Inter-roller just released a set of rather disappointing earnings.
- Revenue was down 11.5% for the 4th quarter
- Revenue was down an overall of 13.7% for the full year
- Made a profit loss for the 4th quarter. The first after a long time
- Overall a 32.5% fall in net profits.
Not surprising, the market rewarded shareholders for such a stellar results by a huge gap down 16% to 47.5 cents
Lets compare the fundamentals.
- Net operating profits after tax is negative at -11 mil compare to 29 mil in 2006. On the surface it is very alarming and investors will be pretty shock by this but its not totally unexpected to me since being in an industry where business is in a similar structure you would expect this kind of cashflow shock. Much this can be attributed to 2 differences:
- A 12 mil profit from sales of investment properties that is minus off the operating cashflow.
- A 19 mil increase in contract work-in-progress.
- The 12 mil profit from sales of investment properties shouldn’t be a worry since it is accounting at a different section, but the puzzling thing is that it doesn’t add up in the Investing activities section which recorded a 29 mil increase instead of 12 mil.
- The 19 mil increase in contract work in progress should eventually be translated to revenues and profits in the future. Basically what this says is that in the near term, liquidity is squeeze because the profits aren’t realised as cash. Should Inter-roller be able to come up with adequate financing in the short term to tie it through and IF projects don’t get delayed, this will be translated to future profits.
- A 15 million reduction in cash holdings. This contradicts my earlier statement of having enough cash to tied over short term. I would assume more payables need to be obtained since cash isn’t enough. The positive aspect here is that long term interest bearing debt is down form 23 mil to 12 mil. The question is whether this is the right time to do this since their cashflow was impacted.
- The cashflow of the company was supported by the sale of 29 mil worth of properties and plant.
- ROIC based on operating cashflow is -14% compared to 41%.Business operations particularly in securing sustantial contracts seems to be decelerating. Backorders would need to be increase substantially if they are to be profitable going forward. When backorders slows down, inter-roller will lose their future profitability. Also to grow, the orders would need to be of sustantial size. Such is the problem of a turnkey business that does not have a maintenance component to it. The group however maintain that their projection in 2006 is correct, as their total contract orders totaled 163 mil compare to 56 mil in 2006.
- The group is confident about their future prospects, like what i have seen in most annual reports lol. "The airport industry continues t present plenty of opportunities for the Group, especially in the category of airports up to 20 million passengers. The Group continues to bid for these airports projects whereby the Group has been sucessful. In additionm we are also positioning ourselves to move up the value chain by bidding for very large projects (30 million passengers and above) directly or by working with partners. However, there are not many projects of this size on the horizon. (Currently there are not more than 30 airports in the world that handles more than 30 million passengers annually.)"
- Price to book value remains at 2.5 times. A book value of 2.5 times should reflect a certain level of safety in owning the company. However, with the challenging roads ahead, I don’t think it should be a safe entry level.
It is certainly a difficult company to look at. I have to admit my valuation of it being reasonable at 80 cents when i bought it is very naive.
Looking back, you will only make money if you can anticipate clearly future cashflow generation capability and having a certain margin of safety in purchase price. Both of which I didn’t do.
I’m not going to make rash decisions. I have about 7 more companies to take a look at. Let me look into whether to add on to this or to hold.