Portfolio Changes - Divestment of GRP and Addition of VICOM, SIAEC & Boustead

It’s been a while since I made some major changes to my portfolio, but this month seems to be a good month for it as Mr. Market went through a rather wild mood swing due to the historic downgrading of US Debt, which caused markets worldwide to tumble sharply and valuations to become more attractive. This event, coupled with debt problems in Europe and runaway inflation in China, served to unnerve the world and caused many bouts of forced selling and margin calls. The result, of course, was that the STI fell about 13% in 7 straight days of blood-letting, and this opened up very good opportunities for me to purchase shares. But before I go on about the additions, I have to declare my divestment of GRP and also the underlying rationale for it. Fortunately for me, the timing of the divestment was just right for me to pick up some shares of VICOM, which does vehicle inspection and testing in Singapore; as well as to average down on my cost for SIA Engineering. At the same time, I also bought some more Boustead to add to my current holdings. In the sections below, I shall elaborate on the reasons for the divestment and addition, and also give a brief account on the addition of SIA Engineering. All portfolio changes will be reflected in my month-end portfolio review, though I will provide some details within this post itself of the movement in cost, and also any dividend effects.

Divestment of GRP – Reasons and Rationale

I guess of all the companies within my portfolio, the one which was the most stagnant and which had a declining business had to be GRP. The original rationale for purchase was to enjoy a yield of 10% due to GRP’s large cash hoard and also its ability to generate free cash flows (FCF) due to the presence of rental income derived from its Bukit Batok industrial property. However, do note that the rental income from its property had ceased with effect from May 2010 following the expiry of the lease agreement in April 2010, thus 1H FY 2011 (ended December 31, 2010) did not include the effects of this rental income. As a result of the absence of this item, net profit fell 47% year on year. This was not the only thorn in GRP’s side – gross profit margin had also declined from 35.9% to 31.9% due to more intensive competition in its divisions. Though administrative expenses had fallen 23.8%, the more worrying factor was the erosion of gross margins, which was witnessed in Tat Hong and which also portended a slow but painful decline in its core business.

However, the above was not the only reason for the divestment. In the May 2, 2011 issue of The Edge Singapore, director Han Hai Kwang was quoted as being on the lookout for “synergistic” acquisitions to halt sliding profits, as GRP’s core business divisions suffered from competition and saw its profits eroding. Its PVC business in China, in particular, was suffering as a result of intense competition and the business itself was a commodity one in which GRP itself had no firm competitive edge. It would seem that throughout the years in which I was vested in GRP, Han had been continually looking out for such M&A but without much success, and this resulted in the cash building up into a hoard of about 9.5 cents/share. No special dividend was declared though, as I believe the Company saw that their business was vulnerable and therefore they wished to retain more cash for working capital.

What was more alarming, however, was that GRP’s operational cash flows for 1H FY 2011 had dropped to just $559,000, while capex was $95,000, resulting in FCF of just $464,000. The current dividend of 1 cent/share every half year amounts to $1.4 million, and this represents a shortfall of $1 million. Note that while rental income was still flowing, and using 1H FY 2010 as a comparison, FCF amounted to $$2.24 million, which would have been sufficient to pay out a dividend of $1.4 million and still retain roughly $800,000 for working capital. Looking at GRP’s balance sheet as at December 31, 2010, cash stood at $13.3 million and if they were to carry on with their current dividend policy, the cash would be depleted within 6.5 years ($2 million deficit per financial year), and that is not even counting in working capital requirements. Hence, my conclusion was that the current dividend policy was unsustainable (at 10% yield), and thus the original rationale for purchase was now invalidated; thus requiring an action to divest.

Another related point which I should mention was GRP’s announcement, on July 13, 2011, that it would be disposing of 63.5% of GRP (China) Pte Ltd, its uPVC business, for a cash consideration of $1.92 million; and will also, at the same time, book in a gain on disposal of $313,327. The reason for the disposal was the cash burn and losses suffered by this division for three consecutive years. On the surface, it looked like a good decision; but I have to question why Management took so long on their decision to divest, and also whether there are underlying unspoken reasons for wanting to divest for cash. One possibility (uncorroborated, no doubt) which crossed my mind was that the Company was foreseeing declining business and needed the money for additional working capital; and that they would also concurrently lower their full-year dividend from FY 2012 onwards (I am still expecting a final dividend of 1 cent/share for 2H FY 2011; as of this writing, GRP’s FY 2011 results ended June 30, 2011 have still not been released).

