'Sigificant Change' vs 'Business Cycle Effect'?
Quote:
Originally Posted by
Snoopy
I don't think there is any disagreement that the ROE of the present is higher than the ROE of the recent past. The real question is 'why is this so?' ('significant change in business' or 'business cycle effect').
In an attempt to throw more light on this question (I had been leaning towards the 'business cycle effect' camp), I have re-read my SKL annual report collection since 'Our Liz' took over the chair, and selected a few quotes:
AR2017 p2 "(Our) success has been somewhat masked in prior years by navigating through international market conditions, especially in the dairy, mining and oil and gas sectors."
AR2017 p39
Snoopy Comment: I make the observation that $2.507m in foreign currency gains, compared to a $1.275m foreign currency loss in the previous year, boosted headline profit year on year by an unrepresentative: 0.72($2.547m - -$1.275m) = $2.737m year on year, or 12.4%
The above figures are of note, because it shows underlying profitability to be lower in FY2017, which makes the compounding growth rate for the four years to FY2021 higher (i.e. true underlying earnings have almost doubled).
AR2018 p10 (In the context of Gulf Rubber) "New product development typically takes anywhere from 18 months to 3 years from concept to market ready production."
AR2019 p21 (In context of Masport Vacuum Pumps) "Since the launch of the range of vacuum pump systems in 2016, sales have grown every year. We now have a strong foundation to enable us to become the supplier of choice for vacuum systems in the US."
Snoopy Comment:
FY2017 Revenue from Exploration & Mining: 0.06 x $131.2m = $7.9m,
FY2021 Revenue from Exploration & Mining: 0.08 x $177.4m = $14.2m ( +$6.3m)
Drilling operations require water on site, and Masport vacuum pumps are used in the supply of this. I note that Skellerup's 'Exploration & Mining' business unit includes Flexiflo chutes, which are used to enhance mine productivity. But the pre-2017 collapse in the iron ore price means Flexiflo is not currently a growth focus for Skellerup. Growth since FY2017 in Exploration & Mining products, I believe, has likely largely come from Masport Vacuum Pump products.
HYR2020 p3 (on the Covid-19 effect) "External factors can impact our ability to deliver and this was the case for the first half of 2020. Industrial division earnings were lower due to impacts of trade tariffs and slower demand for products we sell within the water infrastructure oil and gas industries."
AR2020 p7 (Agri division performance) "Growth in sales of essential dairy rubber-ware products into the USA, and a strong contribution from Silclear (the silicon rubber business) acquired on 01-11-2019 were the key contributions."
Snoopy Comment:
|
FY2017 |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
Agri-Division Revenue Trend |
$79.233m |
$89.033m |
$88.750m |
$93.609m |
$102.201m |
North American Revenue Trend |
$58.229m |
$68.364m |
$78.278m |
$81.111m |
$81.514m |
The growth in the North American market, ties in with the growth of 'essential dairy rubber' sales (Agri division growth) and ''Masport Vacuum Pumps' that I have also commented on. The North American growth looks far from cyclical, which is shifting me towards the 'significant change' side of the argument. But over the last three years North American revenue looks to have stalled. This could be because the easy gains in the NA market are over, and we have reached a 'new sales plateau'.
AR2020 p25 (Retention of Customers) "At the end of FY2020, 17 of our top 20 customers when measured by revenue were also in our top 20 in FY2016."
HY2021 p2 (Coping with Covid-19) "Despite some project timelines extending because of Covid-19, we have successfully moved into production with new products and customers across the world, contributing to revenue growth of 11%"
HY2021 p5 "Extended shipping times and increased freight costs due to congestion and availability will have some impact in the near term. We have also seen some increases in raw materials and will be impacted by the recent strengthening of the $NZ"
Snoopy Comment: On p69 of AR2021 under "Financial Risk Management Objectives and Policies" we learn:
"The group seeks to cover up to 100% of the net foreign currency cashflow forecast for the next 12 month period, with foreign currency contracts."
I find it difficult to reconcile that statement above with the previously stated effect of being 'impacted by the recent strengthening New Zealand Dollar'.
AR2021 p14 "We are focussed on growing the business, we are also disciplined in eliminating business that generates marginal returns and requires disproportionate resource to do so. During FY2021 we discontinued a small range of products used on roofing applications in the US. We managed to exit well and continue to work with the customer on new product developments."
Fuel for both sides of the debate in those excerpts I think.
Quote:
Originally Posted by
Fiordland Moose
I talked to the business being transformed over both the last 10 years and again over the last 5. The strategy to pivot from being more or less a contract manufacturer to a provider of bespoke OEM components did occur over the previous 5-10 year period but what I highlighted was the financial flow through of that pivot has taken time, and you can literally see it occur over the last 5 years where the company improved in nearly all its financial metrics in every consecutive year. It takes time to phase out legacy lower margin products, which has occurred over the last 5 years, new products get in the door, incrementally higher margin secondary products and services (which both require less capital and upfront investment than the initial sales) take time to take hold after that, so the financial profitability and ROIC naturally lifts in the many years post the strategic pivot. It doesn't occur immediately and sort of waterfalls down after that.
There is evidence of a step change in business operations. But 'Waterfalls down' sounds like a continuous process. I wonder how much 'water' is left at the top of the 'Skellerup falls' feeder lake?
SNOOPY