Monday, February 15, 2010

GRP – 1H FY 2010 Analysis and Review

On February 5, 2010, GRP released their 1H FY 2010 results. Considering the Company has hardly any news and updates in 6 months (it does not report quarterly), suffice to say this was quite a “momentous” event indeed! I immediately sat down to thoroughly run through its financials, commentary and to read about its plans and prospects. I shall now do an analysis and summary here and offer my comments on what to expect from the company in the next 6 months.

Profit and Loss Analysis

Disappointingly, revenues had dipped 5.4% from S$13.4 million in 1H FY 2009 to S$12.7 million in 1H FY 2010. In one traces back further, revenues had dipped 11.5% from 1H FY 2008 to 1H FY 2009, from S$15.2 million to S$13.4 million, so this is a 2-year continuous decline and does not bode well as it appears to be an effect of the global financial crisis; which has crimped demand for GRP’s products. This is probably also a result of oil prices which have remained low and which has affected its Hoses and Marine segment.

If one breaks down the revenue contribution, Hoses and Marine contributed S$5.54 million (43.6% of total) for 1H 2010, up 13.2%; Metrology and Measuring Instruments division contributed S$6.61 million (52% of total), down 12.9%; and uPVC Pipes and Fittings contributed S$0.57 million (4.5% of total), down 40.9%. Hoses and Marine had increased its contribution to 43.6%, up from just 39.7% in FY 2009. This is actually positive news as Hoses and Marine has traditionally registered much higher gross margins than Metrology division, and Metrology’s share of revenues has dipped from 54.3% for FY 2009 to the current 52%. However, gross margins dipped from 38.9% to 35.9% as a result of more intense competition, and the better performance for Hoses and Marine was attributed to upgrading projects at two oil terminals. It remains to be seen if this is a one-off event or if the Company can look for more of such opportunities to boost revenues for their most profitable division.

uPVC Pipes is the most “commoditized” division of the Group and thus I was not surprised that it was hit the most badly, with revenues falling 40.9% to just S$0.57 million. Personally, I think the Group should exit this loss-making division and just focus on its Hoses and Marine and Metrology as these two divisions are the cash cows and have stable characteristics. It may be possible to bring up this point during the next AGM after the FY 2010 results are announced some time in August 2010.

Profit attributable to shareholders, however, managed to rise 11.1% to S$2.32 million despite the challenges stated above. Credit must be given to Management for being able to steer the company to better profitability in spite of the harsh conditions. Distributions costs were reduced as sales volumes dipped (falling 29%), and stringent cost controls were implemented for administrative expenses (therefore falling 10%); and these measures helped to boost the bottom line.

Balance Sheet Review

GRP has one of the cleanest Balance Sheets I’ve seen in my career in accounting, and it is both simple to understand and easy to read. A quick glance reveals some positives – cash and bank balances increased yet again to S$14.2 million while inventories fell to S$8 million (as a result of purchasing inventory from Japan at favourable exchange rates). Trade payables also dropped to S$1.9 million as Management accelerated payment on a foreign currency denominated payable to take advantage of the same favourable interest rates. As a result, current ratio increased further from 4.77 as at Jun 30, 2009 to 5.87 as at Dec 31, 2009. This ratio is actually a little on the high side, and it shows that the company is hoarding cash (cash constitutes more than 50% of its total current assets); thus it may be better for the Company to return cash to shareholders if it cannot find a better use for it, or be able to deploy it to generate good returns.

ROE is computed as 9.36% for 1H 2010, compared to 8.72% for 1H 2009. Simply put, ROE could be much higher if the Company could allocate the cash to businesses or activities which drove up net profit. By itself, 9.4% is pretty decent for an ungeared company, but unless the Management intends to use the excess cash generated (please see “Cash Flow Statement” section), ROE is going to be eroded further moving forward.

NTA for the Group stands at 17.78 cents per share as at Dec 31, 2009.

Cash Flow Statement Analysis

To put it mildly, GRP is currently swimming in cash. They have about 10.21 cents per share in cash on their Balance Sheet. Their cash has also been building up over the last 2 to 3 years, and the Company is generating very healthy Free Cash Flows every 6-monthly period.

There was net cash inflow from operating activities of S$2.2 million, up from S$1.3 million in the corresponding period last year. Capex was low for 1H 2010, at just S$203K; so this means free cash flows of about S$2 million was generated. This was an improvement over 1H 2009 when about S$1.2 million of free cash flow was generated. Note that financing activity cash flows (negative S$1.4 million for the 1-cent per share dividend payout) only consisted of payment of dividends, so this is essentially one of the “cleanest” cash flow statements I have analysed.

