Its Christmas time and I have 4 days of free days so what better way then to spend a morning writing up this company I chance upon.
Not many would be familiar with the name Pertama Holdings. Pertama is a retailer of electronic goods sold to consumers with a brick and mortar front end.
It runs 12 Electronic Stores in Singapore and 6 Electronic Stores in Malaysia.
You have never seen it’s store? Well, the reason is probably because it doesn’t have much of a store. Back 8 years ago, its got only one store that I am able to find in Funan Mall.
What happens is that in 1999 Harvey Norman Holding Limited did a reverse takeover of Pertama Holdings, there after it operates as Harvey Norman instead of Pertama but its still named as Pertama
Super Low Margin Business
Harvey Norman’s margin is really low at less than 2%!
It is no surprise that in the consumer electronics business, it is not as lucrative as last time. Spend sometime to talk to the sales people at Harvey Norman, Courts and you would hear astonishing salaries from sales people.
But it is still very good! I kept hearing of Lucky Plaza sales people driving BMWs or Jaguars so the commission must be very fat.
The cost of producing electronics have gone down but so has the retail prices due to competition.
Shops like Harvey Norman employ sales personnel and they get paid by commission on the number of sets the sell.
- They have a price that they cannot sell below.
- There is a original price tag to each item, which most of the time is the price that gets the maximum margin.
- Between these 2 prices is what the sales person can play with.
- It will come as no surprise that 2 prices quoted could be different during sales time and at different Harvey Norman.
- There are many sales year round to boost volume, but the sales person will always tout the ones that earns the most commission for himself.
But at the end of it is that:
- Harvey Norman will not sell a product at a loss. It will always be how much of a margin it earns
- Harvey Norman is a volume based business. The more store front put out to maximize consumer catchment areas, the more revenue earned
- When recession comes, products sold are discretionary consumer spending and therefore will be heavily impacted.
- As Caveats look for a build up in inventory as tell tale signs of lukewarm sales period.
Earnings, Capex and Cashflow Analysis
Here are some graphs that I have consolidated. Do click on them to maximize them since this blog space is pretty small.
Earnings(Darker Blue Line) have been good since 2000. Investors should be aware of 2 recession periods in this 11 years, that is, 2000 to 2001 and 2007 to 2008.
Pertama have manage to stay profitable within this 2 years, reflecting that beneath this discretionary consumer business, profitability can be maintained.
Erratic Operational Cashflow
However, operational cashflow (Red Line) have been erratic. In the 2001 and 2002 deep recession, that have been bad and at one point they were bleeding 10 mil.
Since 2004, Operating Cashflow have been positive, but still erratic compared to Earnings.
Why is Cashflow so erratic since Earnings is consistent?
Remember that in this business inventories and receivables play an important role. For greater understanding do read up on my write-up on Cash Conversion Cycle.
In recession, a lot of inventory bought could not be sold. Likely Harvey Norman would have ran deep sales, but in bad times, would you care to buy a Plasma TV?
An analysis of the change in working capital shows that in 2001,2002 and 2004, when they have negative operating cashflow, the changing in working capital was –12mil, –18mil and –16 mil respectively. That is a huge buildup.
Taking a look at the table above, Days Inventories Outstanding, which tells us how much long before inventories got sold have been increasing, but in 2001,2002 and 2004 there was a huge jackup.
Days Sales Outstanding, which tells us how fast that purchase translates to cash, have been falling all the while but take a look at 2008 to 2010. Something happen such that the days receivable translates to cash got shorten from 30 days to 6 days!
How does that impact their cashflow? A shorter overall cash conversion cycle probably means that inventories do not sit idle and translates to operating cash much more efficiently.
The change in Days sales outstanding was the key why in the 2007 to 2008 recession, Pertama survived much better.
The management also learn a fair bit about inventory management and forecasting to reduce that impact.
Here we see how important good management is in a narrow moat market.
Capex and Free Cashflow well managed
Capex (Green Line) bar 2001 have been consistently below earnings. A look at Free Cashflow (Purple Line) shows that bar that 3 bad years, free cashflow have been consistently positive.
The disappointment is that it is not consistently increasing.
After Dividend Payments, there are still Net Cash added
What is great is that even after yearly dividend payments, cash is still added to the company.
I believe this is important because, if you pay out all your earnings in good years, you live your dividends vulnerable in the bad years. The cash adds up as the smoothing of the erratic operation cashflow.
Big Cash Holding Zero Debts
For a cash generative business, that has low capital expenditure, there is really no need for Pertama to take on more debts unless they want to do a rapid expansion.
Just how big is the cash holding? Since 2000, its been increasing from 34 mil to 84 mil.
Since 2005, its Cash holding have been greater than its Total Liabilities.
At 2010, Cash Holding is 78% of Equity and 75% of Market Cap.
Pertama have been consistently paying out 3% yield and recently have hit 10% due to the low price.
2010 – $0.048 – 9.7 mil
2009 – $0.0245 – 5 mil
2008 – $0.0243 – 5 mil
2007 – $0.0243 – 5 mil
2006 – $0.0163 – 3.7 mil
2005 – $0.0143 – 3.1 mil
2004 – $0.0116 – 2.2 mil
Since 2004, Free Cashflow have been consistently well above 5 mil, forecasting a dividend payout of $0.0245 cents is not demanding.
On a current share price of $0.47 cents, yield is 5%.
Average free cashflow for the past 11 years have been 6.9 mil. Which roughly is 7% free cashflow yield.
Price to Sales
Current Price to Sales is 0.29 times which is well below 1 times. This normally indicates undervalue.
Price to Book
PTB is 1.05 times. This means that market is valuing it correctly based on its underlying asset value. It is easy to value since most of it is in cash!
EV/EBITDA is 2.9 times. This is very very cheap, but historically speaking, Pertama have reached a valuation of negative in 2009!
By historical standards, Pertama is at a high, but if you look at the earnings potential it will only take you 3 years of 13 mil to earn back Pertama if you buy it now.
The average operating cashflow for the past 11 years have been 11 mil. So to earn back your money in 3.5 years is really not bad.
What I provided here is the price chart from 2000 to 2010. Right now, we have hit somewhere its highest price since IPO. Recent earnings results have been great, and probably justifies where it is.
At Investment Moats, we lament that we should have taken a look at this stock 6 months early.
A good price to accumulate is 30 cents.
Pertama is the kind of stock that hindsight is a much better gauge then when we first take notice of it in 2004.
This is a business with high competition, but its management have proven that it is able to navigate the Singapore Market well.
However, its Malaysian business have not been performing that well. ROA on Singapore is around 19% while for Malaysia it is closer to 2%!
Retailing is normally a difficult concept to grasp overseas. Would Pertama go regional?
My advice is to follow breadtalk and acquire overseas business instead of venturing on their own.
Would I buy Pertama now? Judging by my character I probably will wait till price becomes more depress, it is not really a momentum stock that we should be chasing so I would rather purchase on price weakness.
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