SCT - Scott Tech

[Snoopy]

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Ah yes - and we don't know the agenda of the majority shareholder (meat processor JBS) which without doubt will guide the management team. I don't think that increased earnings would be their highest priority.

For those who came in late.....

Actually we do know the JBS agenda as it was fully disclosed at takeover time in November 2015. From p6 of the Northington report on the takeover proposal:

"We understand that JBS is attracted to Scott because of the potential to apply Scott's technology throughout its global operations., providing the potential to deliver higher efficiency, higher yields and productivity gains."

"In theory Scotts could provide its service to JBS under the existing ownership structure., without JBS taking an ownership position in the company. However Scott will be in a far stronger position to take advantage of opportunities if it is well capitalised and has the financial resources to scale operations as required."

Things have really gone south since one year ago. It would be a much cheaper buy-out today for JBS if that was the overall plan. I feel like a minnow (or a mushroom) in this game.

JBS want control so that they can consolidate SCT within their own company accounts A buy out is not on the agenda, or at least it wasn't in 2015. JBS gained control by buying 51% of the company for $1.39 per share. So even at $2 -from a JBS perspective, SCT doesn't look cheap.

I am going to say that one and one half of these 11 plants are now robotised, leaving 9.5 to go. A full robotised installation today (X-ray Primal & Grading, Middle, Forequarter and Hindquarter) will cost the customer (like JBS) $12m to $13m. Scott gives a 'payback guarantee' of 18 months. This payback is achieved via improved yield, because robotized cutting is more precise, and results in less waste that a 'human knife wielder'. Gains in productivity (because robots don't get tired) and fewer accidents (robots don't sue) are a bonus. JBS hasn't done enough trialling yet to know if the 18 month (1.5 year) payback will be achieved. But based on past experiece from other installations, I am guessing it will be.

So: 9.5 (no. installations in Oz to do) x $12.5m (average cost) = $120m that JBS will ultimately spend.

Annnual payback with everything up and running will be:

$120m /1.5 = $80m

JBS have indicated they will not be paying 'mates rates' for their installations, even if they become controlling shareholders of SCT (Do I believe that? I'll take the claim at face value for now).

So: Outlay $120m (a one off).
Savings over ten years $80m x 10= $800m

Net gain: $800m-$120m = $680m

Amount laid out to 'get to the top of the customer list' : $15.4m to $50.4m (depending whether 80% or 20% of share holders accept Scheme of Arrangement).

Worst realistic case return for JBS over 10 years (calculation slightly quick and dirty, because not all installations will be installed at year one, but then again neither will all the outlay be paid in year one- but still indicative) :

$50.4m(1+r)^10= $680m

r=29.7% compounding!

This is simply a staggering return on investment. No wonder JBS Australia are keen to seek a controlling position in SCT at what, in investment terms, is an incredible bargain basement price.

Above is my analysis from 2015. Admittedly I can now see some flaws in it. But if the idea is to save $680m in costs for JBS over ten years, then the JBS share of the Scott's profit over ten years is puny by comparison - in the vicinity of $70m perhaps. For JBS it is Scotts rolling out the robotics to their plants that matters. The actual profitability of Scott Technology on the way effectively makes no difference to JBS's overall investment objective.

SNOOPY