Skellerup (SKL) Fundamentals

[Snoopy]

You know the country is doing well when gumboot sales are on the rise

I picked on this post from the late Winner69 because it sterotypes where Skellerup sits in the minds of many investors. An old traditional NZ manufacturer plugging away in the industrial Heartland of Christchurch producing dull commodity type products - albeit those with a long standing reputation among our farming community. Yet this view is very far from the reality of Skellerup today.

Around ten years ago (2006) Skellerup did a bit of soul searching. What are our strengths going forwards? They answered their own question in three parts:

a/ A wealth of experience in technical polymer (mostly rubber) development and production.
b/ The ability to make use of low cost manufacturing, both in house and outsourced.
c/ The ability to make best use of global distribution networks.

This re-evaluation meant that parts of the ‘old’ Skellerup were divested as acquisitions that fitted with the three core strengths were made. I think of FY2006 as the start of the ‘new’ Skellerup. FY2006 was perhaps not co-incidentally, the same year the company became Skellerup (from Skellmax), by name once again. So FY2006 is the first year of data that I have considered in my 're-evaluiation' exercise.

SNOOPY

[Snoopy]

I think of FY2006 as the start of the ‘new’ Skellerup. FY2006 was perhaps not co-incidentally, the same year the company became Skellerup (from Skellmax), by name once again.

Just what business is Skellerup in? Skellerup is New Zealand’s largest industrial rubber supplier and exports to more than 30 international markets. From the FY2014 annual report:
“The Skellerup group markets develops and manufactures highly technical polymeric products and vacuum pumps. These products are distributed worldwide for a variety of specialized –industrial-AND-agricultural- products.”

Skellerup product development involves materials, product design and sales staff working together as a team.

Skellerup Industrial uses this ‘team approach’ to solve ‘niche industrial’ problems. One product, “Ultralon” foam, is being used for orthotic insoles. But Ultralon is also used in leading makes of ski boots like Atomic, Fischer, Scarpa and Scott.

The Masport pump for liquid waste is mounted on truck and trailer units all across the USA . Skellerup’s ‘Masport’ dominates that market in the shale and Hydrocarbon industry.

The ‘Flexflow’ rubber chute system, after six years of development, is now specified by BHP in their Pilbara region developments. Flexflow allows sticky yet abrasive iron ore extract to be moved with much reduced downtime. Future applications for ‘Flexflow’ could include bauxite, gypsum and coal. These three examples aren’t giant markets, but part of a wide small market niches serviced well. Skellerup’s customer focussed team approach mean they are very strong across a series of what are in global terms minnow (but profitable) markets.

Skellerup’s Agridivision manufactures and distributes products for the global dairy industry, OEMs and dairy sector distributors. Skellerup is the second largest dairy rubber supplier in the world. Delaval of Sweden claims a 50% share of the dairy market equipment globally and turnover of $NZ1.5 billion (all industry products). By contrast, the turnover of the Skellerup Agridivision in FY2014 was $80m. That means Skellerup is likely second by a long way, yet still ticks the ‘major player’ box.

Conclusion: Requirement satisfied

[Snoopy]

FY2006 is the first year of data that I have considered in my 're-evaluiation' exercise.

2010: ($11.958-+0.67x$1.180m)/ 191.148m = 6.7cps
2011: ($29.560-$0.265-$9.360)m/ 192.806m = 10.3cps
2012: ($34.493-$1.663m-$10.229)m/ 192.806m = 11.7cps
2013: ($26.631-$0.871-$7.595)m/ 192.806m = 9.4cps
2014: ($29.202-$0.093-$8.458+$1.6)m/ 192.806m = 11.5cps

Notes:
a/ Results for all years have had foreign exchange currency gains removed. Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2010 removes the effect of the golden handshake on the retirement of previous CEO Donald Stewart.
c/ Result for FY2014 adds back a $1.6m long standing warranty dispute adjustment.

Note that I have made various adjustments to the normalised profit figures to normalise them a bit more. I have removed any currency hedging profits or losses. I don't consider these indicative of ongoing operational profitability. I have also removed gains and losses from property plant and equipment sales. Again these are restructuring costs that are not indicative of future profitability. Finally I have removed declared 'one off' effects. In FY2014 that includes the adding back of a $1.6m long standing warranty provision.

Conclusion: Requirement satisfied (two significant figures)

SNOOPY

[Snoopy]

FY2006 is the first year of data that I have considered in my 're-evaluiation' exercise.

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

SNOOPY

[Snoopy]

FY2006 is the first year of data that I have considered in my 're-evaluiation' exercise.

Margin = Net Profit/Sales

2010: $12.748m /$180.719m= 6.7%
2011: $19.935m /$193.593m= 10.3%
2012: $22.600m /$207.313m= 10.9%
2013: $18.165m /$189.496m= 9.6%
2014: $22.251m /$196.606m= 11.3%

While not increasing every year, the five-year trend is definitely upwards with a solid improvement from FY2010.

Conclusion: Requirement satisfied

[Snoopy]

So FY2006 is the first year of data that I have considered in my 're-evaluiation' exercise.

Skellerup meets all the criteria of being a Warren Buffett style growth company. This growth is largely overseas. So Skellerup have proved that they can work outside of the ‘New Zeland box’. Skellerup has done this through the development of offshore-based manufacturing sites and distribution channels.

Subsidiary Gulf industries in Australia have access to manufacturing facilities in Vietnam. The famous Red label Skellerup gumboots, and their more upmarket and specialized Quatro brand cousin, are designed in New Zealand. But manufacturing is done in low cost China.

In 2014 Skellerup bought ‘Thermoplastic Foam Industries’ as a distribution platform for the wider group Skellerup products within. Australia. Likewise in 2007, Skellerup bought ‘Turenedi’ in Itaily as their beachhead into Europe. Fully owned US subsidiary “Canewango” does a similar job in the Americas.

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.

SNOOPY

disclosure: New shareholder

[Biscuit]

Thanks for posting your analysis Snoopy! I agree it is a bit of a quiet achiever that mostly flies under the radar these days

[babymonster]

Good analysis! I am happy with my holding and trying to add more if my funding is available.

[macduffy]

Yes, thanks, Snoopy!

I'll take your analysis as justification for my hands-off "strategy" of benign neglect of this company - except for the burst of enthusiasm that saw me adding a few more a year or three ago!

[Marilyn Munroe]

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.