Skellerup: Redefining an NZ icon
Quote:
Originally Posted by
winner69
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
BT1/ : Significant BusinessScale (Top 3 in chosen market): FY2014 view
Quote:
Originally Posted by
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
BT2/: Increasing EARNINGS PER SHARE (One setback allowed): FY2014 view
Quote:
Originally Posted by
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
BT3/: RETURN ON EQUITY (>15% for five years, one setback allowed): FY2014 view
Quote:
Originally Posted by
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
BT4/: Ability to raise margins above the rate of inflation: FY2014 view
Quote:
Originally Posted by
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
Buffett Test: Overall Evaluation Conclusion (FY2014 Perspective)
Quote:
Originally Posted by
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
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.