Skellerup (SKL) Fundamentals

[RTM]

I think Ggcc's post #870 helps explain why the market is prepared to pay above the average PE of 15.6 ie 19.7.It is certainly not based on eps growth.
'The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.'

No guarantees...., I agree. No matter where one looks there are risks and no guarantees.
Even money in the bank could evaporate in the event of a bank failure. Being well diversified has served us well through the current market issues. I am anticipating further issues next year and hold sufficient cash to "see us through" (hopefully).
Disc: Long Time Holder and topped up at 182

[Snoopy]

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+0.15)^10 = (3.24+1.13) => P= $1.08

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 modelling numbers that I have generated into the Buffett style ten year growth model.

For this model I am using:

a/ an ROE of 15.0% (the actual average of the last 5 years) AND
b/ a dividend payout ratio of 84% (the actual dividend payout of the last 5 years).

I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax (at a rate of 28%) must be deducted from half of all future dividends, compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction (assuming all dividends going forwards are 50% imputed, 50% non-imputed).

	SOFY
FY	Asset Backing	Operations Earnings	add OCI (*)	less Dividend	equals Retained Earnings	Unimputed Dividend Tax
2020 (historical)	0.916	0.150	0.011	0.130	0.031	(0.018)
2021	0.948	0.142		0.120	0.022	(0.017)
2022	0.970	0.146		0.123	0.023	(0.017)
2023	0.993	0.149		0.125	0.024	(0.018)
2024	1.017	0.153		0.129	0.024	(0.018)
2025	1.041	0.156		0.131	0.025	(0.018)
2026	1.066	0.160		0.134	0.026	(0.019)
2027	1.092	0.164		0.138	0.026	(0.019)
2028	1.118	0.168		0.141	0.027	(0.020)
2029	1.145	0.171		0.144	0.027	(0.020)
2030	1.172	0.176		0.148	0.028	(0.021)
2031	1.200	0.180
Ten Year Total				1.333		(0.205)

(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)

With FY2031 projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:

15.6 x 0.18 = $2.84

The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)

Using a market share price today of $2.95, the expected compounding annual return 'i' can be calculated from the following equation.

$2.95(1+i)^10 = (2.84 +1.13) => i=3.01%

This projected 3.01% return is a net return per year. The equivalent gross return is 3.01%/0.72 = 4.18%. While this kind of return looks attractive, compared with term deposit interest rates under 2%, I don't believe it is sufficient for Warren to be interested in buying into Skellerup. What we have here is a very good company, but one that is what I would term 'fully priced'. The fact that I am predicting the share price in ten years time ($2.84) to be slightly lower than the share price today ($2.95), despite solid incremental operational growth says it all.

What Skellerup share price (P) would Warren need to buy at to get his much touted 15% compounding return per year?

P(1+0.15)^10 = (2.84+1.13) => P= 98.1c

SNOOPY

[glennj]

Snoopy there is very little or nothing around that meets the Buffet criteria. I do some screening with adapted "softer" criteria and it has served me well. The average cost of my current Skellerup holdings is c. 103c per share. Were I to have sold at the end of August price; return including all dividends and realised capital gain would have been close to 20% pa compounding according to my bookkeeping software. I'm happy to have owned this investment for quite some time but if I'd strictly applied Buffet criteria it would likely have kept me out of this investment.

[Snoopy]

Snoopy there is very little or nothing around that meets the Buffet criteria. I do some screening with adapted "softer" criteria and it has served me well. The average cost of my current Skellerup holdings is c. 103c per share. Were I to have sold at the end of August price; return including all dividends and realised capital gain would have been close to 20% pa compounding according to my bookkeeping software. I'm happy to have owned this investment for quite some time but if I'd strictly applied Buffet criteria it would likely have kept me out of this investment.

