Skellerup (SKL) Fundamentals

[winner69]

Our Liz quitting as Director and he sell off of her shares starts .... another 520,000 to go

Hope she not doing this as she thought SKL can't do much better over the next few years .... like peak performance or something

[Ggcc]

Dividend received today. Eager to see how they are doing currently and how the NZD is benefiting their bottom line as lots of growth in US and worldwide

[Muse]

Skellerup starts well, predicts another record result
https://www.nzx.com/announcements/401169

Guidance $48-52m NPAT. Consensus is 51.9m.

[winner69]

Skellerup starts well, predicts another record result
https://www.nzx.com/announcements/401169

Guidance $48-52m NPAT. Consensus is 51.9m.

Even if its $48.0m its more than last years $47.8m so is going to be a RECORD profit

After 38% profit growth in F21 and 19% in F22 0% to 8% is a bit anemic

We probably need to take this as a sign that the outlook for many companies in F23 is really that brilliant ....and doing about the same as F22 is going to be a good result

[Snoopy]

Skellerup are a brand that stands behind the big brands as crucial component suppliers. For governance purposes , Skellerup is split into two divisions: 'Agri' and 'Industrial'.

Agri

As supplier to the share holders of Fonterra, our dairy farmers, Skellerup supplies the milking liner that attaches each cow teat, via a Skellerup supplied silicone hose to the milking machine. The dairy worker keeps their feet dry wearing Skellerup 'Red Band' gumboots. After milking the chances of teat infection is reduced by using the Skellerup supplied "Ambic Jetstream" Teat Sprayer. This is a fully automated device that operates on vacuum power which means no electricity is needed. Skellerup remain the world's second largest supplier of disposables to the dairy industry worldwide, and their target growth market is the United States where sales are catching up to their home market stronghold level in New Zealand.

Industrial

The industrial division is driven by strong and effective partnerships at research and development level, between Skellerup and their customer companies. The focus is on mechanically challenging problems that nevertheless lend themselves to quick solutions by leveraging on the skills and experience of a multi-disciplined Skellerup technology team. Skellerup's strategy is not to patent exclusive technology, but to cleverly apply their materials knowledge to what some might be seen as 'out of the square' applications. Many of these problems involve sealing off one liquid or gas so that it does not mix with another.

Declining markets over FY2020 included oil & gas, an industry into which Skellerup supplies space efficient vacuum pumps for fuel transporter trucks. Furthermore the closure of the Australian car industry and weaker automotive component sales in Italy has meant lower rubber drive coupling sales for Skellerup. However Ultralon U-deck is finding favour as a preferred decking covering for boats, especially in the United States of America. New products and improved sealing applications are driving sales of the Deks roofing product in Australia. Sales relating to the pumping and piping of potable water still make up the largest category of gross industrial division sales for Skellerup. Some projects in this space were deferred due to Covid-19, so Skellerup have high hopes for a sales bounce back in FY2021.

Skellerup is keen to pursue the advantageous properties of silicone to augment their undoubted prowess in conventional rubber componentry. In July 2018 they forked out $US1.1m for a minority stake in 2015 start up 'SimLim' in the United States. Partnering with business founder Michael O'Hara, SimLim's silicone products are very sterile which sets them up for good use in various medical applications and sophisticated consumer products. Then in November 2019, Skellerup purchase 'SilClear' for GBP3.3m. 'Silclear' is the global market leader in making innovative silicone rubber products, in particular food grade tubing diaphragms valves and liners, a good fit for crossover applications into the dairy industry.

Skellerup remain number two globally in the disposable dairy supplies market (second only to DeLavel), and are a well entrenched supplier to various leading industrial brands. At the end of FY2020, 17 of Skellerup's top twenty customers by revenue were also in the top twenty in FY2016 (four years earlier). Customer retention is a measure of enduring relationships not easily usurped.

Q/ Does Skellerup qualify as a key (or top three) supplier in their chosen markets?
A/ Yes, this test is passed.

Skellerup designs and manufactures critical components for OEM manufactuers. All such critical components incorporate rubberized material or foam as constituent parts. These components are often required to meet stringent food, drinking water, hygiene and safety standards. Skellerup's competitive advantage is to leverage their expertise in engineering, chemistry and manufacturing to create rapid product prototypes to tight specifications, that can nevertheless be manufactured cost effectively.

