Skellerup bullish on profit prospects with expected upturn in US market

Skellerup Holdings [NZX: SKL], the rubber goods company, expects annual profit to grow as much as 19 percent as its investment in the US market over the past three years begins to pay off.

The Auckland-based firm told shareholders at the annual general meeting today that it expects net profit of between $24 million and $26 million in the year ending June 30, 2016, up from $21.9 million in the 2015 financial year.

Best-known for its Red Band rubber gumboots, Skellerup has two business units: an agri division that provides rubber products including dairy milking liners, tubing, and filters and animal health products; and an industrial division supplying polymer products for a range of industries in more than 30 countries.

Chief executive David Mair said the industrial division should account for the main profit uplift in the 2016 financial year, particularly in the US which delivered a 20 percent rise in sales last financial year.

There has been a shake-out in top management of the industrial division, with a younger set of divisional heads put in place whom Mair hopes will help lift earnings before interest and tax in that market.

North America currently accounts for 25 percent of revenue, the same as Australia, and just 1 percent above New Zealand.

"The US will be the largest market share of revenue this year without a doubt. I'm optimistic about this year," he said.

Skellerup has focused on growing international markets and innovation to offset a decline in dairy and iron ore prices although it lifted net profit 6 percent in 2015 despite those impacts.

Dairy products now account for just 10 percent of revenue. Mair said while the lower forecast payouts for New Zealand dairy farmers led to a drop in local sales, this was counterbalanced by improved sales in international markets. US dairy production continues to increase, as does demand for dairy products in developing countries.

He cited two examples of dairy product innovation Skellerup has made to help boost returns - new liners made from silicon which last longer than the traditional black rubber and improved milking filters.

In the US, Mair sees big opportunities for Skellerup in the shift from coal to clean energy and the increasing demand for potable water. Its new Ultrathon foam division had no presence in the US market two years ago and potential applications now range from exercise mats to oyster farm floats.

Skellerup told shareholders it was on track and on budget with a new 19,000 square metre Christchurch factory to make its agri-business products. It has spent $15 million so far on what is its biggest ever capital project and has earmarked a further $25 million to complete the construction and fit-out with the full relocation expected to be completed by the middle of next year.

Chairman Selwyn Cushing said the board had made no decision on whether to sell part or all of the new site.

The company leases its current Woolston site, adjacent to one it owns that was affected by liquefaction after the Christchurch earthquakes and hopes to co-market the two properties once it moves.

Cushing told shareholders that the company's share price had risen to $1.57 today which was a "fine way to start" the 14th annual meeting.

He also assured them that recent share purchases by directors and management were in line with stock exchange rules and were not a result of them "knowing anything in advance" of other shareholders.

Earlier this month NBR referred to share purchases by directors and officers and, in particular, noted Mair and Cushing had been especially bullish on the company, investing $2.5 million and $1.4 million respectively. Skellerup's shares had been on a downward trend until it delivered a better-than-expected result in late August.

Cushing said a lot of the company's stock had come on the market at one time due to a sell-down by institutional shareholders which could have had a negative impact on the share price but instead it has risen.

One of those institutions is AMP Capital Investors which held 16 percent of Skellerup according to the 2014 annual report, reduced to 8 percent in the 2015 report. In a September notice to the stock exchange AMP further reduced its shareholding to 4.93 percent.

(BusinessDesk)