Scales (NZX:SCL) 2024 Forecast To Double Profit

... So why hasn't the share price doubled?

UPDATE: Having revisited the market announcement, I see that I had misread the NPAT data. There are several sets of NPAT, ranging from NPAT attributable to shareholders, Underlying NPAT to Underlying NPAT attributable to shareholders, and more. Due to this, I see that the forecast is in fact not double. Rather it's just an increase in Underlying NPAT attributable to shareholders from $27.6m to $30m-$35m. Still not bad at 18%, but nothing world changing.

In light of this, I expect the share price hasn't been rerated to not factor growth, rather it's just reflecting the value better, as per my analysis of the share price below.

As my calculations below are using correct numbers, I don't think that much changes of my analysis, though I now have a better expectation of the trading range of SCL shares. Since it doesn't seem that the market isn’t changing its valuation method, I expect that shares will trade between $3 and $3.50 over the coming year. I base this guesstimate on the original value plus 18% (mirroring the increase in forecasted NPAT).

Im not leaping out of my chair to buy these shares, but I may still take a small parcel.

Here you can find my original article, unchanged as it was published earlier today with incorrect information.

I was super excited to see that Scales had forecast an increase in NPAT range from $14m-$19m to $30m-$35 for 2024¹ and that I hadn’t missed the boat - it was after trading hours on Friday and the share price only moved from about $3 to $3.15. After jumping around the room at the prospect of being able to double my life savings this coming Monday, I had a celebratory beer and calmed down. I figured that I’d have plenty of time over the weekend and it would be prudent to do some investigation and a valuation before jumping into anything. After all, every time I buy shares without doing the work, it’s been a fail.

Based on the information at the time, I had previously valued SCL at $3 a share, and the market agreed with this after a bit of time to settle. However, that was based on the fact that while the Horticulture division wasn’t going anywhere, the Proteins division was growing and would in future be a significant enough part of the business to warrant a valuation that assumed some growth.

Despite the recent forecast predicting a return to normal business for the Horticulture division, I no longer feel that SCL can be valued as a growing business. That’s not to say that I don’t think it’ll grow in future, rather the growth story isn’t reliable enough to factor into a valuation. This is because the latest (1H23) announcement from the nascent Proteins division (where the growth was coming from in my previous modelling) was flat and the wording around it suggested that this performance was above expectations:

Global Proteins produced an extremely good result, with Underlying EBITDA of $30.1 million (1H22: $29.9 million)²

Valuation

So what’s a company worth if it’s not growing? Well, the market has attributed a price of $449.3m³ for the business, which gives it a forward PE of 13.6 based on the median value of $33m NPAT from the 2024 forecast. If we look at the NPAT as an ROI to shareholders, that represents 7.35% of the share price. I guess that’s OK since it’s above the rate of inflation and pays a dividend.

… and how about that dividend? since SCL’s policy is to pay out 50%-75% of NPAT as dividends (let’s say 60% for our sums), we’re looking at a 4.4% dividend after tax. I realize that 4.4%% is less than the risk free rate (which for me is the mortgage rate), but don’t forget that the value in the company grows above the risk free rate, meaning that the money that’s not paid out in the dividend is either going to be paid to shareholders later or invested in growth (I believe I read that their ROCE is above 12% from an annual report - citation needed). Therefore, the return is actually better than the risk free rate.

So what’s SCL worth? Well, it’s probably worth about what the market has deemed it worth (around $3.15), but with their troubles behind them and potential for the share price to rise to it’s former (growth based) glory (I think that even just a single good future announcement should restore confidence in the growth story, given the history), along with a nice place as a reliable payer in a dividend portfolio, it’s probably not a bad buy… I’ll probably buy a small parcel on Monday as part of a larger dollar-cost-averaging buy-in, but I won’t have the same fervor that I had about it on Friday evening.

1. Source: https://www.nzx.com/announcements/423143

2. Source: https://www.nzx.com/announcements/416859

3. Source: https://www.nzx.com/instruments/SCL