Skellerup (SKL) Fundamentals

[Under Surveillance]

As to Cushing's role at SKL, I take some comfort from Cushing and related interests having skin in the game to the tune of 6% plus of SKL.

However, trying to put it nicely, Cushing is in appearance of advanced years and uncertain durability. And the board numbers just 4, of whom one hasn't long been a SKL director, and another is the CEO.

I would happily support an increase in directors fees so at least one additional director can be appointed and robustness added to the board with an eye to succession.

[Snoopy]

Snoopy, while I do not dispute your analysis I have been cautious about SKL.

Selwyn Cushing the chairman of SKL was also chairman of Air New Zealand during the Ansett calamity.

Boop boop de do
Mariyln

Discl: Small holding of SKL.

Yes I do remember the Air NZ Ansett business. I remember going to the Air NZ AGM in the town hall in Christchurch shortly before. I remember Uncle Sel stand up and proclaim that Air NZ was as well capitalised as any airline internationally (or words to that effect). That may have been true. But unfortunately virtually every major world airline (bar Qantas and the Arabian ones) went broke, or close to it, soon afterwards! Got out of Air NZ 'only' losing half my capital :-(.

I took from this the lesson of Warren Buffett. When you think about investing in an airline and convince yourself the PE and yield is attractive, ring up a prerecorded investment advice message to yourself, reminding you not to do it!

I think the Chairmanship of Skellerup is a semi-retirement project for Uncle Sel these days. I don't think you can knock his performance at Skellerup in recent years though. Maybe the board being a bit lightweight is just what is needed for David Mair and his management team to just get on with things? I do agree with US though. An extra board member with an eye to succession would be welcomed.

SNOOPY

[percy]

Anywhere Cushing has skin in the game,either at SKL or REL [unlisted market], he is very much on the ball.
I note the sp $1.37 is still under both the 50 day EMA $1.39, and the 200 day EMA $1.51,so take care..

[Snoopy]

Anywhere Cushing has skin in the game,either at SKL or REL [unlisted market], he is very much on the ball.
I note the sp $1.37 is still under both the 50 day EMA $1.39, and the 200 day EMA $1.51,so take care..

I bought my initial stake at $1.33. I guess that means I'm in real trouble ;-P ? Seriously though, there could be some short term volatility ahead. Slipping out of the NZX 50 woudl mean that index funds are forced to sell (I will be buying if that happens). Not sure how stable their European operations will be short term. The dairy downturn could affect sales in FY2016 etc.

None of this is too much of a concern to me though. I will be getting a steady dividend stream while things settle down.

SNOOPY

[Snoopy]

ROE= (Net Profit)/(EOFY Shareholders Funds)

2010: $12.748m /$100.890m= 12.1%
2011: $19.935m /$110.325m= 18.1%
2012: $22.600m /$121.372m= 18.6%
2013: $18.165m /$124.673m= 14.6%
2014: $22.251m /$144.691m= 15.4%

Conclusion: Requirement satisfied

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.

SNOOPY

[Snoopy]

Skellerup have shown their ability to reinvest profits at rates of return that far outstrip their cost of capital over many years. This more than makes up for what on paper today is an average dividend payer. IMO Skellerup is one of those below the radar NZX gems that if bought at the right price should prove a very rewarding investment.

Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the numbers into the Buffett style ten year growth model.

For this model I am using an ROE of 17.8% (the actual average of the last 9 years) and a dividend payout ratio of 62% (the actual dividend payout of the last 9 years).

	SOFY
FY	Asset Backing	Earnings	Dividend	Retained Earnings
2013	0.63	0.094	0.080	0.014
2014	0.65	0.115	0.085	0.030
2015	0.75	0.134	0.083	0.051
2016	0.80	0.143	0.088	0.054
2017	0.85	0.152	0.094	0.058
2018	0.91	0.162	0.101	0.062
2019	0.97	0.173	0.108	0.066
2020	1.04	0.185	0.115	0.070
2021	1.11	0.198	0.123	0.075
2022	1.19	0.211	0.131	0.080
2023	1.27	0.225	0.140	0.086
2024	1.35	0.241	0.149	0.091
2025	1.44	0.257
Total			1.13

With a 2025 year earnings of 25.7cps and using a PE of 12.6 (actual average over the last 9 years) the expected share price for Skellerup in ten years time is:

12.6 x 0.257 = $3.24

The dividend return over that time is $1.13 (as per above table)

Using a market share price today of $1.39, the expected compounding annual return 'i' can be calculated from the following equation.

