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Skellerup shares surge, best performer on the NZX 50 Index, as profits seen rising

Thursday 22nd August 2013

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Shares in Skellerup Holdings surged 7.4 percent, making the stock the best performer on the NZX 50 Index today, after the company beat its 2013 profit guidance and signalled higher earnings in the coming year.

Shares in the industrial rubber goods manufacturer surged 10 cents to $1.45, their highest level since May 1. Skellerup made a profit of $19 million in the year ended June 30, ahead of its May 2 forecast of $17 million, but 23 percent below the year earlier $24.7 million, the Auckland-based company said. Revenue fell 8.6 percent to $189.5 million on lower sales in its industrial division.

Skellerup's earnings bounced back in the last two months of the 2013 financial year following two earnings downgrades. Profit is expected to rise in the coming year as the company benefits from new products, improvements in delivery times and as demand improves on the back of an economic revival in key markets such as the US.

In 2014 "we are going to do better than last year," chief executive David Mair said in an interview. "I am very positive about Skellerup's growth going forward."

More detailed earnings guidance will be provided at the company's annual meeting in October, he said.

Skellerup cut its 2013 earnings forecast following a board meeting in late April after New Zealand's worst drought in 70 years delayed demand for rubber dairy products and footwear, and as falling iron ore prices halted sales in January through April of its Flexiflo shute lining system for miners.

Sales of its New Zealand rubber products bounced back earlier than expected in June and July and urgent orders for Flexiflo maintenance products came through from miners in May and June.

"The outlook for the year and beyond is positive," chairman Selwyn Cushing said in a statement. "Our agri business continues to provide us with steady underlying earnings even during difficult times as just experienced. The industrial business had a tough year however we expect to see a stronger performance in the current financial year."

In the company's industrial division, 2013 earnings before interest and tax dropped 40 percent to $13.5 million as revenue slipped 12 percent to $116.9 million after lower oil and gas exploration activity reduced earnings from vacuum pump sales in the US and a softer Australian economy reduced earnings from its Gulf Rubber business.

The industrial unit's performance reflected a slowdown in demand rather than a loss of business, which means that the company remains well positioned for any pickup in activity as economic conditions in its core markets improve, Mair said. The company has refined its products, developed new products and relocated operations closer to customers to speed up delivery, he said.

In the company's agri division, which manufactures and distributes products for the global dairy industry, earnings before interest and tax increased 4.2 percent to $19.8 million as revenue fell 2.3 to $72.4 million.

The US, where a drought and higher feed prices has crimped farmer spending and increased price competition, offers the company its biggest growth potential, Mair said.

"We are still a relatively small market share in the US, in Australia and New Zealand we are quite a large proportion of the market," Mair said. "They have increasing food standards. As the standards tighten, we are in an ideal position to launch new products or even launch existing products into that market."

"The agri side of the business is strong and will continue to grow," Mair said.

Skellerup aims to continue reducing debt, after net debt fell 49 percent to an historic low of $2.2 million in 2013, Mair said. The company had the capacity to fund an acquisition of about $30 million without seeking approval from shareholders, although no current plans were in the pipeline, he said.

"We are starting to see product opportunities and company opportunities for growth," Mair said. "For the last two years I have been very focused on organic growth. There are opportunities there that we can take advantage of whether it is attacking with a product of our own or even buying a product or buying a company. We could easily fund acquisitions internally or maybe even take on a bit of debt if needed," he said.

Skellerup will pay a second half dividend of 5 cents a share, taking its total payment for 2013 to 8 cents, unchanged from the year earlier. The payment, at 81 percent of earnings, is ahead of the company's payout ratio policy of 40 to 60 percent.

"We have certainly in the past been seen as a yield company but I would like to see us going down the path of growth as well," Mair said.

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