GRP – FY 2010 Analysis and Review

GRP released their FY 2010 results on August 20, 2010 (the company has a June 30 year-end). Suffice to say that there were no major surprises; either negative or positive, but the prevailing sentiment from me is that the Company can do more to either increase their dividend or to reinvest the cash which is just piling up. There was not much articulated about how the cash will be utilized or how the business would be grown beyond what it is now; so it was quite a disappointment for me. I will go through the usual review and analysis which will be kept brief as this is a simple company to analyze; but I will focus at the end on what I’d expect from the Company in FY 2011 and how I hope it can communicate better to shareholders.

Financial Analysis

Profit & Loss Statement

Revenue was essentially flat, rising just 1.4% from S$25.3 million to S$25.6 million; and was mainly due to the weakness in Hoses and Marine as well as the PVC pipes division (in China). Cost of goods sold, however, increased by 6.2%, which resulted in gross profit falling by 6% from S$10 million to S$9.4 million. Gross margin fell from 39.6% to 36.7% mainly due to exchange differences in the Measuring Instruments division (so I understand it is unlikely to persist). Other revenues consisted of rental revenue from their property at 1 Bukit Batok Street, which terminated in April 2010. Henceforth, from April 2010, GRP will no longer enjoy rental income. This was a factor which I had accounted for initially when investing in GRP; and more will be said on this in the review of the Cash Flow Statement section, which is key to this investment as it is a yield play.

Profit for the year actually dipped only 3.1% due to the reduction in distribution costs by 5.7% and decrease in administrative expenses by 14.2%. These two items helped to mitigate the impact of lower gross margin and lower revenues by blunting their impact; and allowing net profit to remain flat.

Balance Sheet Review

GRP’s Balance Sheet has traditionally been very “clean” and spartan! For this review, the same can be said, although Trade Debtors did inch up a little; but was offset by yet higher cash balances of S$14.5 million compared to S$13.6 million a year ago. However, Trade Payables and Income Tax payables decreased which brought current liabilities down to just S$4.4 million from S$5.5 million a year ago. The result of this was an increase in current ratio from 4.77 to 5.99 over just a year! It really boggles the mind to know that the current ratio keeps increasing year after year till it’s about 6.0 this financial year, yet Management has yet to declare a special dividend to utilized all that cash! ROE stands at 15.2% as the cash has added on “drag” to the ROE. Last year’s ROE was 17.5% and was noticeably higher.

Cash Flow Statement Review

Cash flows from operations continue to be positive for GRP for FY 2010, at S$4.2 million versus S$5.5 million for FY 2009. Capex was very low at just S$240K (it was just S$175K for FY 2009); meaning there was FCF of about S$3.8 million for FY 2010. Assuming the rental income of about S$2 million is removed for FY 2011, there will still be FCF of about S$1.8 million assuming business conditions, revenues and net profits remain largely stagnant. Perhaps this is one reason why GRP does not want to pay out more dividends; because their cash flows may be in danger in FY 2011 and Management have decided to be prudent and conserve some cash in order to make future dividends more sustainable.

Prospects and Plans

There is some concern about a slowdown in the Company’s business because of their prospect statement stating that market conditions will remain “challenging” in the next 12 months. Even though they have a very good track record of stable revenues and cash flows for the last 8 years, I must warn that past performance is not indicative of future performance. I am cautiously optimistic that the Company can continue to provide a decent yield of 2 cents/share, which translates into a 10% yield at my purchase price.

I acknowledge that the concept of a low risk, high yield investment does not exist in this world except in concept; due to the nature of business cycles and competition, any so-called competitive advantage and moat which cannot be suitably maintained will eventually be eroded through time (just as a steady drip of water droplets can, over time, penetrate a block of stone). Companies which continue to innovate and think of novel ideas to package and sell their products and/or services will continue to flourish. Those who are not able to do so will naturally fall by the wayside, and are either soon forgotten or remembered for the sake of use in classroom textbooks for business students. Let’s all hope GRP can continue to maintain some edge in maintaining the business (and drawing in cash flows) and not end up as a cigar butt with no more puff left......