BT1/: Significant Business Scale (Top 3 in chosen markets): FY2020 View
Quote:
Originally Posted by
Snoopy
Skellerup is organised into two principal divisions:
1/ Agri: manufactures and distributes milking liners, tubing, filters and feeding teats. It also sells dairy vacuum pumps and other agricultural products, notably rubber footwear. Skellerup is the second largest manufacturer of dairy rubberware in the world. The new dairy rubber-ware manufacturing facility at Wigram is the base for future growth. 60% of Agridivision sales are now outside of NZ. Markets targeted for future growth are Brazil, India, China and Russia as these nations gear up to meet pent up home market demand. Growth prospects come from the ability to customise short runs of products based on Skellerup's intimate knowledge of their rubber raw materials and how it reacts with dairy animals. Given Skellerup make all their production tooling 'in house', there is no better company to design products that are lighter and more ergonomic to use. The Skellerup market presence through 'Argi' is definitely major.
2/ Industrial: manufactures technical polymers for construction, infrastructure, automotive, mining and general industrial applications. This division also sells industrial vacuum pumps. The static revenue performance of the industrial division over recent years does not give an accurate picture of the potential for this division. The near simultaneous collapse in iron ore and oil prices after 2013 hit this division hard with 50% of Industrial Division sales going to iron ore mining companies in Australia and petroleum companies in the USA. Fast forward to FY2017 and the iron ore and oil industries make up just 20% of sales. 50% of sales today are from potable water and waste water projects.
How did this market adaptation take place? In simple overall terms, much of what Skellerup does can be summed up by using rubber compound engineering to to keep liquids either 'in' or 'out'. When put in these simple terms you can see how existing rubber technology can be relatively easily adapted to other industries. Lessons learned in oil and gas transportation were directly applicable to the waste and potable water markets. Fundamental global trends of 'growing populations', 'changing weather patters (flooding more common)' , and 'ageing infrastructure in many developed cities' all produce a tailwind of opportunities that is less susceptible to the vicissitudes of commodity markets. A rubber seal is not the most expensive component of an underground piping system. But it is an absolutely critical components. So saving money on a seal is likely a poor risk strategy when the quality of the competition is unknown. Skellerup works closely with pipe manufacturers and this gives them a competitive 'moat' that potential competitors will find hard to breach.
So is Skellerup's presence in industrial rubber 'major' in a global context? Skellerup supplies critical rubber componentry for other industrial manufacturers. Few would know that Skellerup manufactures all the drive shaft couplings in their Italian factory for the Mercedes Benz E class cars that are made for the Chinese market , for example. Yet no-one would call Mercedes Benz a minor player in the luxury Chinese car market. I think being a manufacturer of world class componentry qualifies Skellerup as 'major players', albeit in their own specialised niche of rubber products.
To summarize,
1/ Strong and deep relationships not just with manufacturing partners but also final end users, AND
2/ Industrial standards and approval processes that provide a barrier to entry for competitors, AND
3/ Adaptability of rubber technology across industries opening up organic growth opportunities
provide solid reasons to expect that Skellerup will continue as a strong player in the niche markets where they choose to operate.
Conclusion: Pass Test
Skellerup are a brand that stands behind the big brands as crucial component suppliers. For governance purposes , Skellerup is split into two divisions: 'Agri' and 'Industrial'.
Agri
As supplier to the share holders of Fonterra, our dairy farmers, Skellerup supplies the milking liner that attaches each cow teat, via a Skellerup supplied silicone hose to the milking machine. The dairy worker keeps their feet dry wearing Skellerup 'Red Band' gumboots. After milking the chances of teat infection is reduced by using the Skellerup supplied "Ambic Jetstream" Teat Sprayer. This is a fully automated device that operates on vacuum power which means no electricity is needed. Skellerup remain the world's second largest supplier of disposables to the dairy industry worldwide, and their target growth market is the United States where sales are catching up to their home market stronghold level in New Zealand.
Industrial
The industrial division is driven by strong and effective partnerships at research and development level, between Skellerup and their customer companies. The focus is on mechanically challenging problems that nevertheless lend themselves to quick solutions by leveraging on the skills and experience of a multi-disciplined Skellerup technology team. Skellerup's strategy is not to patent exclusive technology, but to cleverly apply their materials knowledge to what some might be seen as 'out of the square' applications. Many of these problems involve sealing off one liquid or gas so that it does not mix with another.
Declining markets over FY2020 included oil & gas, an industry into which Skellerup supplies space efficient vacuum pumps for fuel transporter trucks. Furthermore the closure of the Australian car industry and weaker automotive component sales in Italy has meant lower rubber drive coupling sales for Skellerup. However Ultralon U-deck is finding favour as a preferred decking covering for boats, especially in the United States of America. New products and improved sealing applications are driving sales of the Deks roofing product in Australia. Sales relating to the pumping and piping of potable water still make up the largest category of gross industrial division sales for Skellerup. Some projects in this space were deferred due to Covid-19, so Skellerup have high hopes for a sales bounce back in FY2021.
