Tuesday, March 24, 2015

Recent Action - Noel Gifts International

I've initiated a small position in Noel Gifts International to test out the strategy I have previously discussed on my post on Design Studio (view article here). Since the counter is rather illiquid, I have only managed to purchase 18,800 shares at a price of $0.295.

The idea of using this strategy is to test out the psychological importance of paying out dividends out of earnings that is in excess of 10% yield in a single year. While this is not the most prudent way for the management to do so, it allows a good opportunity for investors to get in early in anticipation for the announce-to-be special dividends later in the year, where it will announce a strong signal that I think will send the price to rocket upwards, similar to what it recently does to Design Studio.

My time frame for holding this counter will be somewhat short and I am expecting to hold it for less than 2 years. I will explain more in detail later on the significance of that 2 years holding period. This is rather weird because I do not usually purchase a stock if I don't think the business is going to be a success for the long term. Anyway, I still did my own due diligence on the matter and hope you will find this as useful.


Company Overview

Noel Gifts International is the leading hampers, flowers and gifts company with an extensive offering of chic floral arrangements and gifting ideas for the stylish and discerning.

The company has been in existence for the past 39 years and it was listed on the SGX Mainboard in 2008.



Financial Numbers

The gross margins over the years have been rather impressive given the relatively easy entry of barriers for the business to operate under, I do not expect them to churn out a margin of around 50% or thereabout. 

The problem begins to arise when you start looking at their overhead cost operations, with employee salaries being the main issue, along with the other distribution costs. You can take a look at their financial statements to understand better of the situation. In general, the gross profit is barely covering the distribution and the employee's cost despite their impressive margins turnover over the past few years. With overhead costs only going to go up with increase salaries, the only solution to tackle this issue is to increase the volume they are selling and improve productivity per headcount. We can see a lot of companies doing that on the productivity kpi these days.




The EPS that you see in 2012 and 2013 were inflated due to the one-off fair value adjustments on the investment properties. Again, this is one aspect of accounting treatment that I have repeatedly emphasized on this blog that may skew the nopat results. Without accounting for such adjustments, the EPS is rather stable at around 1.50 cents/share.

The company has interestingly been dishing out aggressive dividends of around 1.50 cents/share, which is around what it earns for their main core businesses. I can understand why they have maintained the dividends in 2012 and 2013 even when EPS was higher than usual because the gain is mostly on the adjustment which does not impact the cashflow. As far as cashflow is concerned, they are paying out mostly what they earned on the earnings.




Cash Conversion Cycle

I am curious on the way the business is operating in terms of the cash conversion and my initial intuitive proves to be somewhat right.

As you can see on the table below, the number of days of sales outstanding (DSO) is around 21 days while days of payable outstanding (DPO) is about 16 days. What this means is that the company is churning out their working capital (excluding inventory) just about fine in terms of receivable and payable. For those who are curious about this, you'd always want to receive money as soon as possible while delay payments to suppliers as long as possible if you are acting as a business owner and it makes sense because you want to turnaround cash to your advantage as soon as possible.

The reason I have actually striked out the inventory portion is to highlight the business that they are operating under. As a company operating in the hampers and gifts business, they will always have to stock their inventories in advance as much as possible and ensure that they re-stock their inventories ahead of the festive. The good thing is most of the inventories will be hardly be obsolete since they can last for some time on the shelf. It is also easy to predict whether business volume is going to increase by looking at the inventory holding increase or decrease. If they are estimating business to increase, we should be seeing a corresponding increase in the inventory, just like what is going to happen in 2015 due to the demand for the SG50.


Cash Conversion Cycle Calculation

Inventories movement

Before I proceed to the next segment, it is also important to note that the company is operating under a debt free scenario for a few years now, so their balance sheet looks relatively clean but with the caveat that their return on equity is pretty poor due to the poor turnover of its return on assets, despite the high margin they are churning out.


