SCT - Scott Tech

[Snoopy]

It may be a rather long phone call.
Would think it may pay to speak to Chris Hopkins.

CEO Chris Hopkins is set to give his last address to shareholders today. So no more phone calls from shareholders. Chris has been sacked, oh sorry, moved into his new position of 'sales director'.

"Scott Technology’s Board of Directors has appointed John Kippenberger as the company’s next Chief Executive Officer. John is an experienced business leader who has a successful career as CEO of a number of international business‐to‐business and consumer branded companies.This has included time in Australia as CEO of several industrial companies of George Weston Foods Limited before leading their large meat & dairy organisation which included 1,200 people operating across seven factories. After returning to New Zealand in 2006 with his wife Julie and children Emily and Tom, John was a part‐owner and the Chief Executive of Premier Beehive NZ Limited. More recently,John led the exponential growth and development of Manuka Health NZ Limited.This included expansion of the company’s agricultural and factory operations,along with an acquisition in Germany and the opening of company operations in Australia, the United States, the United Kingdom and parts of South East Asia and China."

The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?

SNOOPY

[Snoopy]

The 'meat and dairy background' of JK would suggest that majority shareholder JBS has had a hand in this appointment are unhappy with how fast the meat industry robotics were progressing under Hopkins. Kippenberger will be good for JBS. But will he be good for Scott's minority shareholders?

I never envisaged when writing this summary it would be an epitaph to the Chris Hopkins era. But here we go. Benchmarking one company against another, even if they are not direst competitors, can be insightful. I choose Skellerup Limited as a foil for Scott Technology.

The net profit margin at Scott Technology is roughly half that of Skellerup Ltd. Granted these businesses operate in different industrial and agricultural spaces. But both are kiwi based exporters that have expanded in recent years. Both have substantial overseas based manufacturing interests scattered across the globe. Both have around 800 employees. And both have sales of around $230m to $240m per year. Both expense any research and development expenses in the year those expenses are incurred. Scott's call this R&D policy conservative. However the amount of Research and Development build that can subsequently be recovered by being 'on sold' as part of a new project over the last five years has been very low (1). So I would argue Scott's R&D policy is better termed realistic.

The earnings per share picture, once normalised, is quite consistent over five years. But eps growth at Scott's over a five year period of 15% compares poorly with Skellerup's 36%. One argument as to why the comparison is unfavourable could be that Scott's is going through a more transformative phase. Scotts want competent and adaptable engineering teams worldwide at several sites. Whereas Skellerup have their key products made at specialist manufacturing plant at different sites. A look over the change in staff numbers over five years show how Scotts have now achieved their goal of global employee balance (AR2019 p2):

Number of Staff	FY2015	FY2019
New Zealand	94	248
Australia	70	101
Asia	52	36
Americas	45	83
Europe	1	316

The drop in staff numbers in Asia since 2015 is because a then four year agreement with 25% China partner 'Teknatool International Ltd' came to an end in October 2015, with Scott's former joint venture staff then resized and reskilled to pursue Scott Technology projects only.

The good thing about Scotts having a manufacturing base in China, the United States, Europe and Australasia is that you can make your projects in a location that will avoid trade barriers. But the bad side to that strategy is that while trade barriers exist, you will always have some of your manufacturing base in the wrong place. Given Scott's results since the 'globalised bases of scale' strategy has come to fruition, I am not clear it is the right strategy. The fact that Scott's have been able to maintain fully imputed dividends while only around a quarter of the workforce is NZ based, shows how 'profitable' (sic) the overseas manufacturing bases are. Of course there may be some internal transfer pricing that artificially inflates the New Zealand contribution to profit when more than one manufacturing base contributes to a project, But it isn't clear that any of the overseas bases are real profit stars.

With Scott Technology we have a highly skilled workforce doing clever things and making very average profits. Of course there are plenty of technology companies out there that make no profits at all, and Scott's deserve kudos for actually making money while doing smart stuff. But the automated boning room project has been a disappointment of late, principally because the lamb boning room which was technologically very successful and profitable has such a small potential market. The real money in automated meat processing is in processing beef. And the larger beef carcass, more variable in size, seems to be proving problematic to adapt to the robotised technology proven in the lamb boning room.