Hi GlennJ; Holding an investment in Skellerup at an average price at $1.03 is a great result: Well done! I present my work on Skellerup as tool you can use however you like. Not a lesson from the pulpit on what to do. Ultimately it would be fantastic to plug into an investment that gave a 15% compounding return. But as you have noted, the chances of finding such an investment is slim. I don't see that as a reason not to do the work though. You can lower your standards a bit and be happy with a return of 'only' 12% compounding, for example. That is what I did when I did the exercise below in 2014

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

I have been accumulating SKL since and my average entry price is $1.33. Not as good a price as you achieved but I can't complain. I didn't wait for the share price to drop to $1.08 which would have seen me miss out. With the impressive rally since Covid-19, SKL is now my largest NZX holding, which is another -personal- reason to up the work I am doing on Skellerup. As well as telling investors when the time might be to buy, a Buffett style analysis can also tell you when it might be time to sell down. I don't think we are at the sell down point yet, But it will pay to keep an eye on things going forwards.

SNOOPY

[Snoopy]

I have had a quiet look at the half year annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend payments.

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2016	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
FY2020	7.5c (50% I) + 5.5c (50% I)	8.96c + 6.57c	15.53c
Total			69.49c

Averaged over 5 years, the dividend works out at 69.49/5 = 13.9c (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 of Skellerup to quickly 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 SKL is:

13.9 / (0.075) = $1.85

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

Top of Business Cycle Valuation: $1.85 x 1.2 = $2.22
Bottom of Business Cycle Valuation: $1.85 x 0.8 = $1.48

My target accumulation price is 10% below 'fair value', and that equates to $1.67.

SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?

I have had a quiet look at the FY2020 annual report that arrived in my mailbox on Friday. I have done a Buffett style evaluation and found the company to be at best fairly valued. So for a different perspective, what does the announcement of the October 2020 dividend payment do for valuing the company based on capitalised payments?

I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:

"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"

The calculations to work out the equivalent gross figure for FY2019's, FY2020s and FY2021s unimputed dividends, those actually paid in the FY2019, FY2020 and FY2021 financial years, are as follows:

FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)

FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)

FY2021 P1/ 5.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2016	5.5c+3.5c	N/Ac + 4.86c	4.86c
FY2017	5.5c+3.5c	7.64c + 4.86c	12.50c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	7.0c (55% I) +5.5c (50% I)	8.50c +6.57c	15.07c
FY2020	7.5c (50% I) + 5.5c (50% I)	8.96c + 6.57c	15.53c
FY2021	7.5c (50% I) + ?c (50% I)	8.96c + ?c	8.96c
Total			70.81c

Averaged over 5 years, the dividend works out at 70.81/5 = 14.2c (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 of Skellerup to quickly 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 SKL is:

14.2 / (0.075) = $1.89

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

Top of Business Cycle Valuation: $1.89 x 1.2 = $2.27
Bottom of Business Cycle Valuation: $1.89 x 0.8 = $1.51

My target accumulation price is 10% below 'fair value', and that equates to $1.70.

SKL shares are trading at $2.94 as I write this (well above the upper end of my expected valuation range) and as such are now overvalued by at least 30%. An alternative way of looking at this result is to say 'forget dividend capitalisation' and accept that there is now a 'growth premium' built into the share price. That means that the Buffett style valuation model is the best way to look at the true value of SKL going forwards.

SNOOPY

discl: hold SKL

[Ggcc]

https://www.nzx.com/announcements/362244

Very Nice

[Waltzing]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!

[percy]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!

No not for us,but very pleasing seeing them trading well,and shareholders doing so well..

[Biscuit]

https://www.nzx.com/announcements/362244

Very Nice

Yes, they have got their act together these days.

[Snoopy]

Well there are going to be shareholders that are throwing an ATM style party soon... Not us nor Mr Percy...

We did not lose money but!!!! what a surprise!

Mid point of outlook for FY2021 is a 10% profit rise to $32.5m. This is very welcome but with the share price at $3.14 (up 6%), we are still looking at a PE of near to 30. Traditionally this company has traded on a PE of 15. So I think the 'party' has already happened.

SNOOPY