Catalyst 1

In the month of Oct in 2014, the company has entered into the agreement regarding the sale of one of its investment properties for the Balmoral Development. In doing so, the company has locked in a gain of around $2.4m or an EPS of about 2.1 cents/share.




The management did mention that they were going to use the proceeds for other investment opportunities and returning part of them to shareholders. 

I expect the management to return about 1.3 cents/share from this transaction alone.


Catalyst 2

In Jun 2014, the company has been awarded a huge contract from the NPD regarding the distribution of gift in regards to the celebration for the SG50.




The contract value awarded is amounting to $7.47m and using an conservative estimated net margin of about 4.7%, the contract will add an estimated EPS of about 0.34 cents/share for 2015. I suspect it might just be slightly more because they probably are going to use the extra hands of people they already hired and factor in the contribution. In other words, I am expecting an improved productivity and an estimated 0.50 cents/share.

From here, I expect the management to distribute a special dividend of about 0.30 cents/share.


Catalyst 3

Earlier last week, the company has been awarded another mega contract from MAS for the packaging, marketing and sale of numismatic currency set for an awarded contract of $7.9m.




Using the same estimation margin as above, I estimated the company to factor in at about 0.55 cents/share.

However, since this will most likely be recognized in the financial year 2016, I should be excluding this for the 2015 projected dividends. The special dividends for this will come in the year 2016 to shareholders.


Conclusion

Earlier, I mentioned that this will most likely be a short holding period trading from me which I estimated to be less than 2 years. Judging from the catalyst that the company has been awarded in the next 2 years, we should be expecting a huge jump in earnings and a special contributing dividends of around 1.5 cents (from normal core business) + 1.3 cents (catalyst 1) + 0.3 cents (catalyst 2) = 3.1 cents/share for the financial year 2015, which translates to 10.5% yield at the current purchase price of $0.295.

For 2016, I am expecting a dividend of at least 1.5 cents (from normal core business) + 0.4 cents (catalyst 3) = 1.9 cents/share. This of course excludes any potential major contract won in the future with its better brand recognition. Assuming there are any, this will only contributes more to its bottomline.

Having said all this, the risk is obviously there if you are holding this for a long term play. I have highlighted some of the major issues they are currently facing in the overhead operations cost and another in Malaysia and China where they have ventured but still facing major struggle to compete with the others given the ease barriers to entry for local vendors.

Let's see if the strategy works out fine in the end. I'll post an update should I decide to sell at the end.


19 comments:

  1. Hi B,

    Ooo, nice, I like the company too. Low debt and decent P/NAV are what won me over. I've tried to queue Noel in the past with orders around $0.26 hoping for the illiquidity to help me pick some shares up at cheap prices, but alas no luck for me. Nice analysis, especially about the EPS without adjustments!

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    Replies
    1. Thanks GMGH!!!

      The balance sheet looks clean and it appears they are able to maintain their current dividends at least. Overhead could be an issue though and they will need to take care of this sooner than later if they are going to grow for the long term.

      Delete
  2. I am a believer of noel gift growth story too.
    I think this counter can hold for long term.
    The 2 government contract will likely be catalyst for more to come.
    Mid - long term wise ave 2c dividend/yr shd be sustainable barring unforeseen circumstances.
    personally i accumulated 0.75m shares at ave ard 26c and intend to keep for long, both for cap gain as well as passives.

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  3. Hi Paul

    I see that you are vested in the counter.

    Could you care to explain how do you see the company tackling its increasing overhead costs in the future? Without the 2 big contract, they are likely to be flat earnings. How do you see them grow their businesses in the future?

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  4. tackling its overheads would mean working more efficiently. I think that shdnt be a problem for the team which has gone thru so many crisis.
    in fact that sg50 is testament of the garmen faith in them. This is a start. followed by the mas.
    i believe there are more to come since this brand is endorsed by the garmen as one of their preferred brand.
    if u read ngi recent stratis times interviews, alfred wong said that there are a number of deals in the pipeline...then came this mas one.
    these wld definitely lead to growth of their biz.
    dun forget ngi cap is only 30m. Its far easier to double to triple such small cap.
    n part of it is backed by hard asset n cash.
    thats my view.

