SCT - Scott Tech

[Stranger_Danger]

I've held XRF since 09 and rate the management. I agree that a CPB takeout is likely one day. XRF is worth consideration in my opinion.

[Snoopy]

There are 40.3 million shares out, Snoopy, which upsets your arithmetic. 200 by christmas would represent a PE of 11.4 (with 40.3 million shares issued). However, shares issued under the current DRP, and an assumed full year DRP, could take the December towards 42 million, with which the PE would be close to 12.
For mine 12 would be a fully appropriate PE for a company with SCT's record over the last few years, assuming the $7 million is in the bag.

Yes, I temporarily forgot about all of those shares created as a result of the cash issue. So thanks for the correction. No real excuse for that because I was one of the subscribers!

That $7m of profit is never in the bag until it is, well, in the bag. However by year end that will be old news and the market will be looking towards FY2013. I have an inkling that FY2013 will see profits fall back from $7m, before rising again in FY2014.

Why? I think the global appliance production line market will take time to come on line again. While the extra effort being put into China is good, these things do not come together overnight.

Mining servicing almost by the law of averages can't continue being as buoyant as it has been (can it?). I will be very interested in following how the joint venture with XRF in Australia works out. I am seeing FY2013 as a year of consolidation, which may explain the act of SCT treachery I committed last Friday!

SNOOPY

[Snoopy]

I am seeing FY2013 as a year of consolidation, which may explain the act of SCT treachery I committed last Friday!

I reluctantly carved off a few more SCT shares from my holding last week. Not really abandoning ship as SCT remains my second largest NZX holding. But I didn't want to continue to be overweight in a relatively illiquid share. I decided to sell down some more two months ago and it has taken this long for the market to match my price!

My investment stats on SCT are looking very good. Median holding time for my SCT shares is four years. Average entry price $1.03. Dividends booked over that time 15cps. Capital appreciation 71cps. Of course I have invested a lot of 'sweat capital' coming to grips with the company. But I would be very happy if all my NZX investments perform as well as this one has.

Despite this I have probably slightly underperformed the 'buy and hold' investor who bought in at only 85c four years ago. But of course that assumes that I could have bought all of the shares I did at 85c without driving the price up. I suspect I could not have which means the win of my theoretical buy and hold competitor investor remains theoretical.

SNOOPY

[percy]

You were right to sell down.
Long led times,distance from customers,few customers,lumpy earnings,and forex concerns,make this unstable company too high risk for the majority of sensible investors.

[Snoopy]

I reluctantly carved off a few more SCT shares from my holding last week. Not really abandoning ship as SCT remains my second largest NZX holding. But I didn't want to continue to be overweight in a relatively illiquid share. I decided to sell down some more two months ago and it has taken this long for the market to match my price!

<snip>

Despite this I have probably slightly underperformed the 'buy and hold' investor who bought in at only 85c four years ago. But of course that assumes that I could have bought all of the shares I did at 85c without driving the price up. I suspect I could not have which means the win of my theoretical buy and hold competitor investor remains theoretical.

Just a note on the investment management of illiquid shares. I think that anything illiquid requires extra careful due diligence, because you may have to hold such shares for a lot longer than you consider as ideal. I like SCT because it is very conservatively managed as regards debt. So even if you have to hold for longer than anticipated to get your price, it is unlikely you will do your dough.

There is research out there that shows small cap companies tend to outperform large cap companies over time. But there is also research that shows when investors try to capitalise on this phenomenon they tend to come unstuck. The liquidity trap means that when it comes time to sell at 'market value' you usually can't. My solution to this conundrum is to be contrarian. That means selling into strength and buying into weakness.

All this is of course an anathema to a trader, who preaches the exact opposite strategy. However, as even the good traders like Phaedrus found out with SCT, the evaporation of paper profits due to poor market liquidity is a very real market hazard. I guess if Mr P was still about on this forum he would preach avoiding a share like this because market liquidity is not enough to make a trading plan work with any meaningful number of shares. As a result I doubt if many shareholders in SCT classify themselves as 'traders'.

But as I have proved that doesn't mean you can' t make excellent returns on a share that wouldn't make it within a bollinger band of our traders Metastck.

