Figures for this analysis of GRP Ltd can be found in this Google Spreadsheet here.
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The google spreadsheet widget was not working very well, so I had to recreate this again.
I really couldn’t find the bandwidth to uncover undervalued long term plays. Most good stocks I have discovered them too late and now their valuation is very rich.
In the end I chose to take up position in this little company called GRP Ltd.
The business of GRP Ltd
GRP Limited engages in the design, manufacture, supply, and servicing of industrial/marine hoses, fittings, marine safety equipment, and related products for onshore/offshore, marine, oil, pharmaceutical, and petrochemical markets.
It supplies and services a range of rubber hoses, which comprise onshore/marine loading hoses, industrial/chemical hoses, marine engineering products and services, and hose fittings, as well as products for use in the safe applications to protect loading and unloading systems from damage and downtime; and consultation, engineering works, and inspection and testing services.
The company also trades and distributes precision measuring instruments and equipment, and scientific apparatus, such as dimensional measuring instruments, optics/inspection and measurement, analytical/environmental, electrical/electronics, and torque meter products.
In addition, it fabricates and trades plastic moulds and plastic products, such as uPVC pipes, as well as fittings in the electrical, pressure, DWV, and rubber/sewer sectors for the construction industry under ‘Arrow’ and ‘STAR’ brand names. Further, the company involves in the rental of office and warehousing space.
It has operations in Singapore, the People’s Republic of China, other ASEAN countries, and the Middle Eastern countries. The company was founded in 1977 and is headquartered in Singapore, Singapore.
I see similarity between GRP and Micro Mechanics in that they provide the solutions for the marine and petrochemical industry. In Micro Mechanics case, is to provide precision products for the semi conductor industry.
For me, there are 2 bad points that comes straight to the brain for a company like this:
- The products are low tech. Even if they earn a good margin now, their margins will surely thin in light of more competition with more entrants (competitors)
- A lot of its fortunes are tied directly to the fortunes of its clients. If there is a down turn such as something similar to the semi conductor industry, profits will take a hit
In short there don’t seem to be much economic moats to allow GRP to earn above average profits. An investor in this company will surely have to watch increasing competition that would reduce the margins of GRP.
Profits and Revenue
GRP started off in 2000 (the furthest data I have) Net Loss and turned profitable in 2005.
Since then profits have been hovering around 4.8 – 5 million dollars.
The strange thing is that Revenue have been on the decline yet profits have been rising. This is likely attributed to a reduction in operating expenses related to the business.
Profit Margins swung to the positive as well in 2005 and have been going from strength to strength.
A profit margin of around 20% is pretty good to have. But as mentioned, I wonder how long it will last. This is probably an industry that depends very much on the activity of the marine and petro-chemical industry.
Good profits can also be attributed to the good activities of these 2 industry during the twenty first century.
Comparatively, operating cashflow margin have never been negative for these 10 years. This means that the cash brought in have always been good.
In fact, other than 2001, and 2005, their operating cashflow have been higher than current dividend of 2cents.
Dividend Yield and Free Cashflow Analysis
(Y axis is in SGD in Millions, X axis is time in years)
GRP Ltd earns a pretty good Free Cashflow. This is attributed to the low to non-existent capital expenditure. This can be liken to software companies, who after coming up with a unique competitive products simply sells it at no additional cost and capital expenditure required because there is simply no need for capital replacements.
Free Cashflow, which is Operating Cashflow – Capital Expenditure have been positive for the past 10 years. This is hard to carried out as I have seen many cash generating companies in the region and not many can boost a 10 year record like this.
Dividend payout was initiated only in 2006 and have risen steadily to 2.78 million. How safe is this dividend?
Granted, they have for the most part paid within their limits (Dividends < Free Cashflow yield) However, in light of any downturn in the industry, it will be tough to pay out 2.78 million consistently.
Currently, the yield on cost for me is around 9.3%. This is a very good yield and if business is maintained, it presents a very attractive yield for the long run.
The median Free Cashflow yield is somewhere around 7%. This should be the level of dividends GRP should consistently paid out. That would be a 22% reduction in dividend paid out bring the dividend paid out to SGD 2.1 million.
Again, much will depend on an analysis to see how sustainable GRP can weather a industry wide downturn.
ROE and ROIC
ROIC have been in lock step with ROE that is until 2007. It is then that more profits and in turn cash is generated making ROIC more impressive.
I would expect heighten competition to bring down this figure, but the company have been operation for years and given the low barriers to entry, its amazing why ROIC and Margins have not been reduced.
Price to Sales
GRP have a Market Cap of 29.9 million and a Revenue of 25.59 million.
This works out to a Price to Sales ratio of 1.16 times.
This is a fair price based on P/S ratio. Nothing under valued about this.
GRP have an Enterprise Value of 15.60 million. This is far less than the market cap mainly because it has a 14 million cash holdings.
Basically what it means is that when you buy GRP for 21.5 cents, almost half of your purchase is in cash.
Its Operating Cashflow is roughly 4.24 million.
This works out to an EV/EBITDA of 3.8 times.
What this means is that, given the current operating cashflow, it will take only 3.8 years to earn back 100% what you purchase today.
This is rather cheap if you ask me. The problem is that earnings and operating gets severely depressed thus resulting in this EV/EBITDA to be distorted.
Overall, GRP provides a good current yield and they are definitely paying within their means.
On another plus note, they are building quite a sizable cash holdings while paying good dividends.
However, more research needs to be carried out as to how come competition have not reduced ROE and Margins.
For me, any additional investments will depend on a more thorough understanding of the business nature of GRP.
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