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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Skellerup Holdings</h2>
FY19 — Less Milk, More Water
 Skellerup (SKL) reported continued NPAT growth in FY19, in line with guidance, helped by margin expansion, particularly within its Industrial division. SKL continues to deliver operational efficiencies assisting both margins and responsiveness to customers. We have tempered our growth outlook slightly given heightened near-term headwinds. However, note that SKL’s capital light model and focus on OEM business mean an additional customer contract could provide reasonable upside.
What’s changed?
<ul>
<li>Earnings: Modest downgrades reflecting softer dairy outlook and a slower growth trajectory for Industrial margins. FY20/FY21/FY22 NPAT revised -5%/-4%/-5%</li>
</ul>
Slowing operating environment offset by margin expansion
SKL reported robust, albeit slowing, EBIT growth in FY19 (+5% to NZ$41.8m) on a small increase in revenue (+2% to NZ$245.8m), highlighting a continued improvement in margins.
<ul>
<li>Industrial EBIT +10% to NZ$22.9m: The Industrial division achieved a fourth consecutive period of margin expansion despite geopolitical headwinds, evidence of operational improvements and efficiencies. The US–China trade war had an ~NZ$0.8m impact on FY19 EBIT, stripping this out, the Industrial division achieved an EBIT margin of 15.1% (14.6% including tariffs) vs FY18 13.7%. Management commentary suggests the project pipeline remains robust, although margin expansion of the same trajectory will be difficult to replicate.</li>
<li>Agri EBIT flat at NZ$22.8m: The Agri division delivered flat earnings growth on a slight decline in revenue amid weakening dairy markets in Australia and New Zealand. Footwear was a highlight within the division with positive momentum in specialty boots sales. The dairy outlook remains soft in Australasia, however, pockets of growth exist in Europe, where SKL is gaining market share. Whilst expected to offset weakness elsewhere, growth in those markets will have a negative mix impact on margins. We expect SKL will find it difficult to sustain current Agri EBIT in FY20.</li>
</ul>
Net debt rose modestly in FY19 to NZ$36.6m, reflecting the acquisition of Nexus Foams during the period. SKL’s balance sheet remains lightly geared and positioned for further bolt on acquisitions. SKL will pay a final dividend of 7.5cps (50% imputed), giving a full year of 13.0cps (FY18 11.0cps).
Tempered outlook amid heighted headwinds
SKL did not provide any formal guidance although noted a number heightened headwinds — namely a weakening dairy outlook, slow Australian construction activity, and a direct impact from geopolitical tensions. We expect SKL to continue to deliver earnings growth, driven primarily by its Industrial division. We temper our forecasts slightly to reflect a tougher operating environment.
<div class="content-highlight">
Investment View
SKL sales are largely driven by commodity volumes including dairy, iron ore, and oil/gas prices, albeit the volatility of earnings has been falling. While SKL’s Agri division operates in a number of mature markets, SKL’s Industrial division is generating robust growth. If SKL was able to obtain a new contract/customer, this would likely result in a meaningful increase in earnings.
</div>
Guy Hooper
<a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a>
+64 4 495 5255

Skellerup Holdings
FY19 — Less Milk, More Water
 Skellerup (SKL) reported continued NPAT growth in FY19, in line with guidance, helped by margin expansion, particularly within its Industrial division. SKL continues to deliver operational efficiencies assisting both margins and responsiveness to customers. We have tempered our growth outlook slightly given heightened near-term headwinds. However, note that SKL’s capital light model and focus on OEM business mean an additional customer contract could provide reasonable upside.
What’s changed?

Earnings: Modest downgrades reflecting softer dairy outlook and a slower growth trajectory for Industrial margins. FY20/FY21/FY22 NPAT revised -5%/-4%/-5%

Slowing operating environment offset by margin expansion
SKL reported robust, albeit slowing, EBIT growth in FY19 (+5% to NZ$41.8m) on a small increase in revenue (+2% to NZ$245.8m), highlighting a continued improvement in margins.

Industrial EBIT +10% to NZ$22.9m: The Industrial division achieved a fourth consecutive period of margin expansion despite geopolitical headwinds, evidence of operational improvements and efficiencies. The US–China trade war had an ~NZ$0.8m impact on FY19 EBIT, stripping this out, the Industrial division achieved an EBIT margin of 15.1% (14.6% including tariffs) vs FY18 13.7%. Management commentary suggests the project pipeline remains robust, although margin expansion of the same trajectory will be difficult to replicate.
Agri EBIT flat at NZ$22.8m: The Agri division delivered flat earnings growth on a slight decline in revenue amid weakening dairy markets in Australia and New Zealand. Footwear was a highlight within the division with positive momentum in specialty boots sales. The dairy outlook remains soft in Australasia, however, pockets of growth exist in Europe, where SKL is gaining market share. Whilst expected to offset weakness elsewhere, growth in those markets will have a negative mix impact on margins. We expect SKL will find it difficult to sustain current Agri EBIT in FY20.

Net debt rose modestly in FY19 to NZ$36.6m, reflecting the acquisition of Nexus Foams during the period. SKL’s balance sheet remains lightly geared and positioned for further bolt on acquisitions. SKL will pay a final dividend of 7.5cps (50% imputed), giving a full year of 13.0cps (FY18 11.0cps).
Tempered outlook amid heighted headwinds
SKL did not provide any formal guidance although noted a number heightened headwinds — namely a weakening dairy outlook, slow Australian construction activity, and a direct impact from geopolitical tensions. We expect SKL to continue to deliver earnings growth, driven primarily by its Industrial division. We temper our forecasts slightly to reflect a tougher operating environment.

Investment View
SKL sales are largely driven by commodity volumes including dairy, iron ore, and oil/gas prices, albeit the volatility of earnings has been falling. While SKL’s Agri division operates in a number of mature markets, SKL’s Industrial division is generating robust growth. If SKL was able to obtain a new contract/customer, this would likely result in a meaningful increase in earnings.

Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Skellerup Holdings: FY19 - Less Milk, More Water