SNOOPY

[Under Surveillance]

Here's an article, posted yesterday on the TWR website, which might interest SCT followers:
Investment case study: Scott Technology
At TOWER, we are believers in the ability of Kiwis to innovate, invent and design.
Indeed the use of number 8 wire for a myriad of purposes has become a symbol of the country‟s ingenuity and self sufficiency.
It should come as no surprise then that many of the companies that we invest in are world leaders in industrial design and fabrication.
While we invest to generate long term wealth for our clients, this can be achieved by providing capital to Kiwi companies that are taking these skills to the world market.
When we look at our portfolio we see many excellent examples of world standard designers such as; Skellerup, Fisher & Paykel Appliances, Fisher & Paykel Healthcare and Scott Technology.
The longest established of them is Scott Technology, which has been operating since 1913.
The company evolved to become a manufacturer of machines that go into factories that in turn manufacture products, such as fridges and washers.
At one time almost every fridge made in the United States was in part assembled using Scott Technology production line machines that came from Dunedin, New Zealand.
Scott Technology is now translating this technology dominance to other industries where it can create automated solutions, such as meat processing, mineral testing, recycling and even diary milking.
Graham Batts is a director of Scott Technology and played a key role in developing the business in the 1970s and 80s.
Here he recalls the breakthrough into the important U.S. marketplace:
“I travelled to the United States in 1975 and set about networking with a lot of potential clients, including someone from Electrolux who I had previously met, and who had expressed interest in our Australian manufacturing lines and innovatory approach.
“Electrolux were themselves in the process of launching a new product line, meaning they were open to a different approach to mass manufacturing, so the timing was perfect.
“They recognised that our production equipment and methods could be an answer to their large manufacturing volume requirements.
“Following my initial meeting with their senior executives, they expected me to return to New Zealand to co-ordinate a proposal with the Scott team.
“However, I felt timing would be crucial to cement the deal and spent the weekend following the meeting, sketching potential designs and preparing a layout in my hotel room.
“The executives were impressed with what they saw as a „well thought through solution‟ to their pending production problem, which I was able to present to them only 48 hours later.
“Having never seen anything like my design and proposal, they took the risk of dealing with „an outsider‟, and agreed to a $6 million order there and then.
“Scott's biggest project to that point had been $400,000, so such a large overseas contract presented us with considerable challenges.
“This meant our team had to quickly upscale resources to be able to respond, however, we were certainly up for the challenge.
“Not only was that first order the beginning of ongoing work from Electrolux, the breakthrough opened up massive new market possibilities in the States.
“We also successfully used such a direct approach with potential clients in Europe and Asia, developing several opportunities which we quickly exploited.
“It was very hard work, however, we proved that a small New Zealand business could successfully compete with much larger rivals in the global marketplace.
“Additionally, our innovative ideas, quality workmanship, technical expertise and responsive approach to building strong business relationships surprised many potential clients, and won business for us.
“It was the beginning of Scott's very successful export story.”
Source: Scott Technology website
We can think of no better example of that famous kiwi “can do” attitude, unfazed by the situation and just getting the job done.
And through that ability and determination these innovators create real value for their businesses.
We are fortunate that today there are several such businesses that are listed and we can invest in on behalf of our clients.
Outlook
We are confident that over the course of next few years the innovators in our portfolio will be significant contributors.
Companies such as Scott Technology have the potential scope to not only double their sales but to then double them again.
Where companies achieve that kind of sales growth, our experience has told us that their share price can more than double as they demonstrate their true growth capabilities.

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The reference to "diary [sic] milking" reminds me that the SCT 2011 annual report had it that "The dairy sector investment is expected to progress with production prototypes on display in early 2012, followed by commercialisation in 2013."

[Snoopy]

You were right to sell down.
Long lead times,distance from customers,few customers,lumpy earnings,and forex concerns,make this unstable company too high risk for the majority of sensible investors.

I really only sold down the money I put into the rights issue Percy. I retained most of my shares for the following reasons.

1/ Long lead times mean results are easy to predict. Just look at the 'Inventories' section of the balance sheet and you can as good as guess the Appliance manufacturing line profits for the upcoming six months period. The downside to working on big projects is lumpy earnings. Management have addressed this by diversifying into meat industry, milking and honey harvesting robotics. And of course the hugely successful Rocklabs, producing testing equipment for the global mining industry.

