Skellerup: “one of the strongest and most consistent earnings growers of the NZX50”
Those most justified in big-noting themselves tend to be the least likely to do so, in Kiwi culture, at least.
Skellerup did permit itself some back-patting at its annual shareholders' meeting last week, noting that it had achieved a compound annual growth in revenue of 7% for the last seven years and double that pace at 14% per annum in profit growth over that period.
But speeches from the chair, John Strowger, and managing director David Mair were sprinkled with statements of modesty.
“Our history is one of quiet achievement,” Strowger said, noting that “flashy initiatives are not for us.”
When it was his turn to speak, Mair quoted Warren Buffet on the power of making small daily changes culminating in “enormous” consequences.
Mair stressed that Skellerup's record is “not luck” and that he's a big fan of the Japanese approach to management called Kaizen, which means continuous improvement.
Mair is showing no signs of wishing to retire – he turned 65 in late 2021 – but he opened his AGM speech by introducing 12 of the senior management team, as if to underline the fact that credit for the company's performance is not just due to the man at the top.
An “international confederation”
He described the company as “an international confederation of businesses run from a small head office – eight people with two working part-time.”
As Strowger described it, “success here genuinely has many parents.”
But although Strowger is undoubtedly correct that Skellerup's recent history has been “one of quiet achievement,” that wasn't its reputation through the 1990s and the first decade of this century.
Before Mair took on the top management role in July 2010, Skellerup had a track record of continually buying businesses, building debt and producing stagnant profits.
It had also been a target of corporate activity, taken over by Brierley and then refloated in 1993, and then taken over again in 1996 in a Goldman Sachs-backed, debt-laden management buyout that took only three years to go bust.
The company was refloated in 2002 as Skellmax before regaining the Skellerup name in 2006.
Forsyth Barr analyst Rohan Koreman-Smit produced some analysis ahead of the AGM under the headline “A decade of David” which compared key financials in the years between 2003 and 2013 with the 10 years between 2013 and 2023, noting that through the latter, Skellerup has been “one of the strongest and most consistent earnings growers of the NZX50.”
Track record
While sales grew at 7% a year through the first decade and net profit at 4.2% a year, earnings per share had fallen 2.4% a year.
In the second decade, sales grew at a slower 5.8% annual pace but profits rose 10.4% a year and per-share earnings grew at 10.2%.
“During the last decade, Skellerup has undergone a significant transformation,” Koreman-Smit said.
Mair had steered the business away from boom/bust markets “into essential consumables and technical solutions for OEM (original equipment manufacturing) customers.”
In other words, Skellerup makes parts that are incorporated in other manufacturers' products and used in functions from water management, the food industry, medical applications and transport, generally with rubber or silicon and vacuum pumps, although its iconic gumboots are its best-known product.
It also makes the consumable parts of milking systems for the dairy industry.
Koreman-Smit noted that the company also has a strong focus on pricing for value, as well as continuous self-improvement.
Mair said in his speech that Skellerup needs to have processes that are globally competitive. “That means lowest cost. It is then a question of where to run those processes and the recent trends strongly suggest you do that in market close to your customers.”
Sim Lim buyout
That has meant Skellerup taking full ownership of the Sim Lim rubber and silicon injection molding business, now part of the Gulf US business, and Mair said that provides the company with tooling and production capability for liquid silicone rubber products.
'This capability has applications, not only with existing customers, but also in many areas of new business, particularly medical components.”
Skellerup is also looking at manufacturing food-grade dairy rubberware in the US.
One of his slides showed North America is Skellerup's biggest market, accounting for 35% of sales, with NZ the second largest with 23% of revenue, followed by Australia at 15%, Europe at 12% and with smaller markets in Britain, Ireland, Asia and elsewhere.
Already, more than 70% of its manufacturing is done offshore in countries from the US to Vietnam and China, Australia, Britain and Italy.
Koreman-Smit noted Skellerup has low debt at 0.3 times earnings before interest, tax, depreciation and amortisation (ebitda) “and has disciplined capital allocation.”
In other words, it's careful about what it buys. Strowger noted Skellerup is open to small acquisitions, although no purchases are imminent.
“If we could find a good, fairly-priced symbiotic business in a market where we have growth aspirations – that's every market, but in particular, the US – we would give it careful consideration.”
A “lazy” balance sheet
In Skellerup's annual report, Strowger wrote that “we are often told by well-intentioned third-party commentators that we have a 'lazy' balance sheet.
“It is true that we do carry low levels of debt, but in periods of uncertainty have found that to be a distinct advantage; this ensures we make the right decisions for the business in a holistic sense, rather than responding to short-term exigencies.”
As I've already noted, Skellerup has direct experience of the adverse consequences of gearing up its balance sheet.
Koreman-Smit said he's confident Skellerup “will continue to deliver over the medium term and welcomed the guidance the company gave to the AGM, that net profit for the year ending June 2024 should be between $50 million and $55 million, compared with the $50.9 million it reported for the 2023 financial year.
Koreman-Smit's own forecast is $54.5 million and he said he's comfortable sitting near the top of the company's range, “given Skellerup's traditionally conservative approach to earnings guidance and track record of earnings growth.”
He also noted the “challenging” operating environment facing the company, particularly its agri products division, which produced 47.4% of ebit in the year ended June.
Farmers in financial strife
Fonterra is currently forecasting its milk payout to farmers of between $6.50 and $8 per kilo of milk solids when DairyNZ is predicting the average farmer needs a payout of $7.51 to break even.
But Fonterra's forecast is an improvement of 50 cents from its September forecast and Skellerup is expecting dairy sales will gradually improve through the current year.
Strowger noted that the 2023 result was a record and the seventh successive year-on-year growth.
“These year-on-year record years get increasingly hard to beat and inevitably, there will be a year when we do not, but shareholders will, I'm sure, appreciate that here at Skellerup we are - as has been said before – in this for the long haul.”
Skellerup itself may have performed, but its share price certainly hasn't – the shares are down 25% in the last two years, ending Monday at $4.69.
Koreman-Smit says the shares are “trading on unchallenging valuation metrics” of a 12-month forward price-to-earnings ratio of 16 times and balance sheet flexibility “with solid growth prospects.” His 12-month target is $5.41.
Another Forsyth Barr analyst, Matthew Leach noted last week that the 12-month weighted PE for the NZ market was more than 20 times.
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