Friday, June 27, 2008

Not so popular

FY08 results analysis

This is just a brief analysis of popular. Time is too short to analyse too much on a company that I think does not constitute a good business. The report comes from here.



Turnover went up higher in FY08 than FY07, but gross profit doesn't follow through. In fact, gross margin fell from 17.1% in FY07 to 15.3% FY08. However, net profit margin increased slightly from 2.9% to 3.1%. They mentioned that the increase in turnover was mainly attributed to their retail and distribution business, due to more outlets opened in Singapore and M'sia.

Some important business news - they closed down their two english-learning schools and discontinued their school franchise business in Taiwan to minimise the risk and losses given the shrinking Taiwan economy and increasing credit risk in distribution industry. I did notice that their provision for doubtful debts increased from 155k to 370k in FY08, an increase of 1387%. They seem to do better in HK, where two of their pre-primary textbooks were adopted by schools, thus capturing a good market share to sustain their dominant leading position. More discounts were given (hinting you the strength of their pricing power) and more money spent on marketing their books. I think they should continue their pre-primary textbook business. I believe that based on Singapore's strong pre to primary textbook branding, they will do very good in this aspect.

Net margins, though improved slightly (might be just the usual business fluctuations, rather than real improvements), are still very low at around 3%. ROE improved to near 10% though. While current ratios seem healthy, their total debts to equity actually increased. We can see that their cash flow statement shows negative net cash from operating activities, negative investing activities but very positive cash flow coming from financing activities. Looking at it more carefully, there is an increase in long-term bank loan to the tune of $52,267,000 for their new property business. That alone constitutes a huge part of their cash/cash equivalent for the period.

Popular gave a dividend of $0.012 (tax exempt) in total this and last FY. Given last closing of $0.270, that's a dividend yield of 4.44%, constituting a payout ratio of 40%. PE (based on FY08) is 9x.

8 comments :

VIncent said...

Hi,

Just curious, are you also proficient with Discounted Cash Flow analysis? Am asking because i've already learned a lot from your ratio analysis of several companies posted on your blog.

My question for DCF is that:
1) How do you account for negative working capital? Examples include Boustead and Yangzijiang.

2) How do you account for cash spent on acquisitions? Should they be included in CAPEX or if not, how should they be treated in an analysis?

Thank you so much!

Brendan Lee said...

Anyone who had ordered books from Amazon.com will know that books from book stalls are much more expensive.

Few people are awared of this yet. But as more people are aware, traditional book stalls will face out. Thereby affecting its bottom line.

I had already stopped buying finance and investment books from book stalls as buying from Amazon is 20% - 50% cheaper.

With the intervention of internet, many businesses are affected, and of course many businesses have boomed. So I try not to buy stocks that are victimised by internet.

la papillion said...

Hi Brendan,

Thks for your comments. From what I see, I think popular's target crowd belong to another group of people altogether. They do not only sell books (in fact, from how they lay out their stores, I think books is only a small part of their operations), they do other retail and distribution on stationaries, CD, IT stuff. Very low margins products.

Even for their books section (except for Harris), I think their most profitable ones are those in the educational textbooks/assessment books used by students. Why do I say that? Because their books selection is quite pathetic, nowhere near the likes of Times/MPH/Borders. On the other hand, they had all kinds of assessment books/textbooks that isn't found anywhere else.

I doubt they retail/distribution business will be hit hard by the boom of e-shoppers.

ps. do amazon really sell that cheap? I bought from berkshire business books before, and I thought it's pretty cheap already. Didn't know there's like 20 to 50% cheaper alternatives!

la papillion said...

Hi vincent,

I know what's DCF. But for my analysis, I used a bastardised version of it - using earnings as the input instead of cash. I put in an earnings growth rate, no terminal or perpetuity value and did it for 10 years. It's from Wallstraits's Curtis Montgomery.

I did not use true blue DCF because the whole method is already full of uncertain variables, it does not make sense to introduce more uncertainties in order to get a more accurate value. Eventually, it boils down to GIGO (garbage in garbage out).

As such, I do not know how to answer your queries, sorry! I'll rather spend less time trying to get an accurate value and more time understanding the business. I'll just do a quick (10 mins is more than sufficient) valuation, and apply a healthy margin of safety on it :)

Mike Dirnt said...

duh i read good headlines for their latest results. turn out to be very low profit margin and quite high debt. i dont see much growth in the company also.

probably it is just a good dividend paying stock. even if go for dividend paying stocks, i wont go for this one surely.

but when you buy from amazon, you need to pay for shipping right?

Brendan Lee said...

Books at Amazon are priced in USD, our SGD has made the books cheaper.

Brendan Lee said...

Do you still subscribe to Wallstraits? What are his recent recommendations?

la papillion said...

Hi Brendan,

I do not subscribe to wallstraits, but I did read his books before. Hence, I do not know what are his recent recommendations. Perhaps you can look around in their forum?