For effective management Skellerup products are grouped under two broad divisions: 'Agri' and 'Industrial'. Further broken down the 'product catalogue' looks like this:

1/ Dairy (Agri): Food grade rubber-ware componentry for the milking shed, including 'udder liners', tubing & filters for hygiene, and feeding teats for the calves. Skellerup are the number 2 supplier of maintenance milking equipment worldwide AND

2/ Specialist Footwear (Agri): The traditional 'Red Band' gumboots to look after our farmer's feet. In fact the gumboots are so well thought of that they find wider application in the fire, forestry and electrical installation industries. Skellerup are the recognised leaders in this market in New Zealand

3/ Transport (Industrial): Vacuum systems, seals, injectors, couplings and gaskets, utilised throughout the transport industry in applications as wide as Mack trucks to Maserati cars.

4/ Houses (Industrial): Suppliers of seals to leading manufacturers of taps, showers, plumbing, and HVAC equipment - even some kitchen appliances. Skellerup also market roofing product directly.

5/ Medical Health Hygiene Equipment (Industrial): Face masks, filters and seals for respiratory equipment, orthotics and prosthetics.

6/ Utility Infrastructure (Industrial): Seals for potable water and wastewater applications. Covers and lids for water fire and electrical services on streets. valves and seals for industrial applications (food, liquid and material processing).

7/ Sport & Leisure (Industrial): Foam boat decking, Foam used in ski and snowboard boots.

Skellerup products are either leading market players in their own right, or are partners with well known branded market leaders via their components in the manufacturing chain.

Conclusion: 'Pass Test'

SNOOPY

[Snoopy]

Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2017: ($31.435-$2.507+$0.025m-[$9.300+0.28*$0.025])m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.6cps
2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps

Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2017 $2.507m, FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2017 adjusts for removing the one off $25,000 earthquake relocation expenses (AR2017 p39) respectively, by adding back the effect of a hypothetical situation where these losses were not incurred. The $9.300m tax figure used for FY2017 respectively has already incorporated the tax relief on these expenses which did occur. But we are modelling the situation where they did not occur. So we have to:

i/ Add in the extra tax payable when certain expenses did not occur (because profits would be higher than anticipated) .
ii/ Add back the expenses themselves that were not incurred, because expenses not paid amount to profit before tax.

c/ FY2020/FY2021 results adds back an after tax $0.400m/$0.319m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
d/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year

2018: ($37.918-$1.123-$10.641)m /192.806m = 13.6cps
2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps
2021: ($54.245-$1.281-$14.070+$0.319)m/195.276m = 20.6cps
2022: ($64.287-$0.882-$16.474+$0.274)m/195.276m = 24.1cps


Notes:

a/ Results for all years have had foreign exchange currency gains removed (FY2018 $1.123m, FY2020 $0.685m, FY2021 $1.281m, FY2022 $0.882m) and losses added back (FY2019 $0.170m). Foreign currency gains (or losses) are temporary differences based on exchange rate movements and not a measure of operational business performance.
b/ FY2020/FY2021/FY2022 results adds back an after tax $0.400m/$0.319m/$0.274m 'before IFRS16' adjustment, to allow a like-with-like comparison of NPAT with previous years.
c/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )

Conclusion: 'Pass test'.

SNOOPY

[Snoopy]

Return on Equity = Normalised Net Profit After Tax / Shareholder Funds at End of Financial Year

2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%

Conclusion: 'Pass Test'

Return on Equity = Normalised Net Profit After Tax / Shareholder Funds at End of Financial Year

2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
2021: $40.243m/$196.140m= 20.5%
2022: $47.205m/$211.208m= 22.4%

Conclusion: 'Pass Test'

SNOOPY

[Snoopy]

Net Profit Margin = Normalised Net Profit / Revenue

2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%

I see a good margin lift from FY2017 to FY2021 with just a small dip on the year Covid-19 hit.

Conclusion: Pass test

Net Profit Margin = Normalised Net Profit / Revenue

2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.4%
2021: $40.243m/$279.613m= 14.4%
2022: $47.205m/$316.829m= 14.9%

I see a good margin lift from FY2018 to FY2022 with just a small dip on the year Covid-19 hit.

Conclusion: 'Pass test'

SNOOPY

[Snoopy]

I have had a quiet look at the FY2021 annual report. I have done a Buffett style evaluation and found the company very fully valued. So for a different perspective, what does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2017	5.5c+3.5c	7.64c + 4.86c	4.86c
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) + 6.5c (50% I)	8.96c + 7.76c	16.72c
FY2022	10.5c (50% I) + ?c (50% I)	12.54c + ?c	12.54c
Total			78.61c

Averaged over 5 years, the dividend works out at 78.61/5 = 15.7c (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. Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, i ma reducing my sought gross yield from 7.5% to 7%.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:

15.7 / (0.07) = $2.25

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: $2.25 x 1.2 = $2.70
Bottom of Business Cycle Valuation: $2.25 x 0.8 = $1.80

My target accumulation price is 10% below 'fair value', and that equates to $2.03.

