Skellerup (SKL) Fundamentals

[Beagle]

Hmmm.., looks like someone wants to get out at $1.42, once that seller gone, should be up and away.

Its had a good strong run since the annual result so some consolidation around there level's is to be expected by my reckoning. Great long term hold for further capital gains over time and 10% gross yield.

[sb9]

Its had a good strong run since the annual result so some consolidation around there level's is to be expected by my reckoning. Great long term hold for further capital gains over time and 10% gross yield.

Seems to be on the move now slowly marching towards 150 mark.

[Beagle]

Yeah agree with you Roger, the annual report was good read over the weekend, very encouraging overall. I reckon $1.50 by ASM next week.

Not many sellers ahead of tomorrow's annual meeting so you could be right. I'd imagine the vibe at tomorrow's meeting should be pretty good so if I get time I'll go.

[Snoopy]

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)

Time to update the eps figures from a five year perspective

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
2015: ($30.956-$0.558-$9.023)m/ 192.806m = 11.1cps

Conclusion: Fail test

SNOOPY

[Snoopy]

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

Time for a FY2015 perspective update:

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%
2015: $21.375m /$159.660m= 13.3%

Conclusion: Requirement satisfied

SNOOPY

[Snoopy]

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

An update on perspective from the FY2015 financial year

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%
2015: $21.375m /$203.011m = 10.7%

The above is a fairly flat looking margin trend. But with inflation near zero, margins are largely holding up.

Conclusion: Requirement satisfied

SNOOPY

[Snoopy]

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

The numbers aren't painting quite such a bullish picture from an FY2015 perspective. The dip in ROE to below 15% will need to be watched. The fall in this figure is more due to an increase in equity than due to falling earnings. The increase in equity is largely being used to finance the brand new Wigram factory. In FY2015 this construction consumed $15m of funds with another $25m of spending earmarked for FY2016 before it opens. Right now, spending on the new factory is 'dead money', an asset on the books producing no return. This will no doubt change when the new factory gets up and running. But even then depreciation charges will be higher. So will the increase in profitability from the new facility outweigh the increase in depreciation charges? This is something we shareholders will need to monitor.

The inability to cement an increasing five year earnings trend (test 2) is disappointing. Granted the eps drop in FY2015 was small. In fact Skellerup management would disagree with me as they reported a normalised profit increase for FY2015. However Skellerup managment have considered the $1.6m warranty payment that depressed FY2014 earnings as part of normal business. I regard that one off payment to be a high enough 'one off' that it should be pulled out of the normal results. Hence the difference of opinion, and of course I am right ;-).

Looking back, what happened to depress results in FY2013? Here is what chairman Sir Selwyn said in the annual report of that year:

"A protracted drought in New Zealand and sluggish international markets impacted customer purchasing decisions; this, in turn, affected Skellerup’s trading performance – breaking a run of record results in recent years"

Could this happen again in FY2016? We shareholders hope not, but yes it could. So I think it is worth looking at Skellerup from the 'five year dividend model', rather than from the 'retained earnings growth model' perspective that I used last year.

SNOOPY

[winner69]

A bit so so eh Snoopy

So you not buying more at the moment

[Snoopy]

I think it is worth looking at Skellerup from the 'five year dividend model', rather than from the 'retained earnings growth model' perspective that I used last year.

Year	Dividends	Dividend Total
2011	2.5c+2.0c	4.5c
2012	4.0c+3.0c	7.0c
2013	5.0c+3.0c	8.0c
2014	5.0c+3.5c	8.5c
2015	5.0c+3.5c	8.5c
Total		36.5c

Averaged over 5 years, the dividend works out at 36.5/5 = 7.3c (fully imputed).

So based on a 7.5% gross yield, fair value for SKL is:

7.3 / (0.075 x 0.72) = $1.35

SNOOPY

[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 0.256 = $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 +1.23) => 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% compunding return?

P(1+0.015)^10 = (3.24+1.13) => P= $1.08

SNOOPY

PS The reason I like this method of analysis is that all the data used to generate it comes from Skellerup itself. I haven't assumed a return on equity rate, nor have a assumed the market value multiple of Skellerup will be anything to different to how 'Mr Market' has valued Skellerup in the past.

A bit so so eh Snoopy

So you not buying more at the moment

As you can see from my other valuation Winner, I bought in when it was a 'no brainer' at $1.39. Actually I paid less than that overall, my average purchase price being $1.30. But let's say I had paid $1.39 back in February.

Since that time, I have received dividends totalling 8.5c and 7c of capital gain (based on today's trading price of $1.46). So my gain on shares bought at $1.39 is:

(8.5c+7.0c)/ $1.39 = 11.1% (net)

That isn't a bad return over 8 months. In fact it is getting close to the 12.1% return I predicted under the previous model as an 'average' return over 12 months.

The question here is not 'is Skellerup a good company to invest in?' (it is). The question is, what price is too much to pay? I think there is a good chance I might pick up some more shares at less than $1.46 over the next six months. Remember the worst of the 'dairy crisis' forms part of FY2016, not the already declared FY2015. Throw some international uncertainty into the mix and I see no compelling reason to buy right now. But then again, I already own a handy portion of SKL shares. So I can afford to be picky with my buying timing.

SNOOPY