Skellerup (SKL) Fundamentals

[Snoopy]

Very impressive result on all four Buffett tests over FY2022. The idea that Skellerup is a great company gains fewer and fewer dissenters as the years roll by. However, this is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021, even if one year later that PE figure has dropped to a more conservative but still high 22. It is very important potential investors bear in mind the value equation:

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

.... and so it proved over the year. Despite earnings per share jumping by 17%, the share price declined by 10% over the September year as FY2022s bumper result was digested. This shows the folly of buying a good company with no regard to the share price, in the short term at least. In the case of SKL this was well signalled by me as well.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2022 Capitalised Gross Yield for SKL (post 1014) is 7.7c / $2.80 = 2.75%.

	Share Price equals	Capitalised Dividend Value plus	Implied Growth Premium
30-09-2021	$5.96	$2.25	$3.71 (+165%)
30.09-2022	$5.38	$2.57	$2.81 (+109%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

Very impressive result with a pass on all four Buffett tests over FY2023. This is particularly notable as companies that are manufacturers and require a lot of cap[ital equipment to operate, in general, find it very difficult to clear the very demanding Buffett investment goalposts. Yet Skellerup have not only done so but 'done it again'. But if Skellerup is doing so well, why has the share price been declining over recent years?

The market PE for Skellerup on adjusted earnings soared to over 29, by 30th September 2021 (share price $5.96). One year later, and despite growing earnings, that PE figure has dropped to a more conservative but still high 22 (share price $5.38). By 30th September 2023, despite earnings growing yet again, the share price had come down to $4.65, for a PE of 17.

What is interesting about this is that although the share market as a whole has been weak over the year, my 30th September eight year average historical PE for Skellerup is 18.4, not too far above the Skellerup PER of 17 at 30th September 2023. So what we shareholders are seeing here in terms of share price is 'reversion to the mean', nothing more.

It is very important potential investors bear in mind the value equation:

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

.... and so it proved over the year. Despite earnings per share jumping by 13%, the share price declined by 13% over the September year as FY2023s bumper result was digested. This shows, for the second year in a row, the folly of buying a good company with no regard to the share price, in the short term at least. For long term investors with a time frame greater than two years such share price movements make little difference. Dividends have continued to increase over the year and I personally have had no need to sell. If I had been in a position where I was short of capital for investment opportunities that may emerge I may well have sold down my position a couple of years back. But if anything I am in the opposite position with my fixed interest portfolio, bank term deposits, at its highest ever level and good equity investment opportunities scarce.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2023 Capitalised Gross Dividend Yield, a no growth metric, for SKL (post 1236) is $3.38

	Share Price equals	Capitalised Dividend Value plus	Implied Growth Premium
30-09-2021	$5.96	$2.25	$3.71 (+165%)
30.09-2022	$5.38	$2.57	$2.81 (+109%)
30.09-2023	$4.65	$3.38	$1.27 (+37.6%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

SNOOPY