Intelligent Investor's Notes
Red Flag on LONBISC
Intelligent Investor
Publish date: Thu, 29 May 2014, 04:43 PM
I have conducted several financial statement analysts on APOLLO and LONBISC
References:-
From the financial statement analysis on the income statements, LONBISC’s revenue grew 57% frm year year 2009 with a CAGR of 12%. However, it net profit is showing a negative gorwht with a CAGR of -3%. This is mainly contributed by various expenses (COGS, Administrative Expenses, and Financ Cost) which grow faster than it revenue. Net profit margin is the first element on the ROE DuPont analysis and the drop in the net profit is the first big RED FLAG for LONBISC.
The balance sheet analysis show us that LONBISC kept on borrowing money from banks and putting its hands out asking money from shareholders to grow its revenue. The inflow of money not able to growth the net profit maring but sponsor the growth of the PPE. The PPE grew 64% (CAGR 13%) and now the PPE is contributing 75% of LONBISC's total asset. This is further impact on the ROE in view of the asset turnover (with asset in the denominator) is the second element on the ROE DuPont analysis . The unhealthy PPE growth serve as the second RED FLAG.
Financial leverage is the third part of ROE DuPont analysis. Financial leverage is a double edge sword it can hurt ROE badly in the bad times. And, high leverage can make a company’s balance sheet unhealthy and become risky during economy downturn. LONBISC Cash/Total Debt is only 12% and it is hardly to see LONBISC able to generate free cash flow from its business. In view of this, does LONBISC have enough cash to serve it's debt? The financial leverage on LONBISC is a RED FLAG for me.
Financial leverage is the third part of ROE DuPont analysis. Financial leverage is a double edge sword it can hurt ROE badly in the bad times. And, high leverage can make a company’s balance sheet unhealthy and become risky during economy downturn. LONBISC Cash/Total Debt is only 12% and it is hardly to see LONBISC able to generate free cash flow from its business. In view of this, does LONBISC have enough cash to serve it's debt? The financial leverage on LONBISC is a RED FLAG for me.
If we look at the return of assets (ROA=net profit/Total assets), LONBISC ROA is just 2.2% (and deteriorating unabated) compared to 12.5% of APOLLO. The 2.2% ROA ie even lower than the FD in the bank. This certainly is another RED FLAG.
References:-
Posted by Intelligent Investor at 16:36
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Discussions
Be the first to like this. Showing 8 of 8 comments
I am from JB and we can watch Singapore TV channels. In the past 2 years, LonBisc poured big money to sponsor their Mediacorp Star Awards. It got the most coverage for its London Chocolate Roll during the show so I guess it should be the biggest sponsor.
I always wonder why LonBisc needs to spend big on a small market like Singapore? Don't they feel that there is a mismatch between a Star Award where people look for glamarous things and a less than S$1 Chocolate Roll?
If they have money to spend they should change their packaging and food quality. The packaging looks cheap and food quality tastes cheap. The TV ads looks cheap too. It is definitely not appealing to the general Singaporeans.
2014-05-30 08:21
To LonBisc shareholder, this is how your money is spent -- http://m.youtube.com/watch?v=SVbnyjwh1vg
2014-05-30 10:26
Look at Mr. Chong comment and Think about it. Why not put the money to bank FD to get a better return? And it is risk free and you can sleep well.
2014-05-30 14:33
"Growth creates value only when it takes place within the limits of a strong and sustainable company franchise, and these are rare. Second, not all growth - even growth that is worth something - can be appraised with enough precision to permit an accurate valuation." - Bruce Greenwald
2014-05-30 17:40
London Biscuits just announced it 3rd quarter 2014 results. With a turnover of 96m, the net profit is 2.3m, or a net profit margin of just 2.4%. This is not even half of the last year net profit margin of 5.2%. Your analysis of ROE based on last year's data is already very miserable at 4.15%, way below the required return of any sensible investor. So look like the expected ROE this year is 2.5% (?). How?
Where is the widely talked-about turnaround?
Already stopped investing in PPE? I can see its PPE increased some more from 517m to 528m now. How?
2014-05-30 18:45
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Intelligent Investor, good work.
But I just wonder people care about all these numbers or red flags. Just for curiosity sake, let us try to fathom what those numbers mean.
You got your Return of assets (ROA) of 2.2% in this thread and return of equity of 4.15% here:
http://intelligentinvestor8.blogspot.co.nz/2014/05/dupont-analysis-apollo-vs-lonbisc_6394.html
Imagine you put in 1m and borrow another 1m to buy equipments and some working capital for a food business. So total asset is 2m. Your business makes a net profit of 44k (ROA=2.2%). Are you happy about it?
And from your equity of 1m, you make a net profit belong to you of 41,500 a year (ROE=4.15%). Are you happy with it? Hack, for me I rather go work as a clerk and I can easily earn that amount of money without any capital nor stress.
Or I just put that 1m in bank deposit I will earn that amount of money without any stress nor any risk. And the interest I earn is cash interest.
And what kind of return is that investing in LonBisc, a "return" in terms of more PPE, receivables and inventories!
Oh we haven't come to cash flow yet. How do you like when the business tells you that yeah, we earn some profit but the profit is not enough to pay for some more equipment, as the old ones need replacement. Give me more money.
The business is turning around? How much more it makes? Double, triple? Even with that, is that enough for the risks you are taking? Need to put in more money into the business again or not?
2014-05-29 18:10