Tuesday, February 26, 2008

Ossia International Ltd

Today there's quite a number of companies posting results. A few are interesting, but let me just look a bit more in detail for Ossia international limited. They had just released their full year results for FY07, so there's more things to look at in comparison with FY06.

Gross profit went from 50.9% in FY06 to 52.1% in FY07
Sales went up by 9.8%
COGS went up by 7.2%

As sales went up, COGS went up by a proportionately lower amount, bringing gross profit up a little.

I saw a 38.3% jump in operating income, which looks interesting. I tried searching in the report, but not much clues from there. Maybe I didn't really search hard enough (though they should make a note beside the item too to make it easier for investors). There is also a one off gain on the disposal of investment property to the tune of S$3.4 million from the sale and leaseback of Ossia building near changi area. From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. Distribution costs went up 23.2% which the management attributed to the expansion of distribution channels in China.

Ossia disposed off its entire equity interests in 2 subsidiaries from Hong Kong (I wonder why?), resulting in a gain of $85.23 million. Interesting...i wonder what's their game plan? Selling off HK subsidiaries, increased distribution channels in China, opened more than 20 stores in Singapore and M'sia. Is there a clear plan stated by the management? This is what I'll be looking for.

(Found that they had stated in point 10 that "the Group will continue to focus and expand its core business to be the regional distributor and retailer in lifestyle products apparel, bags, footwear, sports and golf in Asia Pacific". Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries? )

Net profit rose 26.1%.
Net margins for FY07 is 59.9% while FY06 is 2.9%.

Without the disposal of subsidiaries interest (85.23 million) and the one off gain from the disposal of investment property (3.4 million), net profit will be be such a stellar figure, improving from 2.9% to nearly 60% in FY07. So don't take the stated figures so literally. I remember the net margins for fjben is around 4 to 5%, so I'm wondering why Ossia isn't having a similar margins. Could it be the brand names that Ossia is selling compared to that of fjben? Highly possible.

I won't be calculating the inventories turnover for Ossia as I suspected that the disposal of subsidiaries will distort the figure a lot, so no point. It's satisfying to see that later on in the report, the management said as much that the decrease in inventories is due to the disposal of subsidiaries in HK. Inventories turnover remains an important metric to look at such companies though.

Cashflow for Ossia is mightily strong, waiting to receive a huge chunk of cash from their disposal of the subsidiaries. Gearing ratio went from 0.52 times in Dec 06 to 0.09 times in Dec 07, due to the repayment of the borrowings. Looks like Ossia have a strong balance sheet.

Point 13, Ossia had a segmented revenue and business results. The following is a summary:

Operating profit----------------------------------------

For the sales, the percentages are with reference to the continued operations sales. For operating profit, the percentages are with reference to continued operations operating profits. It's not possible to find the percentages of segmented operating profit in 2007 because the HK region is making a loss. Below is the actual figures for FY07:

In FY07
S'pore/M'sia ----$409,000

I think this small exercise shows why Ossia decided to dispose of their interests in their HK subsidiaries. They completed the disposal exercise in January 2008, so the subsidiaries are still operating as of FY07.

It appears that while sales figure for HK is nearly 1/3 of total sales, the operating profit is only a paltry 4.8% of the total operating profit in FY06. FY07 is even worse. I wonder why? Perhaps a more careful and detailed look in the previous few years of data will shed some light on this abnormal situation. Could it be the same situation that plagued Popular - that of rising HKD that erodes their profits? It's a possible reason, given that in point 10, they mentioned that had a foreign exchange loss (HKD to SGD) when they dispose of the two HK subsidiaries.

Did some sleuthing and found these are the brands that Ossia is marketing:

Elle Paris, Elle Sports, Elle Active, Elle Petite, Bodymaster, And 1, Prince, Mizuno sports, Spank, Keds, Sperry Top Sider, Bridgestone Golf, Kasco Golf, Bally Golf, PRGR Golf, Sword Golf, Hedgren, Tumi, Columbia, Acegene, Progres, Playboy, Diesel, Levi's, Kangol, Hush Puppies, Scholl, BCBG, Nina, Vago and Millie's

(There could be more...I didn't really search their website, if there is one)

Okay, maybe I swaku, because I only heard of Elle, Bodymaster, Bridgestone golf, Columbia, Playboy, Diesel, Levi's, Hush puppies, Scholl and Vago.

Based on Wallstreet's general piece on Ossia, ROE of Ossia isn't exactly fantastic. Going from 17.3% (FY04), 14.6% (FY05) then to 5.7% (FY06). I'm not sure how they count it, but I'm not going to calculate the ROE of Ossia in FY07 due to the disposal (if I just subtracted those one off, I'll get negative net earnings!).

I'm pretty convinced of its instable ROE though. Family owned business by the Goh family (60 % over), but not exactly my cup of tea :)


shade343 said...

I spotted a few errors in your analysis and inaccurate statements. Allow me to correct them one by one.

1)"From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. "

Ans: This is not true at all. Ossia is the master lessee of the building now. They pay a fixed sum of money for the rent of the building to MI REIT. Should they sub let out the units in the building to other parties and collect cash in excess of what they are require to pay, they would have a profit. And Ossia has confirmed that they are already doing that. They have also negotiated for a very competitive rent from MI REIT.

2) "Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries?"

Ans: Your analysis is inaccurate as you failed to consider the principle buisness activity of their HK subsidiary. Their HK subsidiary is involved in the selling of Millie's Lady shoes in China, Malaysia, SIngapore, HK, Taiwan and US. They only invested $10million for the business and opened up numerous outlets in China. Most of the earnings were in RMB and NOT HKD.

Results wasnt really fantastic at first, but they have mentioned many times they wanted to fight head on with Belle International-their biggest competitor. However, Belle International decided to buy them out at a bombshell price. Since the profit is in excess of 80million, why not take the money and invest in somethingelse?

SHareholders certainly enjoyed the 15cents a share special dividend arising from the disposal of the buisness.

And profit was eroding due to higher expansion and distribution cost, not becos of an increaisng HKD. In fact, its the SGD that has risen against the HKD that resulted in a forex loss. This loss was not possible to be hedged as the management didnt know the exact date as to when the money was coming in.

By the way, included on their balance sheets are results from Pertama holdings which ossia has a 50% stake in it. Do remember to factor that in.

Going forward, Ossia will focus on the retail industry, with possible selective acquisitions of other retailing buisness.

Perhaps you would like to meet the management over a cup of tea? I assure you that the Goh Brothers are very kind people who will look after the interest of Minority shareholders. If you look at the past announcements, the Goh Brother have been buying back Ossia's share at 15cents-26cents, and they are doing it because its severely undervalued.