2/ Manufacturing of the Appliance Production System lines takes place in New Zealand. But in every important continent where SCT operates they have a company owned sales office staffed by hand picked personnel. This means they are very close to the needs of their customers, much closer in fact than any other New Zealand exporter than I can name.

3/ The global appliance industry consists of just a few big players. This makes keeping up contact with the key customers very easy.

4/ The company runs a no term debt policy, and hedge all contracts in overseas currency as soon as they are confirmed. In the worst case some jobs are done on tight margins, particularly is casual contractors are required to be hired to get work done. But because of the high intellectual property which cannot be easily duplicated by lower cost competitors I would judge SCt as the safest manufacturer in New Zealand to invest in.

I have of course put my money where my mouth is and only have one manufacturing investment in new Zealand. This one.

SNOOPY

PS Percy if need another SCT referee, try talking to your mate Mr Waller at the next EBOS AGM.

[Snoopy]

Outlook

We are confident that over the course of next few years the innovators in our portfolio will be significant contributors.
Companies such as Scott Technology have the potential scope to not only double their sales but to then double them again.
Where companies achieve that kind of sales growth, our experience has told us that their share price can more than double as they demonstrate their true growth capabilities.

Interesting article US. At the risk of deflating the superbullish sentiment I should point out that none of the SCT robotic joint ventures produce any significant profit as yet. Double the sales on something that makes no money and the increase in profit is zero. Result: no benefit to the share price.

Rocklabs is currently the jewel in the SCT crown. But Rocklabs was not started by those running SCT at board or management level. I would prefer to judge the growth potential of SCT on when those robotics joint venture projects start making some real money.

SNOOPY

[percy]

I really only sold down the money I put into the rights issue Percy. I retained most of my shares for the following reasons.

1/ Long lead times mean results are easy to predict. Just look at the 'Inventories' section of the balance sheet and you can as good as guess the Appliance manufacturing line profits for the upcoming six months period. The downside to working on big projects is lumpy earnings. Management have addressed this by diversifying into meat industry, milking and honey harvesting robotics. And of course the hugely successful Rocklabs, producing testing equipment for the global mining industry.

2/ Manufacturing of the Appliance Production System lines takes place in New Zealand. But in every important continent where SCT operates they have a company owned sales office staffed by hand picked personnel. This means they are very close to the needs of their customers, much closer in fact than any other New Zealand exporter than I can name.

3/ The global appliance industry consists of just a few big players. This makes keeping up contact with the key customers very easy.

4/ The company runs a no term debt policy, and hedge all contracts in overseas currency as soon as they are confirmed. In the worst case some jobs are done on tight margins, particularly is casual contractors are required to be hired to get work done. But because of the high intellectual property which cannot be easily duplicated by lower cost competitors I would judge SCt as the safest manufacturer in New Zealand to invest in.

I have of course put my money where my mouth is and only have one manufacturing investment in new Zealand. This one.

SNOOPY

PS Percy if need another SCT referee, try talking to your mate Mr Waller at the next EBOS AGM.

Yes I forgot to mention staffing problems;Impossible to attract when required,expensive to retain in slow downs.
As for talking to Mark Waller at EBO;no way can I get near him.Everyman and his dog go to EBO agms.First one I went to there were about eight or ten sharehoders including great SCT shareholder Ian Urquarhart,the chairman Jamnie Maddren served the tea.That was offcourse about 1991 Mark Waller I greatly respect,infact EBO is my largest holding.I do not like NZ manufacturing,although we hold some SKL,but even those I watch carefully,and that holding is not large.

[Snoopy]

Yes I forgot to mention staffing problems: Impossible to attract when required, expensive to retain in slow downs.

Attracting skilled labour is always an issue when you company relies so much on intellectual capital, including the very valuable eyes and hands of the ground floor workers. However, I am not aware of this problem delaying the development of any SCT projects. Once hired labour has a habit of sticking around at SCT. I would go so far as to say they have the best labour relations of any New Zealand company. I have talked to many workers over the years and have been surprised by their enthusiasm and long service.

The problem with keeping these workers busy between big projects is a long term issue. SCT is addressing this by increasing the complementary work allocation between the Christchurch and Dunedin bases. Having more standardized product, as most of the new generation robotics are, will also assist in filling those work flow holes.

SNOOPY