    ReplyDelete
    Replies
    1. Hi Paul

      My personal take is that it will not be an easy task to tackle the overhead. For a company that is raking in 50% gross profit margin but only 4.7% net margin, it means the overheads alone is taking up around 45% of the revenue, which I think is a huge chunk even if they managed to improve productivity.

      I agree about the increased brand awareness and perception. It appears that as the official brand selection for the govt, there could be more winning contract in the future which could lead to increase volume in the business.

      Other than that, I think they have a pretty good record and should be able to sustain the business for a very long time to come.

      Delete
  5. Hi B,

    Sounds like an interesting strategy, and great to see how clearly you've stated your plans to sell and what exactly you're expecting to happen with the dividends. I hope it all goes to plan, look forward to hearing further about it when the time comes to sell!

    Cheers,

    Jason

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    Replies
    1. Hi Jason

      Investors tend to like dividends a lot and what more than a dividend in excess of 10%. My bet is that it will push the price upwards so we'll see if I could sell them off making profits in such manner.

      Delete
  6. The coming mths cld see prices going up beyond 35c. For 3c div that sort of prices wld make a v respectable 8% dividend.
    Long term wise 2c div might be expected if the contracts can continue.

    ReplyDelete
  7. Just wondering what moat this business has? What's stopping people from ordering from Far East Flora (unlisted) instead of Noel Gifts?

    Also, are margins poorer for large orders (e.g. MAS) compared to smaller individual orders?

    Thanks.

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    Replies
    1. Hi MW

      Let me try to answer this as best as I can. Maybe Paul is more familiar and could help with his views too.

      As a customer, I have personally ordered gifts flowers and hampers from both far east flora and noel. Both of them are the major players in singapore segment. I am.not sure about far east flora but noel has roughly 40% market share for singapore. I expect the same with far east flora and the rest should go to smaller local players. As a customer, my priority is in timeliness of delivery and quality of the products when I am delivering. Both has not disappoint so far. I did mention that I do not think the nature of the business has a high barriers of entry so brand recognition play avery big part here if they are to succeed. Also the larger scale of their business also allows them to scale up thetheir operations not only for the festive season but also the daily 365 gifts as they call it. I doubt the smaller local players are able to compete in this segment so far east flora is probably the closest competitor.

      For the second question, I am predicting that margins go lower for bigger orders as there were more bidders for the project. I think what they are aiming here is to gain further brand choice recognition and the recent 2 big contract has proven them to be so.

      Delete
  8. Thanks very much B for your quick reply.

    It would seem that these two companies take up the dominant market share of the gifts industry in Singapore. I've personally seen colleagues ordering corporate gifts or get-well hampers from Far East Flora. May I check where you got the 40% market share for Noel Gifts? Did the Company mention it in their AR? (Sorry lazy to check haha). If so, it is impressive that they can build up such a strong market share as there are low barriers to entry for this industry. But I do agree that loyalty and timeliness of delivery (i.e. reliability) are paramount in this industry.

    Another thing I've been wondering about is - what is the growth for the gifts industry in Singapore? Is the pie growing for all players, or does Noel Gifts have to take market share away from smaller players? How has the Company been growing its revenues, profits and cash flows over the years?

    My initial impression was that Singapore is a small market and hence may suffer from saturation - i.e. the penetration rate is already very high and everyone who wants to order a gift has already done so (minus ad-hoc events where one may feel compelled to buy a gift e.g. wedding or get-well-soon). Has the Company made plans to expand their gifts business to other countries?

    Also, how did you compute the approximate dividend/share for each catalyst? Was it based on the Group overall pay-out ratio? How consistent has this pay-out ratio been over the years and are they reinvesting their earnings to grow the earnings base?

    In light of the above, would you classify the Company as a growth company or a pure yield company?

