Wednesday, December 09, 2009

GRP – Analysis of Purchase Part 1

This is not meant to be a long rambling post and in-depth analysis of GRP Limited, though of course any justifications and basis for my purchase should be rendered in at least enough detail to provide readers with sufficient information about the company and its merits/demerits to enable them to delve further on their own. I had set out to look for a company which provided good and steady yield, instead of a combination of yield plus growth, and GRP stood out with its fundamentals, boring but steady business and strong Balance Sheet and dividend policy. Note that since GRP can be classified as a dividend yield company, I will not go into too much details on the prospects and future plans section, as these are as yet unknown anyway and cannot be articulated with any clarity.

Background (taken from GRP’s website)

GRP stands for General Rubber and Plastics Limited. The Company was established in 1977 as a supplier and manufacturer of high-end quality hoses and fittings for the marine and oil and gas industries. In 1990, an office and production facility at Tanjong Penjuru Crescent, Singapore was acquired for the purpose of machining, fabricating and warehousing Hose & Fittings close to our customers.

In 1993, Region Suppliers, an international supplier of Precision Measuring Instruments, was acquired as a wholly owned subsidiary of the GRP Group. In the same year, GRP (China) was formed to take advantage of the opportunities being presented in China, particularly uPVC Pipe and Fittings Manufacturing for the local construction industry. The Company is also Master Distributor for brands like Dunlop, Goodyear and Elaflex.

In 1996, construction of an 11,000 square metre Industrial & Commercial Office Facility in Singapore was initiated. It was completed in 1997.

The Company thus has 4 main divisions as follows:-

1) Hose and Marine
2) Metrology and Measuring Instruments (Region Suppliers)
3) China’s uPVC Pipes and Fittings
4) Industrial and Commercial Property Leasing

I shall do a cursory review of GRP’s financials, without going into nitty-gritty specifics for each of the three statements (refer to summary table and trends table). Next, in Part 2, I will be providing some numbers on the performance of each business division by revenue, as well as a breakdown of the gross margins and net margins for each division, based on information gleaned from historical Annual Reports provided by the Company. I had to request for the older annual reports to be mailed to me (e.g. FY 2005 and FY 2006) as they were not available either on SGXNet (which keeps only the last 3 years’ annual reports FY 2007 to FY 2009), or the company’s website (which is spartan, to say the least). I shall, at the same time, try to squeeze in some information on the dividend history of the Company. Forgive me for not doing much competitive analysis as I was concentrating more on their revenue trends, divisional reputation (to be elaborated on) as well as their financials.

Financial Review and Analysis

From the table above, revenues have shown remarkable resilience over the years, through booms and recessions. The 8-year analysis shows that revenues have hovered around the S$20 million to S$30 million mark for all this time, averaging about S$27.6 million over the 8-year period under review. Considering FY 2002 till FY 2009 included part of the bust, SARS and the fallout from the sub-prime financial crisis, this represents a very stable and consistent pattern of revenues for the Company, and says a lot about demand for its products and services. The numbers imply that demand does not fluctuate much with economic conditions and that their products are “staple”. Of course, one must also see if gross and net margins can hold out in spite of almost constant revenue levels, and I will explore this in Part 2 of this analysis of purchase.

Overall gross profit margins have been rising in the last few years, but that is mainly due to the recent sale-and-leaseback deal inked in 2007 whereby GRP sold their 16,000 square metre industrial office facility in Bukit Batok for a period of 3 years commencing April 19, 2007. This lease ends on April 19, 2010 and will NOT be renewed, thus the cash flows from this division are likely to run dry in FY 2010 (the company has a June 30 year-end). In spite of this, it is clear from the Balance Sheet that the company is oozing cash from its ears, as evidenced by the very high current ratio of 4.77 as at June 30, 2009. As to what Management intends to do with this cash hoard, it is unclear but they will be looking out for suitable M&A opportunities to enhance the Group’s top and bottom-line. In a way, it is good that Management are taking it slow and steady while looking for a target. At most, if none is found, then the excess cash can be paid out as a special dividend to shareholders.

Notice too that the Company had ungeared itself since FY 2007, when it performed the sale and leaseback transaction for its Bukit Batok property. In spite of this, its return on equity has remained high for the last five years, with the most recent FY 2009 registering a commendable ROE of 17.5% (without debt!).