If we assume the company continues to pay out 1 cent per share dividends every 6 months, this would result in a cash outflow of just S$1.4 million. Looking at their FCF generation of S$2 million for 1H 2010, technically they can pay out 1.5 cents per share and still be able to have enough cash buffer for operational expenses. With the cash building up comfortably even in the midst of the downturn, perhaps shareholders can expect a special dividend come time for FY 2010 results? At my purchase price of 20 cents, the current dividend payout (assuming it is unchanged) represents a dividend yield of 10%, which is much, much better than inflation and leaving money in the bank.

Plans and Prospects

Well, let me put it this way, GRP was never on the list for grand expansion plans or rosy prospects. They are simply a company that is plodding along, generating tons of cash along the way; but with limited growth prospects. The only reasonable possibility is for them to conduct an M&A, which may be what the war chest of cash is being saved up for. No M&A seems to be on the cards even though Management had alluded to looking for the right opportunity back during FY 2009’s AGM. They are careful in their selection and did not want to commit to an acquisition or merger which will not benefit shareholders and give a decent return on investment.

All I can hope for in the next six months is for the business to be stable and generate more excess FCF. The Management did highlight that 2H 2010 is expected to be “challenging” for Hoses and Marine due to the unpredictable oil prices, but that Metrology division should see improved sales. Most importantly, I am hoping that gross margins can improve after seeing the unexpected dip of 3% for 1H 2010. The Company’s track record should be able to carry it through this downturn without much permanent negative after-effects, and it remains to be seen if Management can successfully maximize shareholder value (perhaps through a share buyback which has to be mandated at an AGM/EGM).

I would like to take this opportunity to wish all Chinese readers a very Happy and Prosperous Lunar New Year! May the year of the Tiger be a good one for you with a resounding ROAR!

16 comments:

Leps said...

I like the GRP purchase in terms of stability and safety. Downside is that the management has consistently failed to show any inkling of how to use their huge cash to increase growth.

without any catalyst, it'll be hard to see profits barring a huge bull market. look at lion asiapac on how a huge cash balance has been of ephemeral benefit to shareholders

Musicwhiz said...

Hello Leps,

I agree. It's boring in terms of growth and potental expansion of their business. As you said, there needs to be a catalyst, which does not seem to be present at the moment.

I am not sure what you mean by "profits" though. As long as one receives a decent yield, this constitutes a return on investment and shareholders will benefit.

In the case of Lion Asiapac, since I don't know the business well, I must ask if it has stable and enduring characteristics? If so, then both companies may eventually declare special dividends to their shareholders instead of letting the cash go idle.

Cheers,
Musicwhiz

xfactor said...

Hi

Care to comment on Jaya

cif5000 said...

Were you there at the FY09 AGM?

Happy CNY!!

JW said...

Hi MW,

thanks for the heads up.

I would like to intro you to two companies which caught my eyes recently. Cerebos Pacific and Aztech.

I will be watching out for these two to reach a nice price before loading in.

Musicwhiz said...

Hi XFactor,

No comments on Jaya as I do not understand their business model well enough. Thus, I am not qualified to offer intelligent comments.

Regards,
Musicwhiz

Musicwhiz said...

Hi cif5000,

Nope, I was not present at the FY 2009 AGM.

Happy CNY too! Blessings to you and your family!

Warm Regards,
Musicwhiz

Musicwhiz said...

Hi JW,

I know about Cerebos Pacific. They do Brands Essence of Chicken right? Why is it a worthy investment?

As for Aztech, I thought their IT margins are getting squeezed to a pulp? Last I heard they are venturing into erm, construction; which strikes me as weird as they have no experience in this. A case of "diworsification"?

So please share why you think these 2 companies are good investments. Thanks!

Regards,
Musicwhiz

JW said...

Hi MW,

As you know, I'm a primary dividend investor. For Cerebos, the dividends is attractive. The baseline is rather defensive, and they are acquiring brands of similar structure. This reminds me of P&G... except that it is in the food sector.

As for Aztech, Az United was branched out from Az Marine, and these 2 branches can source materials together with economies of scale. It is indeed diversification, as they source to diversify their earnings in an attempt to reduce the effects of cyclical nature of the electronics market. For their electronic sector, as an electrical engineer working in the electrical industry in Sg, I can say that this market is recovering strongly. Furthermore, with Nucleus Connect by Starhub and Next Generation Network by Singtel, we can expect the broadband penetration to grow in Sg. If Aztech can capture this market, it would bode well for them. Aztech has been impressive so far with their earnings and dividend payouts.



At current prices, perhaps Cerebos is still not yet a great investment, and Aztech moderately great. It's a time for us to research into companies so that we can buy into them in the next downturn :)

Musicwhiz said...

