019 to 30th June 2020) was the first full year of profit contribution from Nexus. The result for Nexus from 1st May 2019 to 30th June 2020 were not disclosed, apart from saying they were "in line with expectations" (PR2019 slide 2). I am going to make the conservative assumption that no profits were made in this period of establishment. This means the incremental Nexus NPAT for FY2020 of $0.6m (PR2020 slide 3) represents the whole profit for this division that was acquired in FY2019 for a cash consideration of $6.663m

$0.6m / $6.663m = 9%

Not as good as 'Silclear', but still a great result.

I got the fire boot forecast wrong. It seems that any incremental sales made to Australian firefighters was wiped out as European sales reduced due to reduced firefighting boot sales half a world away. Nevertheless footwear profits were up by a 'small green slither' (PR2020, slide 3), which I estimate to be a $0.1m increase in NPAT for the year.

Skellerup look to be increasing their profits in what globally is not an easy market. That kind of performance would have to be confidence inspiring for shareholders. Whether they can maintain that profitability of 2HY2020 into HY2021 just finished will be the key to see if SKL's optimistic valuations by Mr Market are justified. But will the rising NZ dollar prove a profit sapping headwind? If we look in AR2020 p69.

"The Group seeks to cover up to 100% of the net foreign currency cashflow forecast for the next 12 month period with foreign exchange contracts."

So no currency headwinds, for FY2021 at least.

SNOOPY

[Snoopy]

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

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 November 2020 year to date sale for the Mercedes E class sold in China shows sales down 37.6% in the calendar year to date, down to 62,155 units sold . This represents a drop of more than 37,000 drive couplings required for manufacture by Skellerup.

https://carsalesbase.com/european-ca...er-2020-models.

In a Covid-19 year, where total European brand sales look to be down between 15 and 20%, this is a large market under-performance.

Skellerup is also the preferred drive coupling supplier for Maserati. Maserati sales crashed by 45% between CY2018 and CY2019 down to 19,300 vehicles.

https://www.statista.com/statistics/...s-of-maserati/

I doubt if things improved when Covid-19 took hold of Italy in the second half.

Automotive was responsible for a NPAT profit decline of $1.2m (PR2020, p3).

I didn't expect a good result from Skellerup's driveshaft coupling manufacturing unit. But this is quite a lot worse than I expected. Skellerup acknowledge the decline, but say the automotive division is 'not a focus' (PR2020 slide 3). The bright side is that better things can be expected when the automotive market recovers. But with an ageing model line up for both Maserati and the Benz E Class, that could be some time away. I think a bounce back in Skellerup's 'Automotive' division is unlikely for FY2021.

SNOOPY

[Snoopy]

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

Industrial Division

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/

Skellerup has taken their biggest hit of some $2m NPAT (PR2020 slide 3) from the US Oil and gas sector and the effect of US tariffs (Skellerup's tanker gas pumps are manufactured in China) . Low crude oil prices are bad for heavy truck tractors and their associated liquid tank trailers. This is because oil companies clamp down on capital expenditure when oil prices are low. However oil prices have since risen to pre-Covid levels again.

Furthermore A reduction of large crowd events would have dampened the demand for the truck pumps associated with the portable toilet and the septic tank industry. I concur with my previous comment about there being little prospect of recovery until FY2022 (although that is only 6 months away).

SNOOPY

[Snoopy]

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

Industrial Division

Gulf 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.

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

Sales of potable water and waste water sales were impacted by COVID-19 as infrastructure work was suspended and delayed. This is reflected in a year on year Infrastructure NPAT drop of $0.6m (PR2020 slide 3). I didn't predict such a downturn and I expect we will see a catch up. Water infrastructure is something that is essential. But given continued Covid-19 disruption, I would not expect any such catch up to be reflected in annual results until FY2022.

SNOOPY

[Snoopy]

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

Industrial Division

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/

'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.

'Roofing and Construction' boosted Skellerup's NPAT by $1.2m over FY2020 (PR2020 p3). Management cited "New products and improved execution in Australian market in particular" (PR2020 p4) as a reason for this. One such new product is the 'Dekdrain A15' for driveways and patios, designed for an axle weight of 1.5tonnes.

https://www.barbourproductsearch.inf...df?org=newspdf

Another is the new 'Deks Duobond' 'two part epoxy' for joining cast iron and concrete pipe and fitting components, which is approved for use with drinking water.

https://www.facebook.com/DEKS.produc...0975766130532/

The US building permit trend is looking strong, with building permits issued in November 2020 higher than last years five year high in November 2019

https://www.census.gov/construction/...wresconst.pdf?

Australia had three straight months of rises in building permit approvals in September, October and November of 2020,

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

This augers well for the rest of the current financial year. Actual building activity tends to follow six months after a new building permit is issued. It appears, in retrospect, that the Covid-19 lock downs in Australia have transferred what was looking to be an extremely busy building period during HCY2020 into 2HCY2020. 2HCY2020 pre-Covid was looking weaker. 2HCY2020 is the same as HFY2021 for Skellerup, That means my previous forecast for HFY2021 was wrong, although with Covid delaying previous work at least I have an excuse to be wrong. If FY2020 for Skellerup 'Roofing & Construction' finished in a relatively weak way, yet profits were still up, I am expecting a strong FY2021 from 'Roofing and Construction'. If the FY2020 profit growth is matched, this will equate to a further rise in NPAT of $1.2m

SNOOPY

[Waltzing]

Great posting from MR S. Many thanks.

[Snoopy]

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.

The above is what I wrote in March 2020, So how is FY2021 looking after another nine months of wisdom?

Normalised Profit for FY2019	$29.969m
add Agri Increment (a)	$0.887m
less further Automotive decline	($0.200m)
add US Oil/Gas recovery	$1.000m
add Water Systems change	$0.000m
add Further Roofing & Construction gain	$1.200m
equals Total Forecast NPAT for FY2021	$32.856m

This equates to earnings per share of: $32.856m / 194.753m = 16.9cps (based on EOFY2020 share numbers)

On 29th October 2020, Skellerup made their own estimate of a profit for FY2021: An NPAT of between $30m and $35m. However, there was no guidance given as to how this improved profitability might be achieved. My own figure is somewhere in the middle of that range, but does include some explanation as to where that extra profit might be coming from. Now we just need to wait for the half year result to see if Skellerup is on track.

Notes

(a) First half year Agricultural division revenue in the previous year was $44.214m (my post 921). Full year Agricultural division revenue was $93.609m (my post 922). So second half Agricultural division revenue was:

$93.609m - $44.214m -= $49,395m

Annualizing second half revenue to give an estimate of FY2021 revenue:

2x $49,395m = $98,650m

This gives an incremental profit gain of: 0.178 x ($98.650m - $93.609m) = $0.887m

(b) The interest bill has slightly increased during FY2020. The net interest payment over HY2020 was $1.268m (my post 921). The interest paid in the second half was (using figure in post 932):

$2.582m - $1.268m = $1.314m

However, the difference is too small to consider using it to adjust my estimate of the following year's interest bill.

SNOOPY