SOMe questions on Somero

Thursday, Aug 23 2018 by
7

Hello

Looking at this stock ahead of H1 results. Obviously the stock metrics look great. I think a lot of stockopeeps like this one. Found it tricky to get answer i was looking for from their website as seemed to be having some problems (e.g. couldn't pull down reports etc). I have a few things I'm interested in discussing and getting views on....

1) Who manufactures for them?

2) Patents written down to zero at end 2017 (12 year period of write down). I assume these are design patents as they do not manufacture and they typically have a 15 year life. I'm no expert though! I guess they have written down to zero to coincide with end of patent. This means that their machines are now available to copy - right? I don't know how likely that is in this niche but their high margin provides incentive if somebody want to have a go. Any views?

3) There seems to be a significant second hand recycling market in the US for their sort of levelling and placement equipment. I guess that there is a long-life to these products when well maintained. This is my guess for why sales growth was moderate there in 2017 and perhaps will remain so going forward.

4) Whilst revenues remain US biased Somero are at risk of negative sales YoY in US in anything other than a fairly hot construction market given the presence of significant resale market (in a market already well penetrated with their product)

5) It seems that vendor financing has become a significantly more important component of sales. I don't think there is a regional breakdown of this but given flat sales in US and the $5m pick up in accounts receivables it looks like overseas sales are increasingly financed.

6) If incremental growth is non-US then dollar strength is a negative factor. Do/have they discounted abroad? Also, they will be at higher risk of walk away on their vendor financing

7) Can they really grow in China? China has a history of successfully copying equipment. Somero in the US was protected by patents and a niche that not too many wanted to compete in. This counts for nothing in China. And given 50% of global concrete use in China compared to about 3%…

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14 Posts on this Thread show/hide all

Carey Blunt 23rd Aug '18 1 of 14
1

My view is that they can't really get traction in China easily but that growth into China isn't currently priced into the stock. So any (unlikely) growth there is a bonus.

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rhomboid1 23rd Aug '18 2 of 14
10

Hi

Annual report here https://investors.somero.com/~/media/Files/S/Somero-IR/reports-and-presentations/somero-2017-annual-report.pdf

1 they assemble machines themselves from externally manufactured components.. engines by Subaru etc ;
https://www.somero.com/dev/wp-content/uploads/2016/09/Product-Catalog_Letter-Full.pdf

2 they reinvent their offerings all the time from the AR ‘Somero pioneered the Laser Screed® machine market in 1986 and has led the market ever since through continued innovation, growing our product offering from a single model to a portfolio of
13 products. Our proprietary designs are protected by 62 patents and patent applications.’

3 2017 was weather impacted in the US ..this year is ‘strongest market anyone can recall’

4 true ..but each new generation is more efficient so to bid successfully for larger jobs contractors need the latest kit, they also have a sizeable refurbished (high margin) machinery business which brings smaller newer contractors into the Somero family...they normally then progress to new kit as they grow.

5/6 premise is wrong..US is growing fast..many other markets are dollar pegged as well, most business is 3rd party funded , orders only processed on sight of finance approval, their sales team in many cases brokers the deal. In China they provide finance direct with ‘pay to pour’ machinery..ie if contractor fails to pay they remotely stop the machine..this seems to work well

7 China may or may not happen...my guess is they’ve for more chance of cracking it in the future as more multinationals specify floors of such fine tolerance that only Somero kit can delivery. Also many areas of China have the same skilled labour availability challenges as the US ..so it’s not out of the Q they finally unlock it

8 Mgt see no threat to margin..I’m happy to believe them..sorry for the brevity..I’m typing on my phone

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Jamboreebop 23rd Aug '18 3 of 14
7

On the threat of other companies muscling in on their business; Somero Enterprises Inc (LON:SOM) always point out their superior customer service...they can provide on-site training and expert help is available on the phone 24/7. If you're a contractor hitting a problem while acres of concrete are setting all around you, this must be very valuable support. So although others may produce cheaper machines, can they also provide the same level of customer service?

(Anecdotally, I have some experience of this while working for a UK manufacturer of building products. There where Chinese imports that were far cheaper than those that we manufactured, but the importers could not/would not provide any customer service at all...you bought the product and you were on your own.)

So I think Somero's superior level of customer service help to provide something of a moat against competition.

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mojomogoz 23rd Aug '18 4 of 14

In reply to post #392999

This seems sensible.

