Forum Archive Index - June 2002

["New Zealand Social Credit Association" <socred@ihug.co.nz>]

After reading the Prospectus, here are my comments:   

 

According to the "Pro Forma Historical Summary" in the Prospectus, forecast Profit After Tax for the June 2003 year is $12.437m (an earnings multiple of 9.25 the issue price )& forecast dividend is $2.5m.

 

Forecast Operating cashflows reflect the profit, with forecast cash on hand after dividend payment & capital expenditures of $9.5 million at 30 June 2003. 

 

EBITDA cover for the $2.2m of interest is 10.3 times.

 

Senior Management Options are exercisable at prices from $1.32 to $1.75; which are comfortably ahead of the issue price. The Board & Senior Management personnel look credible

 

There are many risks which are acknowledged in the Prospectus. The ones I am most concerned about are a changed economic situation & further exchange rate volatility. These seem very likely by next year.

 

There is a cyclical downturn in progress in pastoral products prices which will affect farm demand. However, Skellmax has strong brands which arguably should survive well. 

 

The Prospectus was prepared on an assumption of an average US dollar rate of 45c during the 2002-3 year. That rate is already 48c. Therefor it would seem prudent to refer to the sensitivity analysis on page 40 of the Prospectus. However, the risks don't appear to be that substantial.

 

Against that:

Net Tangible Assets per share are very low at 24% of the issue price, & there is an appearance of very high gearing in comparison to total assets. Some investors may be uncomfortable with a large "intangible" asset; but the National Bank obviously wasn't, to lend $30 million at 7.3% pa ( they must have identified a "rock solid" part of the "intangibles" to lend that much. However, not all the intangibles may be "rock solid". There is some risk.

   

The need for capital spending & thus low dividends may put off some shareholders who need regular dividends.

 

The float size of $115 million is enough to make it of continued interest to passive funds; but they will be making their own assessments of prospects further out than 1 year; which we don't see in the Prospectus.

 

Forecast sales are up only 3% for the year, & it would have to be acknowledged the company is at the end of a strong growth period.However, the share price seems to reflect a slow rather than rapid growth scenario. 

 

Skellmax may turn out to be one of those "boring, dependable but unspectacular growth" stories to which Warren Buffet subscribes. I will be taking my small allocation ( which is much less than I was offered in the  Briscoes float )