There have been other failures too. Scott Milktech, the robotised milking shed project, was first absorbed into the parent Scott Technology in 2017, as their industry partner sold out, and now it doesn't rate a mention in this years annual report or presentations. The HTS-110 company in Lower Hutt, a full subsidiary since 2014 battles away building applications with magnetic superconductor technology that is globally well respected in international academia and industry. Yet so far the king hit application that will really put HTS-110 on the map remains illusive. No matter. Should either of these business units get on board the commercial express train, then shareholders buying at today's prices will get the benefits 'for free'. In cutting edge technology, ultimate success is often the outcome of a series of failures.

Scotts know there is room for improvement. The last line in the objectives for FY2020 is to "Review all areas of operations to improve bottom line" In the short term, the sale of more proven meat processing equipment is the key to this. And Europe, where most of the company's material handling expertise lies, will have to shake off their 'Brexit Headache'. If you think they can do this there is every reason to remain invested. But I don't think Warren Buffett will be joining you on the share register.


Notes

(1) If some R&D expenditure manifesting as equipment in storage was written off but subsequently recycled, I imagine it would be brought back onto the books as 'Property Plant and Equipment' at no cost. The price it was sold at would then be all profit. So one test to see if this did happen would be look at the profit margin of the Property Plant and Equipment sold during any year when an overall profit was made. Looking at the three years of 'Property Plant and Equipment' when this happened.

	P,P&E Profit	P,P&E Sales	P,P&E Profit Margin
FY2015	$0.280m	$0.445m	63%
FY2017	$0.073m	$1,483m	4.9%
FY2019	$0.343m	$0.302m	114%

It looks to me as though some previously written off R&D funded equipment may have been resold in FY2015 and FY2019. But the quantum of that recycling less than $0,632m in total over five years is not material to the company.

SNOOPY

discl: hold SCT and SKL

[Snoopy]

They bought as well a lot of additional revenue, but if you look at the earnings per share - they are flatlining now for a long time around 13 cents. PE around 19 with no (EPS-) growth at all.

So - it is clearly not a growth company (remember, its only EPS growth which counts for shareholders) and while their interests might be aligned with the interests of the majority shareholder (they are building tools for them) - for anybody else they are basically equivalent to a BB or less rated bond (they are neither a gentailer nor IFT) paying (at today's SP) in average 4.2% interest, which well may turn towards less or even nil when the next recession arrives.

While they are certainly worth something, there are many better dividend payers (if that's your thing) as well as much better growth games out in the market.

I am not sure SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a dividend payer only to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s unimputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2015	5.5c+2.5c	N/A c + 3.47c	3.47c
FY2016	5.5c+4.0c	7.64c + 5.56c	13.20c
FY2017	5.5c+4.0c	7.64c + 5.56c	13.20c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2020	4.0c (18.41% I) + ?c	5.02c + ?c	5.02c
Total			62.67c

Averaged over 5 years, the dividend works out at 62.67/5 = 12.5c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability to move production from affected international production sites, I should not do this.

So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SCT is:

12.5 / (0.075) = $1.67

Now using my plus and minus 20% range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.67 x 1.2 = $2.00
Bottom of Business Cycle Valuation: $1.67 x 0.8 = $1.34

At this part of the investment cycle, with conditions very favourable towards shares, I would argue that SCT shares trading at $2.30 (above the upper end of my expected range) are now overvalued by 15%.

SNOOPY

[Arthur]

Wrote a long piece on the AGM, but the FN system logged me out and wiped it all. Does anyone have any interest ? or questions?

[Snoopy]

Wrote a long piece on the AGM, but the FN system logged me out and wiped it all.

Darn it! I was hoping someone might report in.... I couldn't get to the AGM this year myself!

