SCT - Scott Tech

[winner69]

That PR firm they use says:

If you want to ensure your company is seen as professional, well governed and with a successful strategy, then good communications are key. At Ellis and Co, we can tailor a programme to meet your needs.

Think they doing a good job?

[Biscuit]

OK ...we either trust them and that they know what they doing and it’s all above board or we go to the top to find out.

(So) I’ve emailed them ...

So, we don't trust them to know what they are doing and to be above board then?

Good idea to go to the top though. When you get an answer, can you convey it to us in the tone and character of a detective like Hercule Poirot, denouncing the guilty party at the end of a novel?

[Biscuit]

'E' seemingly escapes scrutiny by most (well Biscuit at least). But have some 'non operating earnings' been reversed to create a higher figure from which the normalised NPAT hasd been calculated? I have a gut feeling that 'E' could be implicated.
SNOOPY

This also is a good approach. As Poirot (or was it Holmes?) says, eliminate the impossible and whatever remains is the truth. But I would eliminate E because it is in both EBITDA and in NPAT. Surely it must be the same figure? Unless E is a different character in EBITDA and in NPAT, then E has a water-tight alibi.

[Biscuit]

.... As Poirot (or was it Holmes?) says ......

It was Holmes, ofcourse:

"It is an old maxim of mine that

when you have excluded the impossible, whatever remains, however improbable, must be the truth."

[winner69]

Maybe they adjusted / normalised things for virus impacts.

[Snoopy]

Time to update my January expectations of HY2020 compared to what was actually announced.

I am expecting a downbeat first half as the new CEO Kippenberger 'clears the decks' of any Chris Hopkins era skeletons. Yet I am prepared to look through all of this near term turmoil, to the underlying potential of what is still there at Scott Technology. In short I still 'believe the story'. And while I am waiting for that happier ending, I am still being fed an above bank investment dividend return. The adequate dividend return coupled with a few potential 'free' Lotto style big winners as prospects is enough to keep this mutt in the Scott Technology kennel.

I am disappointed that no dividend was possible, although the subsequent elevation of Covid-19 to a global pandemic might have had something to do with it. Particularly disappointing was what happened to what had been previously signalled as 'non-performing projects' in Australia and New Zealand. A $6.088m write down was a massive hit to take (Note 4 HYR2020).

There would be a huge improvement in profit if only we were able to wind things back to how things were in 2018. There are significant hurdles to doing this, a few that I can think of being :

1/ The slowdown in Alvey's European market mostly as a result of the uncertainty of Brexit and the shadow that event casts over all of Europe.

From the HY2020 Presentaion p3

"Softening economic conditions noted in key markets, including the impact of global trade and Brexit"

(Expectation confirmed)

2/ The much lower meat industry sales due to the low hanging fruit of the obvious automated lamb line sales being done. Adapting this fully automated technology to handle beef carcases is the technical break through that Scotts have not yet achieved. Consequently meat industry sales could be subdued in the medium term.

There was no 'industry breakdown' in the half year result. The only clue is that 'Australasia Manufacturing', which is the business unit under which the meat industry robotics are developed, had a severe downturn in revenue, in Long Term Contracts (from $26.491m to $17.057m, a 46% decline). Given that there were no 'headline meat industry installations announced, I suspect meat industry robotics has had a poor half year.

3/ The apparent downgrading of the Scott Milktech semi-automated milking project which wasn't even mentioned in the latest presentations. I wonder if this has been written off?

I find it interesting that in HY2020 Note 4, Scott's wrote off $3.715m from the 'Scott Dairy Development Asset'. This was a result of no further commercialisation of Scott Milktech being planned, after discussions with potential commercialisation partners. However, I distinctly remember three years ago Chair Stuart, when responding to a question, stated that they had bought out their joint venture partners in Milktech . So did Kippenberger interview himself when making this decision?

(Milktech Write Off Confirmed)

4/ The closure of DC Ross toolmakers, and the incurrence of any concomitant write off costs.

A write off of $1.429m noted in HYR2020 Note 5

(Expectation confirmed)

5/ The huge goodwill write off at HTS-110, Scott's superconductive technology arm, over the last few years. This division entered the books with $271m of goodwill on the books and at EOFY 2019 this had shrunk to a net value of just $26m. This indicates the sales performance today of HTS-110 has fallen well short of expectations.

HTS-110 to be put up for sale. Let's hope a buyer can be found.

(Expectation confirmed)

But as the project potential of Scott Milktech and HTS-110 fades away, new growth engines are on the horizon to replace them.

So two of we shareholders 'Scott Lotto Tickets' have been ripped up. But we have three new ones left?