Skellerup is keen to pursue the advantageous properties of silicone to augment their undoubted prowess in conventional rubber componentry. In July 2018 they forked out $US1.1m for a minority stake in 2015 start up 'SimLim' in the United States. Partnering with business founder Michael O'Hara, SimLim's silicone products are very sterile which sets them up for good use in various medical applications and sophisticated consumer products. Then in November 2019, Skellerup purchase 'SilClear' for GBP3.3m. 'Silclear' is the global market leader in making innovative silicone rubber products, in particular food grade tubing diaphragms valves and liners, a good fit for crossover applications into the dairy industry.
Skellerup remain number two globally in the disposable dairy supplies market (second only to DeLavel), and are a well entrenched supplier to various leading industrial brands. At the end of FY2020, 17 of Skellerup's top twenty customers by revenue were also in the top twenty in FY2016 (four years earlier). Customer retention is a measure of enduring relationships not easily usurped.
Q/ Does Skellerup qualify as a key (or top three) supplier in their chosen markets?
A/ Yes, this test is passed.
SNOOPY
discl: holding
BT2/: Increasing EARNINGS PER SHARE (One setback allowed) FY2020 View
Quote:
Originally Posted by
Snoopy
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
2016: ($29.099+$0.800+$1.275-$8.429+0.28*$0.145)m /192.806m = 11.8cps
2017: ($31.435-$2.507-$9.300+0.28*$0.025)m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.7cps
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 FY2014 adds back a $1.6m long standing warranty dispute adjustment.
c/ Result for FY2016 adds back $800,000 in restructuring costs.
d/ Result for FY2017/FY2016 adjusts for not including a $25,000/$145,000 cost from relocation expenses respectively, by adding back the 'after tax' effect of not having incurred these costs.
Conclusion: Fail test
Earnings Per Share = Normalised Net Profit over Year / No.of fully paid shares on issue at End of Year
2016: ($29.099+$0.800+$0.145m+$1.275-[$8.429+0.28*$0.145])m /192.806m = 11.9cps
2017: ($31.435-$2.507+$0.025m-[$9.300+0.28*$0.025])m /192.806m = 10.2cps
2018: ($37.918-$1.123-$10.641)m /192.806m = 13.6cps
2019: ($40.036+$0.170-$10.973)m/194.753m = 15.0cps
2020: ($39.831-$0.685-$10.767+$0.400+0.72x0.255)m/194.753m = 14.8cps
Notes:
a/ Results for all years have had foreign exchange currency gains removed (FY2017 $2.507m, FY2018 $1.123m, FY2020 $0.685m) and losses added back (FY2016 $1.275m, FY2019 $0.170m). Foreign currency gains (or losses) are not a measure of operational business performance.
b/ Result for FY2016 adds back $800,000 in restructuring costs (AR2016 p7).
c/ Result for FY2017/FY2016 adjusts for removing the one off $25,000/$145,000 earthquake relocation expenses (AR2017 p39) respectively, by adding back the effect of a hypothetical situation where these losses were not incurred. The $9.300/$8.429m tax figures used for FY2017/FY2016 respectively have already incorporated the tax relief on these expenses which did occur. But we are modelling the situation where they did not occur. So we have to:
i/ Add in the extra tax payable when certain expenses did not occur (because profits would be higher than anticipated) .
ii/ Add back the expenses themselves that were not incurred, because expenses not paid amount to profit before tax.
d/ FY2020 result adds back an after tax $0.400m 'before IFRS16' adjustment to allow a like with like comparison of NPAT with previous years.
e/ FY2020 result adjusted for a $0.255m 'vacated lease' payment. ( AR2020 )
Conclusion: I believe the 0.2cps drop in profit shown from FY2019 to FY2020 is within the margin of error of the inputs used to get the two figures. We know that until Covid-19 (a black swan event) the previous year's result would have been beaten. I am therefore declaring this result a 'pass test'.
SNOOPY
BT3/: RETURN ON EQUITY (>15% for five years, one setback allowed) FY2020 View
Quote:
Originally Posted by
Snoopy
2014: $22.251m /$144.691m= 15.4%
2015: $21.375m /$159.660m= 13.3%
2016: $22.786m /$155.855m= 14.6%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
Conclusion: Fail test
Return on Equity = Net Profit After Tax / Shareholder Funds at End of Financial Year
2016: $22.849m /$155.855m= 14.7%
2017: $19.635m /$159.247m= 12.3%
2018: $26.154m /$172.286m= 15.2%
2019: $29.233m /$178.392m= 16.4%
2020: $28.963m /$184.563m= 15.7%
14.7% rounds up to 15% in whole number terms.
