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Schaffer Corporation had its origins when Croatian migrant George Schaffer arrived in Australia in August 1949, speaking no English. Soon Schaffer was making concrete blocks at Jandakot in Western Australia.

Despite having been listed for half a century, Western Australia-based diversified industrial company Schaffer Corporation (SFC) does not get much press. But Schaffer comprises an interesting group of businesses, one a global leader in its field.

The company has three business segments - building materials, automotive leather and property investment.

The building materials segment comprises Delta Corporation Limited, which makes precast and pre-stressed concrete wall, floor and beam products; Urbanstone, which makes paving products for both the commercial and residential markets; Archistone, which makes and imports a range of stone products for housing; Limestone Resources, which produces a range of natural and reconstituted limestone building products; Lumeah, which makes handcrafted decorative concrete paving products; and Urbanstone Central, the retailing arm of Schaffer Building Products.

The automotive leather division - the global business - consists of the 83%-owned Howe Automotive Limited, which supplies leather to carmakers in Australia, Asia and Europe. The division supplies customers including Ford, Toyota, General Motors, Volkswagen, Audi, Land Rover and Nissan, from its tannery and finishing factory in Victoria and cutting plants in China and Slovakia, and sales offices in Australia, China, Europe and Japan.

The property division consists of a portfolio of commercial property syndicates, property development projects, and wholly owned/operated properties. The division includes a specialist property investment business called Gosh Capital.

For the most recent full-year, to June 2013, automotive leather generated 53% of revenue, building materials 42% and property 5%.

Schaffer Corporation had its origins when Croatian migrant George Schaffer arrived in Australia in August 1949, speaking no English. Soon Schaffer was making concrete blocks at Jandakot in Western Australia. The original company, brick and paving maker Calsil Limited, was listed on the Perth Stock Exchange in November 1963. The business was sold to Boral in 1988 for $43 million, leaving Calsil with Delta Corporation, which it had bought in 1980, and a leather business it had bought in 1984. George Schaffer died later that year, after which the company was renamed Schaffer Corporation to perpetuate the name.

George Schaffer’s son John Schaffer is chairman and managing director of SFC; John’s sister Danielle Blain is non-executive director. Howe Automotive Limited executive chairman Anton Meyer is executive director of SFC.

Through the 1990s the company expanded its leather business, buying WA furniture leather company Gosh Leather, and mounting a reverse takeover of Howe Automotive Leather in 1994. By 2006 the uncompetitive nature of the Australian furniture industry led Schaffer to close Gosh Leather.

Over the same period similar expansion was happening at Delta, which was re-oriented toward pre-cast and pre-stressed concrete products. Urbanstone was established in 1993, Limestone Resources was bought in 2006 and in 2007 Archistone was bought and Urbanstone Central established.

Of the two major businesses, building materials is the most domestically focused, and is particularly leveraged to infrastructure demand – in particular, Delta’s pre-stressed concrete elements, which are used in roads, bridges and mines – and a recovery in housing. Howe Automotive is more exposed to the global economy, with more than 90% of its sales made in Europe, Asia and North America. The car leather business is a net exporter in Euro and net importer in US$: this means a falling Australian dollar against the euro increases Schaffer’s earnings, but a falling A$ against the US$ reduces earnings.

For the year to June 30 2013, Schaffer reported a 9% decline in revenue, to $138.4 million, but a 1% improvement in net profit, to $7.6 million. Earnings per share (EPS) was 54 cents, up 1 cent. Return on equity was 16.4%, while return on assets was 7.7%.

The dividend was lifted by two cents, to 23 cents, although the payout ratio was a very conservative 43%. However, the FY13 net profit was boosted by $2.3 million after tax in insurance proceeds: this was the result of a claim made on Schaffer’s North Coogee (WA) property, which was destroyed by fire in 2012, while occupied by a tenant, a recycling facility. Without the insurance proceeds, the FY13 underlying profit fell by 20% to $5.1 million.

Automotive Leathers revenue fell 19%, to $72.9 million, and profit decreased 32%, from an expected decrease from lower demand as programs were completed, and the strong Australian currency.

Building materials revenue rose 4%, to $58.5 million, and profit increased by 10%, helped by increased activity in the Western Australian resources and civil infrastructure sectors. The property division lifted revenue by 8%, to $7.1 million.

Net debt was reduced by $5.3 million, or 10%, to $48.1 million. Schaffer’s debt has halved since 2009.

Then, for the half-year ended December 31 2013, Schaffer boosted revenue by 19%, to $86.2 million, but saw net profit – after a $3.7 million write-off of the building materials division’s goodwill – fall by 7%, to $4.9 million.

However, underlying net profit more than doubled, from $3.3 million to $7.9 million. Return on equity increased to almost 23% for the period, while return on assets was also boosted, to 10.6%.

Automotive leather lifted revenue by 51%, to $53 million, and profit rose five-fold, to $11.1 million. The previous corresponding period was a low base due to an expected changeover to new vehicle models, political disputes between Japan and China, and the then strength of the $A, all of which negatively affected Howe’s export revenue. Comparatively, in the first half of FY14 the above factors reversed: volumes in China were up 38%, while Slovakian volumes climbed 31%.

Building Materials’ revenue suffered from the comparison to the buoyant conditions of the FY13 first half, decreasing by 12%, to $29.7 million, while earnings almost halved, from $4.7 million to $2.5 million. Property lifted both revenue and earnings by 5%, to $3.3 million and $1.4 million respectively.

On the full-year outlook, Schaffer said building materials’ full year FY14 revenue and earnings before interest and tax (EBIT) would be lower than FY13. For automotive leather, the company said second-half volumes were expected to be similar to the first half, as supplies to new model programs continued. If current foreign exchange rates prevailed, said Schaffer, Howe’s price per square metre would on average be higher than in the first half, but margins were expected to be lower in the second half because sales would comprise hides bought in $US at a higher $ cost. While Howe’s second-half revenue and EBIT were estimated to be “significantly higher than the prior corresponding period,” these would not be as large percentage increases as recorded in the first half.

Overall, Schaffer said it anticipated a “significantly improved second half over the previous period," mainly driven by increased volumes in automotive leather. The company expects the current half to see continued subdued conditions for building materials.

Capitalised at $81.3 million, Schaffer has delivered total return (capital gain plus dividends) of 36.2% over the last 12 months, 25.3% a year over the past three years and 14.2% a year over the past five years. The strong three-year performance reflects the fact that the stock has largely recovered from a slump that took it from a peak of $6.40 in October 2009 to $3.40 in August 2011: since then SFC has been in strong uptrend.

But it is still not expensive: in the absence of analyst forecasts - the stock is not covered by brokers, because of the low volume - and using the FY13 historical numbers, SFC, at $5.80, is trading on an historical FY13 yield of 3.97%, fully franked, and a price/earnings (P/E) ratio of 10.7 times trailing earnings. Those are undemanding numbers for a diversified industrial: Schaffer is worth a look. Schaffer family interests own 30% of the stock, so there is a substantial free float: however, volume is very low, and it would take some time to build a meaningful stake.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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