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!