On August 3, 2011, I sold off my entire shareholding in GRP at 20.5 cents/share, realizing a capital gain of 2.5%. If I factor in dividends of $4,000 received since I first purchased GRP on October 28, 2009, then the total net gain on GRP rises to 22% (net of brokerage). Using XIRR on Excel, I have computed that the annualized return on investment amounts to 13.5% per annum.

Purchase of VICOM

The proceeds from the divestment of GRP were then used to purchase VICOM at an average cost of $3.40833 on August 8, 2011. VICOM is a company listed on SGX (68.19% owned by Comfort Delgro) which is involved in vehicle testing and inspection services (for all cars in Singapore). Revenue for this division hit $25.5 million (a 10.7% increase) for FY 2010 (it has a December 31 year-end) and 438,454 vehicles were inspected during the financial year. This division has seven testing centres spread out over Singapore, and include Sin Ming (lease just renewed for another 30 years), Changi, Bukit Batok, Yishun, Kaki Bukit, Pioneer and Ang Mo Kio. As of June 30, 2011 (based on 1H 2011 results), the Vehicle Inspection Business took up 30.5% of revenues, and had operating margin of 35.7%.

VICOM also has a wholly-owned company called Setsco Services Pte Ltd (Setsco) which provides non-vehicle testing and inspection. This includes construction material testing, certifications, calibration, training, inspection and consultancy. It has its headquarters at Changi but VICOM is in the midst of building a new four-storey building at Teban Gardens due to be completed by 3Q 2011. Revenue for this division hit a new high of $51.4 million (a 7.6% increase) for FY 2010. The division also has operations in Selangor (Malaysia) and Ho Chi Minh City in Vietnam. In FY 2010, Sestco formed a JV in UAE with Dubai-based Ali Omran Al Owais Investment Company to form a 49%-owned associated company called Setsco Middle East Laboratory LLC. This remained dormant for FY 2010, registering a loss for the year. As at 1H 2011, there was still no share of profit from this associated company, which implies that operations had yet to fully commence. For 1H 2011, the proportion of revenue from Setsco was 61.6%, and operating margin stood at a respectable 20%. The remainder of the revenue came from leasing and other related businesses.

I had already stated at the end of m SIA Engineering’s five-part analysis of purchase that I will not be doing a very detailed analysis of purchase for new purchases subsequent to SIA Engineering, thus I will be very brief on the reasons I purchased VICOM. VICOM has a captive market in its vehicle inspection business, as all cars in Singapore have to be periodically inspected as part of compulsory requirements to own a vehicle. As COE prices remain high (as of this writing a Cat A COE costs $49,000 while a Cat B one costs $65,000), fewer people will scrap their cars and thus will hold on to them longer, requiring more inspections. VICOM also has a clean Balance Sheet with no debt, and generates strong FCF every year. In its recent 1H 2011 results, VICOM declared an interim dividend of 6.9 cents/share, up from 6.3 cents/share a year ago. Assuming final dividend remains unchanged at 6.9 cents/share as per last year, total dividend for FY 2011 would be 13.8 cents/share, translating into a yield of 4% at my purchase price. Incidentally, I did not buy VICOM very cheaply; it was priced at about 12.2x PER and about 3x P/B; but this is to be expected since the business model is sturdy and it generates consistent and predictable FCF every year. A total of about $20,000 was spent purchasing shares of VICOM.

Addition of SIA Engineering

As Mr. Market was feeling particularly panicky in those seven days of decline, I decided to deploy more cash (about $10,000) to purchase SIA Engineering, and managed to average down on my initial purchase by buying at $3.51 on August 11, 2011. A quick analysis of SIAEC’s cash generation ability showed that since listing in 2000, it has only dropped its dividend once (in ten years) from FY 2008 to FY 2009 (20 cents/share to 16 cents/share), not counting special dividends. Even if we assume a drastic cut in dividend of 40% from 20 cents/share to 12 cents/share due to another global economic meltdown (crisis), that still represents a yield of 3.4% at my purchase price. With cash flows from associated companies and JVs remaining strong, I would expect SIAEC to at least maintain their dividend policy as they should have baseline cash balance of $400M after paying their recent final + special dividends.

As a result of the averaging down, average cost for SIAEC has fallen from the previous $4.064 to $3.97, and this will be reflected in my next portfolio review.

