Debt position: FY2014 Perspective
Quote:
Originally Posted by
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
A note of warning here. It can be extremely dangerous to rely on ROE as a stand alone indicator. A company can be very highly leveraged which artificially raises their ROE above what it would be if it was more prudently capitalised. But is this the case with Skellerup?
From the FY2015 interim report Balance Sheet:
Cash: $10.678m
Interest Bearing Loans and Borrowings: $2.900m
Net cash position: $7.778m
Skellerup has no term debt and a very strong positive cash position. This is very different from even a few years ago when Skellerup ran up quite a lot of debt. Granted the Christchuch earthquakes and resultant payout relating to their Woolston site has boosted the cash position for now. Some debt may creep back into the balance sheet once the new Wigram factory is built. Offsetting that will be efficiency gains from what will be a thoroughly modern factory. Nevertheless no term debt today is a very good reason to like this company.
SNOOPY
Buffett Growth Model: FY2014 Perspective
Quote:
Originally Posted by
Snoopy
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.
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+0.015)^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.