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Skellerup best performing stock after annual result blows analysts out of the water

Thursday 16th August 2018

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Skellerup is the best performing stock on New Zealand's benchmark index today after the maker of 'red band' gumboots blew analysts out of the water with its annual result.

The company said its 2018 profit increased 23 percent to $27.3 million, ahead of its forecast range of $24.5 million to $26 million, and more in line with analyst forecasts for the 2019 year. Its shares hit a record $2.12, and were recently up 4.5 percent at $2.10, elevating them to the best one-day performer on the S&P/NZX 50 index.

"They had given some pretty strong guidance and said they were on track for a good result this year and then they've come out and blown that out of the water," said Mo Singh, a research analyst at Craigs Investment Partners. "They are a long way ahead of what market expectations were. The market wasn't expecting them to get to that sort of level of earnings until FY19. They have effectively jumped an entire year of forecasts."

Skellerup makes industrial rubber components, such as seals for taps and tubes for milking sheds, and its earnings can be pushed around by the ups and downs of those industries it serves. In the past year commodity markets that underpin those industries - including dairy, oil and gas, and general resources like iron ore - have improved, stoking demand for Skellerup's products and flowing through to its earnings. A weaker local currency, which benefits exporters like Skellerup, is likely to continue to bolster its fortunes in the future.

When all those things are "singing and dancing", Skellerup "can certainly deliver some pretty big numbers", Singh said. 

Improved milk payments to farmers in recent years have also given farmers more cash in their pockets to spend on Skellerup's agri products.

"They are riding the wave of farmers being a bit more cashed up and spending a bit more money. They have been spending up a bit and that's translated through to some decent earnings for these guys."

Elsewhere, oil and gas prices have recovered from lows of 2015-2016. The mining sector in Australia had also started to pick up, with iron ore prices at record levels.

"Skellerup is riding the wave of that upside," Singh said, noting many of Skellerup's products in that market were high margin, benefiting earnings.

While Skellerup generates more than three-quarters of its revenue from international markets and manufactures more than three-quarters of its products outside the country, it would still be getting a decent benefit from a lower New Zealand dollar, Singh said.

"People would expect that to flow in the coming year as well, given where the New Zealand dollar has been tracking over the last week or two."

Singh is expecting analysts to follow today's earnings with big upgrades for coming years.

"They have obviously surpassed any market expectations by a very long way so there's going to have to be a step change in terms of the forecasts that a lot of the analysts have for Skellerup. On the back of that you should see the share price perform pretty strongly over the next couple of years.

"There's no reason, given where commodity prices still are, that next year won't be another strong year."

He noted the company had also strengthened its balance sheet over the past year, reducing debt, pulling back capital expenditure and improving its cash flow after it finished transferring to a new manufacturing facility in Wigram. It had operated from two facilities after the Christchurch earthquake in 2011.

The strong balance sheet allowed the company to take a stake in a Wisconsin-based liquid silicone rubber maker last month, as well as raise its latest dividend more than expected.

"They have got plenty of powder dry," Singh said. "They are in a strong position at the moment and the shareholders are being rewarded with higher dividends and better earnings which is flowing through into the share price."


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