SKL shares are trading at $6.06 as I write this (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.03 and a 'growth premium' of $6.06 - $2.03 = $4.03 (which is quite a bit).

discl: hold SKL

I have had a quiet look at the FY2022 annual report. What does the announcement of the HY2022 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, FY2021s and FY2022s unimputed dividends, those actually paid in the FY2019, FY2020, FY2021 and FY2022 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/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2021 P2/ 6.5c (50% imputed) = 3.25c (FI) + 3.25c (NI) = 3.25c/0.72 +3.25c = 4.51c +3.25c = 7.76c (gross dividend)

FY2022 P1/ 10.5c (50% imputed) = 5.25c (FI) + 5.25c (NI) = 5.25c/0.72 +5.25c = 7.29c +5.25c = 12.54c (gross dividend)

FY2022 P2/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)

FY2023 P1/ 13.0c (50% imputed) = 6.5c (FI) + 6.5c (NI) = 6.5c/0.72 +6.5c = 9.03c + 6.5c = 15.53c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2018	6.0c+4.0c	8.33c + 5.56c	5.56c
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) + 6.5c (50% I)	8.96c + 7.76c	16.72c
FY2022	10.5c (50% I) + 7.5c (50% I)	12.54c + 8.96c	21.50c
FY2023	13.0c (50% I) + ?c (50% I)	15.53c + ?c	15.53c
Total			89.91c

Averaged over 5 years, the dividend works out at 89.91/5 = 18.0c (gross dividend).

Given the resilience of Skellerup over the first year of the pandemic, plus the non discretionary nature of most of the product they supply, I consider a gross of 7% an acceptable return.

Based on my selected sought after 7.0% gross yield over an historic five year business cycle window, , 'fair value' for a 'no growth' SKL is:

18.0 / (0.07) = $2.57

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: $2.57 x 1.2 = $3.08
Bottom of Business Cycle Valuation: $2.57 x 0.8 = $2.06

SKL shares finished trading at $5.70 last week (well above the upper end of my capitalised dividend valuation range). An alternative way of looking at this result is to say that SKL has a 'capitalised dividend value' of $2.57 and a 'growth premium' of $5.70 - $2.57 = $3.13. $3.13 is a lot, but down from the overheated $3.71 from 30-09-2021.

SNOOPY

discl: hold SKL

[Snoopy]

I skipped the BT1/ test because Skellerup is just as powerful in its chosen target markets as it was last year, but incrementally better. So the 'Pass Test' result for 'Buffett Test 1' is carried over from FY2020.

https://www.sharetrader.co.nz/showth...l=1#post843610

Very impressive result on all four Buffett tests over FY2021. As per my equivalent FY2020 round up, the fact that Skellerup is a great company is no secret. But almost everyone involved in the markets knows this. This is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021. So it is very important potential investors bear in mind the value equation

'Good Company' + 'Paying too much for Shares' = 'A Poor Investment'

Can the historical PE ratio has continue to expand even further? The share price has doubled over a year. The dividend is up by around 30% over the same period. Investors can see from this that most of the share price gain over the year has been due to 'multiple expansion'. I would be very surprised to see the share price double again in the coming year.

But what is the investment case for new investors from here? This is the next task for me to investigate.

Very impressive result on all four Buffett tests over FY2022. The idea that Skellerup is a great company gains fewer and fewer dissenters as the years roll by. However, this is reflected in the market PE for Skellerup on adjusted earnings soaring to over 29, by 30th September 2021, even if one year later that PE figure has dropped to a more conservative but still high 22. It is very important potential investors bear in mind the value equation:

'Good Company' + 'Paying too much for Shares' = 'A Poor Investment'

.... and so it proved over the year. Despite earnings per share jumping by 17%, the share price declined by 10% over the September year as FY2022s bumper result was digested. This shows the folly of buying a good company with no regard to the share price, in the short term at least. In the case of SKL this was well signalled by me as well.

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:
Using a market share price today of $6.05, the expected compounding annual return 'i' can be calculated from the following equation.

$6.05(1+i)^10 = (3.73 +1.26) => i= -1.91%

This projected -1.91% return is a net negative return per year.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2022 Capitalised Dividend valuation for SKL (post 1189) is $2.57.

	Share Price equals	Capitalised Dividend Value plus	Implied Growth Premium
30-09-2021	$5.96	$2.25	$3.71 (+165%)
30.09-2022	$5.38	$2.57	$2.81 (+109%)

The share price is lower than last year, and the market growth premium has decreased (which is what we might expect as a consequence).

But what is the investment case for new investors from here? This is the next task for me to investigate.

SNOOPY