Can't get by without me gumboots

By Jenny Ruth

Friday 14th October 2005

In the business of making rubber goods and vacuum pumps, -Skellmax was listed in June 2002 after a $115 million float.

The company emerged as the 'good parts' from the ruins of Maine, the ill-fated manage-ment buyout vehicle backed by US investor Goldman Sachs that took over former listed company Skellerup Group in 1996. It collapsed two years later under a mountain of debt. The Skellerup part of the company dates back to the rubber goods business founded in 1910 by George -Skellerup, and the Flomax side of the business was also founded in 1910 as City Engineering, which became Mason & Porter and then Masport.

The numbers: Skellmax's bottom line results suggest a company that's been stagnating. However, there's been a major distortion of the bottom line numbers thanks to a $1.1 million pre-tax indemnity its previous owner provided in the two years after the float, which wasn't in the latest result. Excluding the indemnity, net profit in the year ended June 2005 would have been up 15.8%, compared with the reported 8.4% increase. The net $12.55 million result slightly exceeded the com-pany's $12.5 million forecast. The 2004 result was also distorted by the company's hedging position going from US$0.42 to US$0.48, which added about $3 million in costs. Acquisitions meant depreciation in 2004 jumped 54.4% and the company also incurred about $200,000 in restructuring costs.

Managing director Donald Stewart says currency won't be an issue for at least 18 months because its exports are hedged at US$0.50 for another 18 months and imports at about US$0.68 for a couple of years. The company will become a net importer by the end of September this year because of its -decision to start moving manufacturing activities to China.

Management: Stewart started with Skellerup in 1979 and became chief executive of Skellerup Industries in 1992, before being given the top job at then Viking Pacific Holdings in mid-1999. This was the -vehicle which rescued Maine's viable businesses, later floated as Skellmax. Chief -financial officer Jim Greenwood has been with the company since 1989.

Current strategy: The company's strategy involves both organic growth and growth by acquisition. Purchases since it listed include Stevens Filterite, which produces milk filters for the Australasian dairy industry in September 2003, and Melbourne-based rubber manufacturer Deks Industries in December 2003. It bought the business assets of Bisleys Environmental Systems, which supplies environmental lining systems -associated with landfills, reservoirs and other liquid containment projects in June 2004, and in April 2005 it bought Street Image Alucobond, which imports aluminium composite cladding material. In August this year, it announced four acquisitions costing about $20 million in total, which are expected to add between $3.5 million and $4 million a year to EBITDA. These include two rubber businesses in New Zealand which offer roller -recovering -services, a Melbourne-based plumbing supplier and a British dairy hygiene equipment manufacturer. With interest costs in the latest year of $2.2 million and EBITDA at $24.5 million, Stewart says the -company can easily fund further acquisitions without recourse to -shareholders.

Recent track record: The company has a target of increasing net profit by 15% each year. Stewart says you could argue that was achieved in the latest year on a normalised basis, and that's without taking into account the costs of redundancies associated with moving manufacturing to China. "We would set ourselves targets to be doing that (15% increases) over the next three years, but we're not going to put our hands on our hearts that we will do that." Part of the problem is that some of the growth will need to come from future acquisitions, which don't tend to present themselves to order, he says.

Analyst's recommendations: Forsyth Barr's John Cairns recommends investors buy Skellmax shares, which he values at $1.67 on a discounted cash flow basis. "We believe the investment case for Skellmax is strong as it is trading at deep discounts to market median earnings multiples and our valuation. Skellmax has a core sustainable business involving dairy consumables which is growing and generates high operating margins."

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