Thursday, December 24, 2009

GRP – Analysis of Purchase Part 2

Part 2 of my Analysis of Purchase delves into the business unit analysis for GRP. Most companies have one very strong division which carries the whole company through and is the mainstay cash cow, just like MTQ’s Oilfield Engineering division with its high margins and steady cash flow compared to the low margin Engine Systems division. For GRP, the same scenario plays itself out again for Hoses and Marine versus uPVC Pipes and Fittings.

Business Unit Revenue, Gross and Net Margin Breakdown (2002-2005)

Interestingly, one can observe that for FY 2002 and FY 2003, Measuring Instruments division made up the bulk of revenues as compared to later years when the Hoses and Marine division was more established. But for the bulk of FY 2002 to FY 2005, measuring instruments still made a significant impact to revenues, as a result of GRP’s representation for several international brands such as Imada, Vision and Motic. They had also represented Mitutoyo in the ASEAN region for 44 years, and thus had built a strong track record in this industry.

In terms of gross profits however, it is hoses and marine which still took up the bulk of it, and the gross margins are apparently much higher for Hoses and Marine (at 40.9% for FY 2004 and 53.7% for FY 2005) as compared to Measuring Instruments (26.9% in FY 2004 and 23.6% for FY 2005). uPVC Pipes, it seems, was an under-performing division which contributed little to gross profits and also had a low gross margin of average 18% over FY 2004-FY2005.

When we come to net profit, this is where the kicker comes in. Hoses and Marine consistently, over the 4 years under review, had the larger proportion of net profit compared to all other divisions, even though in terms of revenues, metrology outperformed for all 4 years. This was because of the strong net margins which Hoses and Marine generated – on average it was 20.7% over the 4 years under review. On the other hand, Metrology’s average net margin was just 6.8% over the 4 years. China’s uPVC pipes division performed the poorest with a net loss margin of average –1.4%, as this was a cutthroat competitive business with poor pricing power.

Business Unit Revenue, Gross and Net Margin Breakdown (2006-2009)

Looking at FY 2006 to FY 2009, Metrology division seems to be taking up the lion’s share of the revenues as well, at always around 50+% of total revenues. Yet, going by the analysis in the preceding section, it shows clearly that Hoses and Marine has the best margins. Hoses and Marine took up on average about 36.6% of revenues from FY 2006-FY 2009, and this division has stable revenues hovering around S$11 million. However, both divisions are stable cash cow businesses with not much room for growth. There is only the possibility of acquisitive growth but this depends on the opportunities presented to Management. As at the date of writing of this report, there are no plans by Management for organic growth or acquisitive growth.

Hoses and Marine continued to generate very high gross margins of on average 48.4% for the 4 financial years, and was comparable with the prior two financial years. Metrology had an average of 28.9% gross margins and though respectable, it still lags behind the margins for Hoses and Marine. Overall, net margins for Hoses and Marine continued to remain high at above 30%, while Metrology maintained net margins at around 15% over the 4 years. Frankly, uPVC Pipes has terrible gross margins and the division is suffering from net losses all the way, so I do not understand why Management continues to put up with this division without at least considering divesting it for some cash. After all, looking at its performance, I dare say it’s probably cash flow negative, and is being “subsidized” by the other profitable divisions.


Dividends have been fairly consistent for the Group since FY 2005, and one can see from Part 1 that this was the time when their cash balance started to increase, and the increase is still ongoing over the last 5 years which culminated into the current balance of S$13.26 million as at June 30, 2009. A special dividend of 3 cents per share was paid out in FY 2007 mainly due to the sale and leaseback of their property; but seeing how the cash is literally just building up without much use for it, and without plans to deploy it to suitable M&A, perhaps another special dividend could be on the cards in either FY 2010 or FY 2011. As a shareholder, I am keeping my fingers crossed!

Purchase Decision

To keep things really short and simple, as a result of the above analysis; and taking into account the stability of revenues, niche position for GRP, decent gross margins for its Hoses and Marine and Metrology division, prudent use of cash (as evidenced from its Cash Flow Statement) and strong Balance Sheet, a decision was made to purchase GRP purely for yield. Considerations for yield would include sustainability as well as potential yield appreciation in future.

Just for comparison sake, I did consider other high-yield companies like Starhub (about 10-11% yield) as well as some REITs but noted that for Starhub, I did not understand the business as well as I would have liked, and Government regulations could also upset some of the “monopoly” power which the telcos have with regards to consumer practices and pricing. Furthermore, their Balance Sheet is leveraged and thus I would prefer a non-leveraged entity with a stable and predictable business. As for REITs, most of them are leveraged and would need to refinance by 2010 or 2011, plus office rentals and property prices may also come down, adding to the uncertainty risk. Suffice to say I do not understand property well enough to make an intelligent bet on a REIT; hence I chose GRP instead.

Seasons Greetings

Before I forget, here’s wishing all readers and their families a very Merry Christmas! Watch out for my year-end portfolio review which should be out on Thursday December 31, 2009.


Akatsuki said...

Yeah 1st to post!
Merry Christmas to you too!

Musicwhiz said...

Hi Akatsuki,

Merry Christmas and Happy Holidays!


Lemizeraq said...

Hi Musicwhiz,

Thanks for the detailed analysis of GRP. Will take a closer look at it.

Merry Christmas and Happy New Year!

Look forward to seeing many new posts from you in 2010.


Ricky said...

Merry Christmas Senpai! :)

Musicwhiz said...

Hi Lemizeraq,

Merry Christmas to you too and Season's Greetings!

Yes, don't worry will continue with my investment journey in 2010 as well. Hehe.


Musicwhiz said...

Hi Ricky,

Merry Christmas too!


cif5000 said...

Your title is perfect - an analysis of purchase.

I was hoping to see some discussion on the business risks and competition, which may throw the dividend premise out...oh well, maybe Part 3.

Musicwhiz said...

Hi cif5000,

Sadly, I am not very strong in the area of competition, and am trying to brush up on this aspect. I use the 10-year trends and also the Company's profile (their products and services) to establish that they have cmopetitive advantage. In fact, I know you are also vested in GRP and I was wondering if we could share notes on the business risks and competition?

I would very gladly discuss it as I highly respect the research you do on your own blog and also your detailed and intense discussions on companies.

*There will be no Part 3.

Wishing you a Happy New Year!


Gosu Warrior said...

hi musicwhiz, the div history is abit young. purely for a yield play its like starhub which can't be guaranteed.

as for starhub, i believe its model is much more clearcut and sustainable. i written a comparison bet m1 starhub and singtel and the future of telco. would love to hear your thoughhts on it!

Musicwhiz said...

Hi Gosu Warrior,

I agree GRP only ungeared itself in FY 2007, but for quite a long time it's been generating good FCF, as I highlighted. So this ungearing simply means their cash balance can continue to grow, and enhances the chances of a special dividend if they cannot deploy the cash to good use.

Will read up on your article, but offhand I know that Starhub has gearing and though they have committed to a dividend payout, there are a lot of risks to a telco's business model and there are also many aspects of their business which I cannot understand (not within my circle of competence). Hence I choose to stay away.