    Thanks!

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    Replies
    1. Hi MW

      Yes, the 40% market share is mentioned in the AR in 2014, so I'll take it as it still hold as of now. Regarding your question about the overall pie, I think the challenge they have in the past is that people tend to spend on gifts only on festives season or special occassion such as birthday or wedding anniversary. I think the management mentioned that they are thinking of creating more innovative products so people can go to them to send any sort of gifts for the usual 365 period. I don't know if this will work in the long run.

      The Singapore market seems maximized for them. They did venture into other areas in Malaysia and China but have not been as successful in gaining market share as they did in Singapore. I think this will take time as they build up on the brand awareness in overseas which is not going to be easy.

      I approximate the dividend based on the usual payout the management did for their core business. The company does not usually tend to hold cash too much as their cash conversion for the inventories they are holding are well managed and relatively predictable.

      I definitely see this more as a growth company than an income type of stock. If investors are looking for income, there are so much better companies that has generated better yield on the fcf. I am looking this more from the speculative point of view :P

      Delete
  9. Hi mw, i see u have quite a no of qns.
    Ngi 40% share info is given in the straits times article n some research articles. U need to dig them out. As for ur other qns, instead of answering them one by one, suffice for me to say that ngi cap was 1.5m in 1994 grown to 30m now excluding dividends. And this company has been.generous with its dividends. U can calculate its cagr. This together with my calculated sum of parts of 45c, presents to me a great opportunity to be vested at 26c.
    My position would be long. Unless a GO comes or price goes up a great deal disproportionately to dividend yield rise.

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  10. Thanks B for the explanation.

    Dear Low Paul, I can appreciate the historical growth of the Company and am very happy for you that you've managed to enjoy such growth since 1994. But for me currently, as a potential investor, it is the future of the Company which matters to me as I cannot enjoy its past growth. While being relevant in terms of seeing how the Company has managed to grow, this could also be an impediment if it means that the growth has resulted in market saturation and the Company has reached its limits.

    How did you come by your sum of the parts calculation of 45c/share? I would question whether sum of the parts is an appropriate valuation methodology since Noel Gifts has a core business of gifting and has no disparate segments or divisions unlike conglomerates such as Boustead and Keppel Corp.

    Thanks.

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    Replies
    1. Hi mw
      the ngi sum of parts is detailed in my blog paullowinvestmentjourney as well as in valuebuddies.
      Half true that past is past n current investors cannot enjoy past success.
      Why? Brand name is painstakingly built.up in past 4 decades. So buying ngi now u can enjoy its brandname ie owning part of a 40yr heritage. So not entirely true that u cannot enjoy past achievements of ngi.
      In stk investment, one crucial qn to ask.oneself if whether past perforfance can.be repeated.
      In.ngi i strongly believe so.
      With population expected to grow n garmen endorsement of this brand, i believe this counter has the potential to multibag. Bear in.mind its only 30m cap. Each garmen contract is 25% of its cap.
      It pays to be vested early.
      In.my case i ignored background noises n.build up a 0.75m share stake. With specials div on.the way, i would be looking at at least a 20k dividend this yr with more to.come.
      I dont believe in saturation. I believe its key now is garmen.brand recognition which might just be the catalyst to.make this counter fly. Remember the garmen has lots of "gift lobang". Sg50 mas are just 2 pf the many many lobang.
      Feel free to visit my.blog or if u prefer u can email me paulcoke8@gmail.com
      We can.discuss it further.

      Delete
  11. Thank you for such wonderful and interesting article.


    Debt To Freedom

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  12. I have 40,000 shares with average price of $0.250. I am not confident that there will be a special dividend but I am keeping it until the price reach closer to $0.400.

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    1. Hi Dividend Hermit

      Care to share why you think there will not be a special dividend and how you derived at a target price of $0.40? Are you expecting core business to improve or growth to accelerate?

      I'll be interested to know regarding fellow vested investor's perception of the business than the price target actually :)

      Delete

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