Hi JW,

I glanced at Aztech's FY 2009 financials. For the full year, revenue was up 1.4% but COGS increased 2.9%, resulting in gross profit dropping by 7.5%. I also noted net profit for 4Q 2009 fell 32.5%. Is their business seasonal?

Balance Sheet wise, it does not look particularly strong. The Company has S$36.1 million of cash but about S$49.3 million of borrowings, thus it is in net gearing. But it is generating healthy operating cash flows, so this is a positive thing. I did not delve further into the financials. Just cursory observations.

As for Cerebos Pacific, I'd say the financials look strong but I will wait for your analysis Part 2 on your blog. There are simply too many companies out there for me to do detailed analysis haha!

Regards,
Musicwhiz

Leps said...

Hi MW

Nice reply. Its really a difference in investment philosophy I guess.

Dividends are rent. Rent seeking strategies are not my cup of tea, simply because you still hold the capital risk of the asset firmly on your balance sheet. Hence I only look at profit in terms of capital gains. The dividend is merely to compensate me for carrying the asset.

Put in another way, if you are only looking in terms of stocks v cash as your asset choices, then you would compare the risk free return of cash v your (mostly) risk free return on your purchase. Capital risk of cash (inflation) is weighed against capital risk of stock price falling. However, there should be no need to do so once you have refined your investing skills - the equation is then between two different stocks (or any other assets) in terms of return. If this is the equation, then capital gain becomes the overriding factor to consider. Hence my use of profits in this sense - gains from stock (asset) value.

Of course, a consistent history of steady dividends (in value) coupled with a low entry price will give a compelling yield. But then one has to gauge the probability of the stock value dropping v the amount one expects from dividends.

On Lion Asiapac, it can almost be considered a cash company, given that the asset value far outweighs the business value. GRP may be different, although both have "boring" businesses which can continue for a long time.

Musicwhiz said...

Hi Leps,

Yes, a difference in the way we perceive investments no doubt. Dividends are a form of rental, but unlike rental there is no obligation to pay. Rentals in the strict sense (relating to property)are fixed and contractual, but dividends are more or less a voluntary return of capital that Management cannot make use of to generate higher profits.

If you are focused on capital gains, then your aim should be an underlying increase in the value of the asset (i.e. investment). So in terms of companies, you should go more for growth companies rather than yield companies or mixture of yield/growth. In this way, you "sacrifice" the dividend in the hopes that Management can reinvest it for you to grow the earnings base and hence effect an increase in the market price of the company's shares.

If one does their homework properly, the risk of capital loss versus high yield from investment dividends is greatly reduced. Of course this kind of risk cannot be totally eliminated, but the higher return one gets is supposed to adequately compensate for the risk taken, which is why the yield on some companies is so much higher than inflation.

I think besides Lion Asiapac that you mentioned, there are quite a few companies trading below NAV. I tend not to use NAV as strict measure of margin of safety; as there are many other factors in play. But it does serve as a cushion in case the Company needs to be liquidated (though fire-sale can push a company way below NAV in worst-case scenarios).

Cheers,
Musicwhiz

疯牛 said...

Hi Musicwhiz,

Chance upon your blog from AK47's.
Am a great advocate of GRP. Slow and steady returns on capital will do for me. Someone once said that not losing money is already a gain in the stock market and i believe the lack of price fluctuations for this counter is a strength in itself!

As a fellow value investor, I want to recommend to you another value counter i am holding; Teck Wah Industies. They are into the printing management business. While not too exciting (boring some might say), but the company is extremely well run and under-valued in my opinion. Here are some statistics for you to ponder.

Current Share Price: $0.032
EPS (08/09) : $0.0522
P/E Ratio : 6x
Cash Balance : $40,153,000.(translated to be $0.17 per share)
NTA : $0.387

Total dividend announced for FY08/09 = 2.8cents, which means a 8.75% return at the current price of $0.32.

Thanks!

Musicwhiz said...

Hi Feng Niu,

Thanks for dropping by, and yes I agree on GRP being slow and steady. I wonder, though, if they can deploy the cash to generate better returns. If not, must return it to me! Haha.

As for Teck Wah, I will check it out when I have the time.

Regards,
Musicwhiz

ss88 said...

Hello Musicwhiz,
Thank you for your research and hard work on GRP. May I ask if u have any idea on the background on GRP chairman Yu Zhongjiang as he's the largest shareholder, came in i think in 2006? how is he helping GRP biz? Many thanks...ss88

Musicwhiz said...

Hi ss88,

You are most welcome.

Sorry I don't have any info on the Chairman. Hopefully I can attend this year's AGM to ask some questions, though!

Regards,
Musicwhiz