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mojomogoz 23rd Aug '18 5 of 14

In reply to post #393014

Thanks. Very helpful

Looking for the darkside ;)

You have followed the company for a while. How did you feel about their last trading statement? If I wanted to be negative I feel I could have read it and felt perhaps some dissonance with statements that most things going so well but performance in line with expectations. Given that US had been flat in 2017 (am I reading this wrong?) if its going very well in 2018 shouldn't they be knocking the ball out of the park?

I looked when sub 200p and skipped as didn't like AIM listed yet 100% US origin...and I view mgt fraud to be quite incidence in the US (more so that here). I am obviously wrong!

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mojomogoz 23rd Aug '18 6 of 14

In reply to post #393034

jamboreebop, these are good points and I had clocked them. If I have time and can get access I hope to have a look at some of their education stuff. Sounds the right thing to do and curious to see how they execute on it...can't remember what they call it but a 'University of Concrete' is novel

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ISAallowance 23rd Aug '18 7 of 14
2

Paul Scott interviewed the management on his own website back in 2016: http://qualitysmallcaps.co.uk/ceo-or-fd-interviews/somero-enterprises-inc-som-ceocfo-interview-20-jan-2016/ Well worth listening to if you're interested in the company.

I don't hold, and they've gone up 200% in the period that I periodically look at them and still don't hold, largely due to concern at buying them just as the construction cycle peaks.


Edit: They've gone up 200% and paid out stonking dividends whilst I don't hold :-(

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rhomboid1 23rd Aug '18 8 of 14
2

In reply to post #393099

I think they are by instinct a cautious team..I’m assuming you’ve seen;

https://www.piworld.co.uk/2018/04/03/somero-som-results-presentation-march-2018/

..my take is that they prefer to knock it out of the park publically only after the period in Q is done & dusted..they’ve upgraded expectations mid year before now & then seen a v good full year result met with a metaphorical shrug ..so I’m happy to let them decide.

Of the mgt teams I follow I think these are one of the most ‘grounded’ ..for want of a better phrase.

This year they’ve also flagged higher capex & new hires relating to the high rise product launch..plus another factory expansion potentially..so some of that will reflect in the P&L ..but I’m still expecting a v good end result

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mccarthydavid 23rd Aug '18 9 of 14
1

Good questions. On point 4 there was a discussion (link below) in their results presentation about the development of kit for the high rise market. The management team pointed out that with real estate at a premium many developers were looking to build upwards and they felt that this was a significant opportunity for them. They hope to get the first products to market later this year.

This kind of development is reassuring for further revenue expansion and protecting their reputation as market leaders. Although they did concede the revenue benefit was expected to be small in the first year of the product trading. The target was c. $1M based on previous product launches.

https://www.piworld.co.uk/2018/04/03/somero-som-results-presentation-march-2018/

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Edward John Canham 23rd Aug '18 10 of 14
2

On point 4, I think its very healthy that there is a good second hand market in Somero's product and their product is long-lived.

This gives a PX market for those buying new and gives Somero Enterprises Inc (LON:SOM) a growing market for parts. I haven't re looked but going from memory the revenue from parts was increasing nicely - these will be high margin sales.

(They say Rolls Royce sell their engines for nil profit - they make their money on the parts and maintenance.)

Phil

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Edward John Canham 23rd Aug '18 11 of 14
2

Meant to add - China is not an issue for me and any progress there is not in the SP.

Key markets are US (obviously) and Europe ( sales growing nicely). I personally worry about IP in the China arena and would prefer they concentrated efforts on Europe where they seem to be gaining real traction.

Phil

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Julianh 23rd Aug '18 12 of 14
3

In reply to post #393119

This is a really interesting discussion. Your points coincide with my experience of the management team (at a Sharesoc seminar a year or so ago). The only thing I would add is that they were badly scarred by the 2008 recession. They went into the credit crunch loaded up with debt (after being IPO’d by a private equity team) and nearly didn’t survive. As a result, management are very conservative. They tend, as you say, to underpromise and to avoid excessive debt. Revenue might take a hit in the next downturn but the company will survive.

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abtan 23rd Aug '18 13 of 14
1

Is anyone concerned by tariff increases and the impact on construction prices?

I did a little research a few months ago and my take was that construction in the US was going to get hit over the next couple of years.

No position, but have high regard for management and the company

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Graham Ford 24th Aug '18 14 of 14
1

Consider also the trend towards internet sales and large distribution warehouses to serve those sales. If you want to have high racking in those warehouses it certainly helps to have a level floor. So for me this is at least in part a play on the theme of warehouses to serve internet commerce. I hold.

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