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.
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.
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|
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.
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.
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.
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.
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.