$1.39(1+i)^10 = (3.24 +1.13) => i=12.1%

This return is a net return, before imputation credits. I haven't seen anywhere else on the NZX I can get a return so strong for so long. So for me investment in SKL at under $1.39 is a no brainer.

Some however, may consider a 12.1% return not good enough. What price (P) would you need to buy at to get a 15% compounding return?

P(1+0.015)^10 = (3.24+1.13) => P= $1.08

SNOOPY

PS The reason I like this method of analysis is that all the data used to generate it comes from Skellerup itself. I haven't assumed a return on equity rate, nor have a assumed the market value multiple of Skellerup will be anything to different to how 'Mr Market' has valued Skellerup in the past.

[samdaman]

just doing a quick calc snoopy you'd be looking at a return of 12.3% a year if that's good enough for an investor then i guess the price isn't too high right?

[Snoopy]

For this model I am using an ROE of 17.8% (the actual average of the last 9 years) and a dividend payout ratio of 62% (the actual dividend payout of the last 9 years).

<snip>

Using a market share price today of $1.39, the expected compounding annual return 'i' can be calculated from the following equation.

$1.39(1+i)^10 = (3.24 +1.23) => i=12.1%

I always like to double check my work by looking at my averaged assumptions, verses actual figures from the last couple of years. ROE for FY2013 was 14.6%, and for FY2014 was 15.4%. These are both lower than the 17.6% I used. However, this is largely due to a blowout in equity (if you can have such a thing!) caused by large cash insurance payments. Once the new factory at Wigram is built, I believe that greater efficiency will result boosting ROE.

One thing I didn't model is any repeat of the two equity raisings over the last nine years. All this cash has been well deplyed earning well over the companuy's cost of capital. So I don't see any doubt about Skellerup's ability to use their capital wisely. A further cash issue (equivalent to more retained earnings) could boost earnings growth even more than I have modelled.

Finally the PE ratios for 2013 and 2014 respectively as at 30th September were 17.4 and 13.7 respectively. Thus using 12.6 in my model is a multiple reduction (conservative).

I am rather unsure what will happen to SKL over the next two years, with upheavals in industrial Europe and drought. I am however much more confident about knowing where SKL will be in ten or so years time given their record. I intend to use any weakness in the market over the next year or so to boost my holding.

SNOOPY

[Snoopy]

just doing a quick calc snoopy you'd be looking at a return of 12.3% a year if that's good enough for an investor then i guess the price isn't too high right?

I used $1.39 as a buy price. If you can buy for lower than that, then the modelled return goes up - yes. Whatever return an investor deems satisfactory is up to them.

SNOOPY

[percy]

I always liek to double check my work by looking at my averaged assumptions, verses actual figures from the last couple of years. ROE for FY2013 was 14.6%, and for FY2014 was 15.4%. These are both lower than the 17.6% I used. However, this is largely due to a blowout in equity (if you can have such a thin!) caused by large cash insurance payments. Once the new factory at Wigram is built, I believe that greater efficiency will result boosting ROE.

One thing I didn't model is any repeat of the two equity raisings over the last nine years. All this cash has been well deplyed earning well over the companuy's cost of capital. So I don't see any doubt about Skellerup's ability to use their capital wisely. A further cash issue (equivalent to more retained earnings) could boost earnings growth even more than I have modelled.

Finally the PE ratios for 2013 and 2014 respectively as at 30th September were 17.4 and 13.7 respectively. Thus using 12.6 in my model is a multiple reduction (conservative).

I am rather unsure what will happen to SKL over the next two years, with upheavals in industrial Europe and drought. I am however much more confident about knowing where SKL will be in ten or so years time given their record. I intend to use any weakness in the market over the next year or so to boost my holding.

SNOOPY

I sold when the PE reach near 17.
With Aussie mining slow down, a little uncertainty in US market,and the new Christchurch not coming into production until the end of this calendar year,I think earnings will be flat,so your 12.6 PE model may be over generous.