11-Year Trend Analysis

From the above table, it can also be seen that revenues display surprising stability in spite of the many ups and downs in the local and global economy. However, one should note that the Company had been making losses from FY 1999 till FY 2001, and only turned profitable in FY 2002 onwards. FY 2004 saw a blip because of a write-off due to impairment loss of S$2.4 million on their industrial property, but which otherwise would have been a profitable year. Other than the anomalous FY 2004, FY 2005 till FY 2009 has seen comfortable profit levels.

A glance at the above table also reveals that cash has been building up since FY 2002 (no records prior to that). Of course, bank loans were also very high at S$17.3 million in FY 2002 and it was only with the sale of the property in FY 2007 that ALL debts were cleared, and the Company stood in a net cash position of S$10.3 million (or about 7.36 cents per share). Subsequently, the cash built up to S$13.6 million or about 9.76 cents in FY 2009.

Trade Receivables has not gone up noticeably over the years; in fact it has even gone down a little which shows that collections are healthy. Inventories have built up steadily over the years and this may be a potential cause for concern in time; but so far cash generation ability has not been hindered or hampered by this slow buildup, so it could be attributable to holding a larger range of products to service customers.

Cash Flows

The reason for a special section mentioning cash flows is due to the consideration for this purchase, which is focused mainly on sustainable high yield. At my purchase price the historical yield works out to be 10%, and it is my job to ensure that the factors are present to justify that this yield is sustainable for the foreseeable future.

Operating cash flows have been positive for every single financial year since FY 2002, which is very rare for a company. Another noteworthy aspect is that Free-Cash-Flows (FCF) has also been consistently positive for the last 8 financial years, and lends strong credence to the belief that this trend will carry on as the business of the company is essentially unchanged and they still occupy a niche market. Cash outflows for financing activities for FY 2008 and FY 2009 consisted ONLY of payment of dividends, so it was an extremely clean Cash Flow Statement which greeted me when I first saw it and it caught me by surprise. Notwithstanding any unforeseen and major event occurring which may adversely affect the Company, it is reasonably safe to say that the Company can and will continue to generate FCF every financial year, and be able to maintain or even increase its dividends moving forward.

Part 2 shall continue on with some business unit analysis, and end off with a simple summary of my purchase decision.


Akatsuki said...

Hi MW! Another market gem here? Hehe, seems as though ppl like me are always look for blogs like this for directions. What advise would you give to people who
"copy" your holdings?

Musicwhiz said...

Hi Akatsuki,

I don't really have a handle or influence on people who wish to mimic portfolios, be it mine or somebody else's. So many other bloggers out there have posted up their portfolios, so it's not really a big deal for me to have posted mine up haha.

I always strongly encourage one to do their own research and number-crunching and critical thinking. For me, this blog is about a diary of my thought processes and decision-making which led to certain decisions. It's not intentionally meant for others to ape.


Christopher Ng Wai Chung said...

That's a solid stock to add to my watch-list. I think by end-2010, I'll owe you coffee for life.

Musicwhiz said...

Haha Christopher Ng,

Well a lot depends on the performance of the company and whether it continues to bleed cash from its ears. Even then, it may or may not increase the dividend payout over time. Seeing how things are at the moment, accumulating too much cash lying idle is not a productive way of allocating capital, thus they might as well declare a special dividend to return cash back to shareholders.

Of course, all these probable events hinge on the business performing stably and predictably; without any major dislocations or unforseen negative circumstances occurring.


jason said...

Hmm, Chris, for a senior engineer posting here at 3pm isnt that highly suspect? :P
Actually, i was thinking why arent you both aiming to set aside some funds for big growth stocks? (aka 10 or 20 baggers as they term them)While time is still on our side, should we not diversify some $ for wealth accumalation and not just dividends alone? Granted there are risks involved, but so long as one does their homework + due diligence, one will be at peace with one's self. (yes, Lehman Bros comes to mind)I've had to learn the hard way how the stk mkt works...Huge accumalation opportunities abound on the US stock exchanges......stocks that have been pummelled from their highs....Companies with sound fundamentals tied in with BRIC..
Not saying we should throw caution to the wind, but this economic crisis has presented an opportunity of a lifetime to pick up blue chips (o/seas) at bargain prices....something we should ride on in 10-20 yrs time. Lets have an exchange of ideas...i have spent the last 6-9 months scouting through the US stock exchanges (with some help of course)...

Musicwhiz said...

Hi Jason,

I believe one should have a good mix of growth and yield if one is young (30's to 40's). So I agree with you.

However, even for BRIC, one has to be very careful in selecting good companies instead of the duds. Otherwise we may end up making the same mistakes, only in different countries!