1/ Transbotics, Scott's acquisition in the Automated Guided Vehicle market which Scotts are looking to grow at 30% per year.
2/ The King Salmon bone removal project for Mt Cook Alpine Salmon and Seafood Innovations.
3/ The adoption of 'Bladestop' Band Saw safety technology outside of the core meat industry market.

No mention of the King Salmon bone removal project. I wonder if this was one of those two Australasian development projects that went bad?

From p3 HYR2020 Presentation:

"Value continues to be added by acquired businesses, particularly Transbotics and Bladestop."

(Expectation confirmed)

SNOOPY

[Snoopy]

No dividend, but no mention of the immediate need for a capital raising either. Net debt is $20.2m. It will be interesting servicing that on a negative normalised EBITDA income.

I have taken a more detailed look at the HY2020 balance sheet. Trade creditors are now above trade debtors ($1.5m more), whereas last year Scott's was owed $7m more than they had to collect. Some would say that change reflects 'sound debt collection practice' at Scotts. But another way of looking at the situation is that Scott's have taken on $7m + $1.5m = $8.5 of net debt by not paying their bills.

The same argument applies to the change in 'Contract Assets' to 'Contract Liabilities' position. At balance date, 'Contract Assets' exceeded 'Contract Liabilities' by $10m. But compared to the previous comparable period (HY2019) 'Contract Assets' exceeded 'Contract Liabilities' by $16m. That means we have a net $6m reduction in Contact Assets, or an increase of $6m in the net debt attributable to long term contracts.

To summarize the 'net work in progress' position at balance date has deteriorated by:

$8.5m + $6m = $14.5m

Next if we look at the actual 'net debt', the bank overdraft has gone from $5.7m to $9m (an increase of $3.3m). In the past this overdraft has attracted a very high interest rate. I sincerely hope that Scott's have since negotiated something better! Term loans are up by $5.5m - $1.5m =$4mvs pcp.

Looked at this way 'underlying net operational debt' has increased by:

$14.5m + $3.3m + $4m = $21.8m

That is a little more than the declared net debt, because I haven't included changes in tax liabilities. Some of these net debt increases could be thought of as Scott's 'exercising their partner goodwill' when working on projects. But any further exercising of this goodwill could see Scotts business reputation sullied. I can't see the announced asset sales raising much capital. Indeed what seemed like promising projects only a year ago have been written down to zero.

Majority shareholder JBS are said to be supportive. But JBS Australia are themselves caught up in the China/Australia meat spat. The following article references JBS’s Beef City and Dinmore plants.

https://www.reuters.com/article/us-a...-idUSKBN22O0FB

"JBS said in a statement it was working with Australian officials “to understand the technical issues that China has raised” and would take corrective action."

That is code for JBS not being able to resolve the issue. So perhaps a capital raising, without the support of JBS, could be on the agenda ;-P? Or perhaps more likely, dividends off the table at Scotts for some years? This is all presupposing that normalised EBITDA can be raised above zero next year, which might yet be more of a challenge than management think.

SNOOPY

[winner69]

Time to update my January expectations of HY2020 compared to what was actually announced.



I am disappointed that no dividend was possible, although the subsequent elevation of Covid-19 to a global pandemic might have had something to do with it.

Burning cash (and not counting acquisitions) for a few years and you expect dividends?

[Joshuatree]

JBS are the largest protein processing company in the world so you think they'd be able have some clout to be able to help resolve issues.

According to John Maudlin theres prob never been a better time for meat processing robot makers. Very few in the world and Scott Tech get a mention in Maudlins weekly letter(Its free you need to subscribe though).

https://www.mauldineconomics.com/reality-check

[Snoopy]

Majority shareholder JBS are said to be supportive. But JBS Australia are themselves caught up in the China/Australia meat spat. The following article references JBS’s Beef City and Dinmore plants.

https://www.reuters.com/article/us-a...-idUSKBN22O0FB

"JBS said in a statement it was working with Australian officials “to understand the technical issues that China has raised” and would take corrective action."

That is code for JBS not being able to resolve the issue.

JBS are the largest protein processing company in the world so you think they'd be able have some clout to be able to help resolve issues.

I had a look at the maudlin economics website reference:

https://www.mauldineconomics.com/reality-check

And boy has that JBS share price dived during the Covid shock. From $14 to $8.40 for the ADRs by the look of it! Possibly down to the worker distancing requirements at each plant? I have heard that can reduce plant productivity by 50%.

JBS Australia is small beer in the total JBS picture. But it is the JBS business arm that holds the interest in Scotts. So closing the export path to China for two of their biggest exporting plants will be hurting JBS Australia big time. The Reuters article seems to think the reasons for the stand off are political and not the stated reason of "Chinese labelling requirements". ScoMo isn't on the JBS payroll, so probably not much JBS can do.

SNOOPY