Addition of Boustead

Even more cash was deployed to purchase more shares in Boustead, at a price of 85 cents. The Company is sitting on a cash hoard of about $39.75 cents/share and has been paying consistent, increasing dividends over the last five years. This effectively values the rest of its business at a mere 5x PER ex-cash, and considering it is a global mid-cap company this “conglomerate discount” was not justified. It has a strong balance sheet with negligible debt (mostly, it is used to finance their real-estate portfolio) and generate very strong FCF every financial year. The strength of its business lies in Geo-Spatial and Real-Estate Solutions Divisions. For the former, it has a PBT margin of around 22-23% and is cash-flow positive, with Government agencies forming the bulk of their customer base (hence, bad debt probability is very low), while for the latter, Boustead is steadily building up its Design, Build and Lease portfolio to just above 90,000 sq metres currently. This is reflected under “Investment Properties” in the Balance Sheet, and the recurring income and cash flows will provide a stable base against the turbulence experienced these couple of weeks in Europe’s and America’s economies.

At my current purchase price, projected yield based on 4 cents/share is about 4.7%; and my average cost has increased from 55.8 cents to 62.2 cents.

Summary

The above transactions had the net effect of increasing my cost base from $220,000 to $238,700, as $20,000 was divested from GRP and re-deployed into VICOM, $10,000 was spent acquiring shares of SIAEC and another $8,600 to acquire shares in Boustead. This represents another new high for my cost, and I shall endeavour to continue to put more money to work if Mr. Market continues to offer me opportunities.

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......

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!

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


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.

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 dot.com 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.

October 2009 Portfolio Summary and Review

I would describe October 2009 as the month in which I had the most portfolio changes since a long time ago! This was due to ongoing additional purchases of MTQ in early October 2009, a full divestment of Ezra due to the aforementioned reasons as stated in my previous 3 posts on Ezra; as well as the addition of another company called GRP Limited in late October 2009. The latter was a result of the deployment of funds from the divestment of Ezra and was researched by me in the last 2 weeks of October 2009. Fundamentally, GRP’s business was simple, easy to understand and the financials were clean. I will be posting a detailed analysis on the rationale for purchase of GRP, and it will be simpler than the analysis for MTQ though no less detailed; but because the company has a cleaner balance sheet and simpler to understand structure (and long operating history), it should take much time and effort to post up.

October 2009 was also the month where USA companies released 3Q 2009 results; and most of them were above expectations. Oil had also hit a new year to date high of US$82 per barrel, but is still way down from its peak of US$140+ last year. High oil prices will spur oil majors to make more investments in oil rigs and O&G projects and this will eventually flow down to benefit MTQ as they are in the oilfield engineering segment. In Singapore, most of the news flow was positive as well; but since Mr. Market had already factored most of the optimism in a few months back, there was low trading volume and nary a movement in market prices. This actually represents an opportune time for an investor to collect shares in the companies he is eyeing.

US GDP also reported surprisingly strong growth of 3.5%, officially ending the recession in which the USA reported four consecutive quarters of negative growth. Still, many obstacles remain as growth is expected to be bumpy and unsteady even as the economy lumbers along.

Property prices had increased 15.8% quarter on quarter for private properties in Singapore, while resale HDB flat transactions also saw a marginal increase in prices to a new record high. COV (Cash Over Valuation) also increased from $3,000 to $12,000, according to the newspaper. Scarily, COE for cars also hit a 4.5 year high of about S$19,000 for cars below and above 1,600cc; and this is testament that prices seem to be rising even though we had just been through the worst recession in 70 years. This is indeed uniquely Singapore!

For MTQ, I have lowered my cost to 68.5 cents from 68.6 cents by purchasing additional shares on October 2 and October 5. My total investment in MTQ is about S$27,000. For GRP, I view it more as a yield company as its growth is in the “mature” stage and it is basically a cash cow generating lots of free cash flows. The declared dividend is 1 cent per share and is for the year ended June 30, 2009 (it has a June year-end). Based on prior year’s dividend history and my purchase price, the yield would be a very attractive 10%. The Company’s business is also stable amid the sharp recession and it can still grow its cash stash; so there is a significant chance of a special dividend (as per FY 2007) if they cannot deploy the cash for yield-accretive M&A. As at October 31, 2009, I had invested about S$20,000 in GRP.

