Reviewing Scales (NZX:SCL) Annual Result
A quick review doesn't look good to me
I read the annual results from Scales this morning. It seems like the folks on the ShareTrader forum were happy1, but I wasn’t excited by it. That’s not to say that the team haven’t done a great job; I think Scales have done a great job given the phenomenal challenge that the cyclone presented within the last year. The problem I have is with the performance of aspects of the business not affected by the cyclone; the outlook from management; the yield with respect to inflation for a business that isn’t growing; and the share price when factoring in a return to normal for the Horticulture division.
Here follows a bit of a dump from the report2 as I read through it. Let’s call it a summary with comments and thoughts because that sounds better than a dump (although, really it’s a bit more of a dump):
Underlying NPAT attributable to shareholders is $19m (down from $27.6m last year). After removing the $12m cash they have in the bank from the current market cap of $469m3, that gives a PE of 24; which means 4.16% of the cost of the share price is profit, or return on the price you pay (to look at it another way). That’s below inflation, so at the current price one would assume that investors consider this to be a growing company, otherwise they would probably put their money elsewhere (against the mortgage in my case, which I consider to be the Risk Free Rate; a yield below which an investment isn’t worthwhile).
The report suggests that the Horticulture division next year will be comparable to the previous year. That doesn’t justify the growth factored into the share price, because EDIT from Horticulture last year was -$7,707 vs -$13,265m this year. That means the company could earn (or rather “not lose”) an additional $5.5m which makes a total of $24.5m Underlying NPAT attributable to shareholders (all else being the same). That would give a forward PE of 18.65 or 5.4% return on the price you pay. Still about the rate of inflation, which is 4.7%4. Not great, especially when you have to wait a year to get that rate.
Make no mistake, looking at the EBIT for each division, Scales is no longer a horticulture company; its profit is coming from its pet food and logistics department. On the logistics side of things, the Outlook on page 35 didn’t feel very inspiring:
The outlook for the global supply chain market suggests that disruptions to key trade routes will remain in place during 2024. In addition, suppliers and manufacturers are expected to continue rebalancing their inventory holdings throughout the first half of the year.
That said, neither did the Outlook on page 15, especially the comments about a couple of the businesses being in “start-up phase” and that they “anticipate that our petfood customers will continue to rebalance their inventory levels to pre-COVID levels” in the Global Proteins division. On that, I notice that Global Proteins’ revenue went from $320m last year, down to $299m this year. This is despite the additional (and not insignificant) volumes of Edible Proteins added to this division late last year through acquisition.
I expect hopeful shareholders to keep this trading in it’s current range of between $3 and $3.50 for the next 1-2 years, however I feel that this is overpriced and only a viable investment for someone with no debt who is seeking a dividend as an income. In fact, that’s the only investment case I can see right now. On the positive side, while acquisitions are not frequent, Scales seem to be capable of making and managing earnings accreditive, sensible acquisitions, so they could surprise on the upside in the years to come. They also seem committed to maintaining the dividend at it’s current level, supporting the above investment case.
It’s not a “buy” for me, but the report (though bad) isn’t enough to motivate me to sell my meager 5 figure holding in Scales… Though I feel that I probably should.
All data was sourced from the current annual report, which can be found here: http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SCL/428634/415672.pdf, unless specified otherwise.
Sourced from the NZX website.