Conclusion: Pass Test
SNOOPY
BT4/: ABILITY TO RAISE MARGINS ABOVE THE RATE OF INFLATION: FY2020 View
Quote:
Originally Posted by
Snoopy
2014: $22.251m /$196.606m= 11.3%
2015: $21.375m /$203.011m = 10.7%
2016: $22.786m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
I see a 'steady margin' picture with a low year of FY2017 offset by a higher year in FY2014
Conclusion: Fail test
Net Profit Margin = Net Profit / Revenue
2016: $22.849m /$211.415m= 10.8%
2017: $19.635m /$210.232m= 9.3%
2018: $26.154m/$240.408m= 10.9%
2019: $29.233m/$245.792m= 11.9%
2020: $28.969m/$251.389m= 11.6%
I see a good margin lift from FY2016 to FY2018, with most of those gains being retained under the Covid-19 influenced period.
Conclusion: Pass test
SNOOPY
Buffett Test: Overall Evaluation Conclusion FY2020 Perspective
Quote:
Originally Posted by
Snoopy
I open this post with a couple of quotes from the Panda which I think are both poignant and sobering.
Quote Originally Posted by Patient Panda
"not a great track record, don’t really own up to bad results and always optimistic for future only to contradict themselves with the result. Maybe Liz Coutts will be an improvement over Selwyn."
"Until they get some wins under their belt a PE of 14.7 looks very rich."
Over the past few years the majority of share price gains have been made up of PE expansion rather than a business going gangbusters. Just something to keep in mind for future risk weighted returns. The historic PE at 30-09-2015 was 11.6. Three years later and it is 15.6 (both with my adjustments).
One good result does not a trend make. The result was good but, as an investor, the likes of Buffett must always consider the multi year perspective. The performance of Skellerup isn't consistent enough to apply the Buffett multi year growth model reliably. This doesn't mean it isn't a good investment. It just means we can't use a technique like Buffett might use to value it.
Two years on and how things change. All four of the Buffett investment criteria are satisfied. That is not an invitation to invest in Skellerup of course. Passing the four Buffett criteria only gets a place at the Buffett evaluation start line. Two very important tests remain. For a start we must determine if Skellerup is too heavily indebted. Overleverage can push up ROE and that is not a good thing as the company could become unstable in a market downturn. Finally we must determine if the recent rise in the share price already reflects the value of future business improvements. No matter how good a company is at the operational level, it is still possible to pay too much for the shares.
'Good Company' + 'Paying too much for Shares' = 'A Poor Investment'
One thing that is certain is that the historical PE ratio has continued to expand. The share price is flirting with $3. If it gets there that will imply an historical PE ratio of 20, which in historical terms is quite a lot for a 'boring industrial'. Still Skellerup's Covid-19 resilience and their ability to keep paying dividends is impressive.
SNOOPY
MDRT from FY2016 to FY2020
Quote:
Originally Posted by
Snoopy
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.
'MDRT' is the answer to the question:
"If all profits for the year were put towards paying off the company's debts, how long would that take?"
My rule of thumb for the answer in years is:
years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Bolt on Acquisitions |
|
New Wigram factory opens |
|
Nexus Foams (NZ) & 35% of SimLim (USA) |
Silclear (UK) |
Cash & Cash Equivalents: {A} |
$9.510m |
$6.022m |
$9.681m |
$9.639m |
$13.617m |
Non Current Borrowings: |
$36.413m |
$41.777m |
$40.400m |
$46.215m |
$41.300m |
add Current Borrowings: |
$0.0m |
$0.0m |
$0.0m |
$0.0m |
$0.830m |
equals Total Borrowings: {B} |
$36.413m |
$41.777m |
$40.400m |
$46.215m |
$42.130m |
Total Net Borrowings: {B} - {A} |
$26.903m |
$35.755m |
$30.719m |
$36.576m |
$28.513m |
Net profit declared {C} |
$20.525m |
$22.110m |
$27.277m |
$29.063m |
$29.064m |
MDRT ({B} - {A}) / (C} |
1.3 years |
1.6 years |
1.1 years |
1.3 years |
1.0 years |
In the case of MDRT it is really only the latest figure that matters. All other figures are historical, but I have included them anyway because I didn't do the calculations 'in period'. Historical figures do give a feel for how conservatively (or not) the business has been run in recent years. But having a good debt position last year is of no help if the debt has blown out this year. Fortunately debt hasn't blown out and Skellerup are in the most conservative position they have been in for five years. Yet over the period Skellerup has made serious capital investment and bought some key bolt on acquisitions along the way. Growth is being pursued while debt, although low, is being repaid. There is a lot to like in this picture. I have no qualms about giving Skellerup a 'pass' on the MDRT front.
Now having reassured ourselves that the Buffett growth model is relevant to apply in this case. let's see what happens when we apply it.
SNOOPY