Though I had added 2 new companies to my portfolio within 2 months, there is no reason to rest and I am in the process of screening another company for potential investment as there is still some opportunity fund left over which I hate to see sitting in a bank account earning 0.5% per annum. The focus is to look for companies with sound management, steady growth and good cash flows (so as to earn a steady income from dividends). My hope is also for a decent year-end bonus for me to add to my cash stash, so that I may have more funds to deploy to worthy companies run by astute Management.


For October 2009, corporate updates and result announcements for my companies are as follow:-

1) Boustead Holdings Limited – There was no significant corporate news from Boustead, except that they were awarded the most transparent company by SIAS. On October 16, 2009 there was a minor announcement of them entering a JV in an Internet-based mapping and location services business (Geologic) of which Boustead will hold an 80% stake.

2) Suntec REIT – Suntec announced their 3Q 2009 results on October 27, 2009 and declared a DPU of 2.921 cents per share. Although this was lower quarter on quarter, it still represents a decent payout and a yield of 10.5% based on my purchase price of $1.11.

3) China Fishery Group Limited – There was on news from China Fishery for October 2009. Results are expected for FY 2009 by the end of November 2009.

4) First Ship Lease Trust – FSL Trust announced their 3Q 2009 results, and declared a dividend of USD 0.23 cents, in addition to the stub dividend announced last month of USD 1.27 cents, making a total of USD 1.50 cents. Separately, on October 29, 2009, they also announced that they had finalized the loan covenant agreements with their bankers. I received the dividend of USD 1.27 cents on October 30, 2009, giving me an effective yield of about 6.4% based on my purchase price.

5) Tat Hong Holdings Limited – There were no significant updates from Tat Hong, except a minor announcement to state that the RCPS have been fully issued to AIF Capital. A corporate update was released on October 6, 2009 together with an analyst briefing and EGM which updated shareholders on the latest developments with the Company. Readers are free to access this through SGXNet, and I will not elaborate too much as most of it is self-explanatory. Suffice to say their expansion into China to grow their tower crane segment is proceeding as planned.

6) MTQ Corporation Limited – MTQ reported a decent set of results for 1H FY 2010 on October 28, 2009 during lunch break. Revenues were down 12%, gross profits down 8% while net profit was up 3%, mainly due to divestment gain of S$1.9 million on partial divestment of long-term investment (I suspect this is Hai Leck). The Balance Sheet was strong with S$23.2 million in cash, up from the same period last year, and there were positive operating cash inflows as well. An interim dividend of 1 cent per share was declared, payable on November 24, 2009. In addition, MTQ also announced a partnership with global brand Bosch to distribute Bosch products as part of their “Bosch Superstore” concept, which offers a one-stop solution for automotive parts. MTQ has 9 branches in Australia and Bosch is leveraging on their network to grow; thus MTQ is expecting the Engine Systems division to benefit from this mutually beneficial partnership.

7) GRP Limited – GRP had announced a dividend of 1 cent per share, and this was approved at their recent AGM held on October 26, 2009. Moving forward, GRP’s business should stay resilient against the global downturn and still be able to maintain a cash flow positive position. Balance Sheet is very strong with current ratio at 4.77 times as at June 30, 2009. With a cash hoard of S$13.2 million (cash per share of 9.47 cents), there is a good chance of GRP paying a special dividend unless it can find good M&A opportunities. Currently, at my buy price, this represents a full-year dividend yield of 10%.

Portfolio Comments – October 2009

October 2009 saw the most changes made to my portfolio since the start of the bear market in late 2007. I collected more MTQ in early October, while divesting my entire stake in Ezra as detailed in previous posts; as well as collecting shares of GRP using the proceeds from the divestment of Ezra. As a result, my cost has been adjusted to S$135,400, while my unrealised gain is +8.9%. Realized gains have increased from S$9.4K to S$26.6K as a result of gain on divestment of Ezra and also dividends from FSL Trust. As a result, total gain is +28.5% of new adjusted cost.

In my previous portfolio review, I mentioned that I had expected MTQ to declare a dividend, and they did with a 1c per share interim dividend; managing at the same time to remain relatively resilient in the face of falling demand for oil and gas services. GRP was purchased mainly as a yield play as their business is very stable (I had compiled data from 9 years of Annual Reports on their revenue stream), Balance Sheet is strong and cash flows are positive and consistent. I do not expect capital gains from GRP, but it gives a yield that is way above bank deposits and unless there is a material change in the business; continues to give me peace of mind.

My next portfolio review will be on Monday, November 30, 2009.