Somero AGM: feedback

19th May '15 by VegPatch

9 comments 13612 reads

I attended the £SOM AGM today and picked up a few useful titbits:

Current Trading
China (15% sales): slow start to the year with Jan / Feb virtually dead. There was some speculation in the trade over there that some contractors had been investing in the Chinese equity market (not as daft a suggestion as it seems to us in the West – seriously!) and hence had delayed equipment orders. However in May the phone calls have “Skyrocketed” from 15 a day to 45 a day, which is well above last May. This is a strong leading indicator according to the company and explains the confidence in yesterday’s AGM statement that things are picking up.

US (62% sales): strong trading, with their contractor customers having in some instances backlogs over 18 months. Looks set for another year of good growth.

Europe (5% sales) : continues to pick up. Growth in sales was 10% in 2013, 20% in 2014 but at $3.6m in 2014 is still massively below the pre GFC high of $20m. Much more still to go for here.

Other takeaways
Somero has v strong customer support: the company operates in 92 countries and operates a 24 hour helpline with a translation service on standby. One of the support staff has to go home with a beeper which rings if they get a support call in the middle of the night. I like this attention to detail and it will continue to differentiate Somero from its limited competition.

New Product Development: A sign of a company prepared to innovate is not resting on its laurels and developing new products. According to the CEO around 50% of sales are from machines developed in the last 3 years. Another good sign.

Conclusion: the China wobble appears temporary and management’s body language appeared relaxed. Little sign of any competition. Sales are on an upward trajectory and this is a very experienced management team. The Chairman is 80 but looks 60 and is totally on the ball as was the CEO, at a comparatively younger 68 yrs old.Overall i expect sales will probably grow around $15m (25%) if China continues to recover as expected, if not sales growth will probably be around $10-12m. Assuming GMs of around 54% (could be higher if sell more large units) I would expect further positive operating leverage. I left feeling comfortable with my long…

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deucetoace

19th May '15

Thanks very much for this. Useful notes especially about China.

garbetklb

Thanks also. Very helpful background info.

Paul Scott

Fantastic report, thank you v much! It has cleared up the confusion over China, so I will edit my SCVR of yesterday to include a link to your report here.

Thanks again, very useful.

Regards, Paul.

tar197

20th May '15

I googled "laser screed" and Somero came up #1, at #2 was a company called Ligchine Int'l which claims it is the "World's #1 manufacturer of Boom operated Laser Leveling Screeds". Ligchine had a press release earlier this year that claimed they are increasing capacity by 300%.

More interestingly i went to alibaba.com and searched "laser screed" and was surprised by the amount of screed knock offs in China.

It will be interesting to see if Somero can ward off the competition and keep their claimed (2014 annual report) 99% market share.

VegPatch

funnily enough I asked that very question at the AGM yesterday after doing some Google research ! (there were only 2 of us present so i had to fill the time somehow....)

re Ligchine: Somero management said Ligchine are a small outfit in Wisconsin. Mainly their lazer products are used in making flat floors for agricultural uses, rather than for more sophisticated warehouses. Their output capacity is hugely below that of Somero. Also their biggest machines cant do the same area as Somero. Somero's biggest machines can do 5000sq m day (apparently). I looked on both websites the machines looked similar to me and saw Ligchine was expanding capacity by 300% as you said. Somero is well invested but they are expanding too with a new facility "a 20,000 sq. ft. expansion to its already 52,000 sq. ft. assembly plant in Houghton, MI." and a new 17,000sq ft HQ. Feels to me that Somero are confident about the future, yet we must be mindful of any competition.

re China knock offs: yes they admitted these were around but said their competitors were seen as machine manufacturers whereas Somero provide a 'service' ie they not only sell the machine but show the operator how to use it. They then provide the 24hr service hotline I talked about yesterday for problems. Finally they have just introduced the new S-485, a ride on version which supercedes their "Copperhead" product.
have a look at it in action
Their lawyer was confident that this competition would remain in China, as the competitors have clearly infringed IP so if they tried to export to Europe / US then Somero could challenge it. In China its a different story.

They also mentioned other competition: Bomform (???) in Spain and some other manufacturer in the Netherlands but said both were v small and hadnt innovated. I have Googled both but can find no trace of either

Management seemed upfront on the issue and didnt shy away. Honesty is a good sign.

WarrantStar

I posted this on another thread on Stockopedia recently, but Paul Scott is a busy chap and hasn't been able to reply yet. Would anyone else like to comment?

Thanks for you report on Somero Enterprises Inc (LON:SOM). However, I cannot share your enthusiasm when the figures that they have put out on 07/04/2015, (and are still showing on their clunky website) in their annual report showing EPS progression as follows:

2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E

EPS (c) (basic) 1.77 9.75 25.76 16.45 17.63 20.13 22.72 24.9

EPS (p) Adj dil 3.76 8.07 12.1 11.38 12.18 13.62 15.10 16.81

If I have made a mistake here then please could someone put me right? But to me the above figures do not look at all like an attractive investment.

21st May '15

Dear Warranstar,

I am indeed a busy chap, and I will continue to be so into the future.

Which is just as well, as your figures are mostly forecasts going several years into the future, up to and including 2019.

Whilst ShareSoc might admire my capacity to foretell the future, I seem to have left my tarot cards at home, so cannot give you a particularly accurate reading right now.

Mystic Paulie says,

Ooooh!!! oooooh!!!! ;-)

Hi Warrenstar
Fair comment

I would reply with:
Sales grew 32% in 2014, EBITDA 60%, pre tax profits 90% and. EPS more than doubled from 10c to 26c That is historic, but what we care about is the future.

In the AGM the company talks about another good year of growth.
My estimate is between 15% and 25% growth in revenues for 2015 given what I heard at the AGM and reading between the lines.
Longer term the company also wants to grow sales by over 50% by 2018 from a 2014 base of $60m.

So given the historic figures above do you believe there will be future positive operational gearing?

If you do then 20% sales growth in 2015 will see EBIT growth of above that (not withstanding the investment in plant etc). You are right to point out the company benefited from a positive tax rebate in 2014 vs tax charge in 2013, which should reverse in 2015 but I feel the company will demonstrate enough positive momentum that we should look through that.

In terms of what we are being asked to pay in terms of valuation: On 10x PE that's appealing to me, however I do accept this is a situation where momentum in sales and thus EPS is your friend.

For Peer group type companies I suggest you look at Ashtead, United Rentals, UK housebuilders (due to high operational gearing rather than anything else) to see if this is massively out of line in terms of its valuation. You may be positively surprised...

Breconeer

27th May '15

Regarding competitors, and who is market leader.

The screed is the top layer of a concrete floor - usually 2-3 inches thick. Many screeding machines are specifically that - they deal with the finishing screed. Somero deal with the screed AND with the laying and levelling of the structural concrete slab beneath it.

Some of the machines ride across the surface that they are laying - others park alongside and reach over it with a rake on a telescopic boom. There are advantages and disadvantages with each approach. Boom rakes can only reach a limited distance, whereas ride-ons can roam vast areas. Boom-rake makers argue that the weight of a ride-on can bend the steel reinforcement within the wet concrete, and the steel has to be stronger to cope with this risk.

Market leadership claims are often specific to a particular approach. One company might be leader in boom-rake screeders, another in ride-on screeders, another in structural slab laying, another in slab-plus-screed (using boom rake), another in slab-plus-screed (ride-on). Some are referring to market leadership worldwide, others within their home territory.

Somero AGM: feedback

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VegPatch

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