There is a trick to get around this 'wiping of ones work'. If you enter your post as a reply to another post, the Sharetrader software will automatically periodically save it as you write it. Then if whatever system you are on 'wipes you out', you can log back in on another session or even on a different computer system entirely. Now press 'Reply' to the same post you replied to before and 'Hey Presto' a little box on the lower left hand corner of the screen will say 'Restore Autosaved Content? You can click 'Yes' and bingo, your wiped work will come back!

I am not sure this works if you just make a general 'Reply' without reference to an existing post. I suspect it doesn't, because the Sharetrader server would have no reference point
to recover from.

Another trick is to write your long post as a word file off line, then just cut and paste it into Sharetrader.

Does anyone have any interest ? or questions?

What was the body language of Chris Hopkins like !!!?!!

SNOOPY

[Arthur]

Chris' speech implied that he had dedicated too much of his life to the company and now it was time to spend more time with his family. The new CEO's CV does not jump out as perfect for the company. He did go around and introduce himself to many of the staff.
Allegedly there is jam tomorrow. In 2016 we were promised that great things would come with the new shareholder. As Snoopy has pointed out meat systems sales are lower than when they wrapped their tentacles around Scott. The new pork system they are working on is probably for JBS, so they may not be a complete bust.
The new extension looks good. They seemed to have more staff in design and R&D.
They were working a machine for Germany/Czech at the factory.

[Arthur]

Turnout was more than they expected. Around 15 people had to stand for the meeting as there were insufficient chairs.
They had a bigger Bladestop machine there. I think they said more than 1000 Bladestop saws have been sold and there are now some in industries aside from meat.

[Snoopy]

The new CEO's CV does not jump out as perfect for the company. He did go around and introduce himself to many of the staff.

Scott's have a long history of bringing their CEOs up through the ranks: Chris Hopkins, Kevin Kilpatrick, Graham Batts. It is a break from tradition to parachute someone into the top job. John Kippenberger certainly has the experience in the international markets where Scotts operate. Perhaps with Scotts being very much an international company now, JK is exactly the person for the job? Like it or not, it may no longer be realistic to think of Scotts home being their Dunedin base any more.

The new extension looks good. They seemed to have more staff in design and R&D.

I saw the new extension was only opened at the end of October.
Is there anyone working in the new extension yet, or any machinery in there? Or is it still a shell?

They were working a machine for Germany/Czech at the factory.

That is interesting because Scotts bought out the assets of their German equivalent from bankruptcy in April 2016. I would have expected a machine destined for Europe would have been built there. Otherwise what is the point of having a skilled team in Germany/ The Czech Republic?

SNOOPY

[Arthur]

The extension looks like it has always been there. They had just moved on a large hide processing machine, so it was looking a bit empty on the factory floor. They also added a lot more office space, some of which is occupied by the younger design staff.
The machine for Europe was abit of a puzzle. If my memory is correct it was shipped from Europe, they had about a week to work on it here and it was being shipped back. Either we had some unique skills here or skilled staff are in short supply in their European office or it is top secret (didn't look like that). It looked like it would weigh about the same as a small car, so would take abit to freight around. Maybe I got the wrong end of the stick because if was a skilled staff issue it could make more sense to send people to Europe. Maybe a work visa issue or maybe it a mission critical machinery where no expense is spared to get it into production ASAP.

[BlackPeter]

....

The machine for Europe was abit of a puzzle. If my memory is correct it was shipped from Europe, they had about a week to work on it here and it was being shipped back. Either we had some unique skills here or skilled staff are in short supply in their European office or it is top secret (didn't look like that). It looked like it would weigh about the same as a small car, so would take abit to freight around. Maybe I got the wrong end of the stick because if was a skilled staff issue it could make more sense to send people to Europe. Maybe a work visa issue or maybe it a mission critical machinery where no expense is spared to get it into production ASAP.

Interesting .... and hard to understand. Expensive and difficult to circle the world with big and heavy equipment, particularly if time is of the essence. It is not just the freight and the lost time in transport .... on top of that the customs procedures (and MAF in NZ) can be a pain.

The only thing I could imagine is that they required for fixing some large / unique / expensive piece of equipment they only have here in NZ. But if this is the case, than you wonder what's the point of development diversification ...