Scott has a cutting edge

00:22, Nov 05 2012

The takeover for Fisher & Paykel Appliances is reaching its nailbiting climax. Will the Chinese succeed with their daringly methodical buyout bid? Will its opponents coagulate into an atherosclerotic blockage?

We’ll know soon. Haier’s takeover offer closes on Tuesday afternoon and some F&P shareholders look likely to leave their decision to the last minute.

But while one of New Zealand’s biggest engineering companies readies itself for potential oblivion, one of the listed market’s smallest is starting to come out of its shell.

Scott Technology, based in Dunedin, once made washing machines in competition with Fisher & Paykel, until it thought better of it and got into the machinery of machinery.

That was decades ago. Since then the company has operated successfully, albeit in a low-key way, until its shares started to pick up speed in the last year or so.

To give an idea of its growth, last June it offered shares for $1.20 in a rights issue aimed at raising money to help finance acquisitions. Last week you’d have had to pay about $2.10 for a share - a price valuing Scott’s equity at about $85 million.

Moreover, much of the run-up has occurred in the last six weeks - a period in which the company announced a planned Australian acquisition, a big Australian contract and a full-year profit up 17 per cent.

Those were significant announcements.

But first some background. Scott, for those who have come across it before, is probably best known for its clever meat machinery - the company’s automated meat processing plants can bone and cut lamb and beef carcasses  more efficiently than traditional human processing lines.

Anyone who has ever tried to carve a roast or fillet a fish will grasp the engineering achievement of Scott’s process.

However, the meat processing represents a relatively small proportion of Scott’s revenue. As well as meat, Scott offers technology for mining, appliance manufacturing, industrial automation and analytical tools using high temperature superconductors.

Of these, the biggest revenue segment is mining, contributing $34m of the $63.8m total in the year to August. Much of Scott’s work in the sector involves its subsidiary Rocklabs, which makes machinery to smash rocks and prepare mineral samples for analysis.

The next biggest segment was appliances, which makes production lines for factories making ovens, fridges, dishwashers and washing machines. It generated $16.5m revenue, all exports.

Meat processing generated $5.6m.

Most of the sales were exports to customers all over the world, although the main markets were North America, including Mexico, and Australia.

All in all, Scott made a net profit of $6.1m, or 16.7c a share, and paid a dividend for the year of 8c a share.

Those are not large numbers, but investors should not confuse smallness with a lack of sophistication. Scott has diversified its core engineering skills into several markets and given itself a much more robust business in the process. By spending on research and acquiring complementary businesses it aims to keep improving.

Its latest acquisition target, announced in September, is a West Australian conveyor belt maker called Integrated Conveyor Systems, whose claim to fame is a cunning design that encloses dusty materials, like coal, say, and can transport bulk cargoes round corners, up hills or through tunnels. It would appear a good fit with Scott’s skills and customer base in the mining sector.

Also in September, Scott revealed its joint venture with Silver Fern Farms had agreed a deal to supply lamb boning automation to two Australian meat processors, generating sales revenue to Scott of $11m. That’s a big deal for a company Scott’s size.

Fund manager Tower Investments owns about 8 per cent of Scott, having started buying in last year, and sees great potential in its meat technology.

‘‘We believe Scott Technology is potentially the New Zealand market’s best kept growth secret,’’ said Tower’s head of equities Richard Stubbs.

After spending a long time - and testing investor patience - developing new applications for its core skills, the work was just starting to bear fruit.
‘‘We feel some of those products are on the cusp of a j-curve,’’ said Stubbs. ‘‘And some of the markets are huge.’’

Looking at its meat processing technology for example, ‘‘you start imagining current meat processing plants a bit like car plants in the 1920s, and what you’re seeing is the future.’’

Of course, Stubbs has invested a decent chunk of money in Scott Technology so you’d expect him to be keen. Other investors will need to figure out for themselves whether they agree. However, a smart company like that deserves a place on the radar.

* After much  thought, I have decided to apply for a small amount of stock in the Fonterra Shareholders Fund. There are three basic reasons. One, I don’t think I will lose money. Two, I think it should be a reasonable, if not spectacular investment. Three, it’s a rare opportunity to share in one of our most significant business and I want to take part. I hope I’m not disappointed.