Food Junction 2008 Full Year Result Analysis

So they released their full year result in November sometime back. Frustrating company now down from my bought price of 68 cents to 17 cents.

Is this a good opportunity to add further? Lets check out the balance sheet first:

• Profit is down 33% from 5 mil to 3.2 mil
• Net Operating Cashflow after tax was up from 4.2 mil to 4.7 mil
• Cash is abit higher from 1.8 mil to 1.9 mil
• Debt is still the same very low to insignificant compare to assets or cashflow
• Liabiliities are higher. This would explain the higher operating cashflow compare to profits.
• The main reason for the higher cashflow vs profit is down to higher other payables,deposit received and accruals. Due to that cashflow looks better even though business wise they generate less cash.
• The propensity to invest and buy capital stays largely the same. capital spending increased from 2.8 mil to 3.6 mil
• Dividends paid fell from paying 6.6 mil in 2007 to 2.4 mil. This represent 75% of profit and 51% of operating cashflow. Year 2007 paid out a dividend of 2 cents

All in all, we couldn’t really tell much since its suppose to be a bad year but they are still profitable. Hey, when the going gets tough, you will still need to eat right?

Lets look at some ratios now:

This table is taken from my Dividend Stock Tracker which is updated frequently with the latest sgx share price so you will see the ratios evolve with the share price:

Previous Year 2007

Latest 2008

Details

• Based on Earnings yield and operating cashflow, earnings have decreased. However it is still quite good. Opearting cashflow have improved. but i have stated why it improved and its now due so much to better profits and all.
• Net margin was low, i can’t remember it is this low. It used to be above 10%. A continual decrease in this is definately a sign of trouble. Especially if it is this low.
• A very high return on investment capital. Well basically most of what is in the assets are cash or fixed deposit. Equity and debt is so low that a matrix like ROIC or ROE will show that it is astoundingly good. A 112% roc means that $1 of capital put into work will yield you $1.12. Sounds good. BUT only if you can replicate it to a large extend.
• Cash on hand is 94% of market cap. At 17cents you are roughly buy 16cents worth of cash + managements “skills” in food related business execution. There is safety in this at this level definately.
• EV/EBITDA is 0.5 times. What it means is that if the profit stays the same, it will take you HALF a year to earn back your full capital. There is safety in this at this level definately.
• PTB is at 0.9. Its nearly at book value, since all its book value is … cash.
• I am using a very conservate forward div yield. According to SGX, they have or going to distribute 2 cents for 2008. they should distrbute another at the mid of next year normally but i don’t think based on this year’s experience they going to do that. The yield based on the share price now is 11%. If they keep the profits it is sustainable. if they go into a loss, it is still sustainable since they can pay out nearly 5 years without profit.

Problem

The problem with Food Junction is not so much of what we can uncover from the balance sheet. It is the execution going forward. I have stayed vested in this company for a long time since early 2004.

Back then this company have such a good ROE and good margin and good balance sheet. Trading nearly 3 times book value, it shows that investors and the market value its stability and predicability in earnings. However, all their ventures have stagnated.

They being to venture into Malaysia and China. The venture in China took so long to materialize and in the end it weren’t very successful. Lets take a look at the turnover/Assets for the 4 regions:

Singapore = 40mil/29mil = 1.37 times

Malaysia = 3.9 mil /4.7 mil = 0.82 times

China = 0.682 mil /2.688 mil = 0.25 times

Indonesia = 0.466 mil /0.693 mil = 0.67 times

As you can see, overseas ventures haven’t been profitable. Which is why this year’s larges cap ex is spent in singapore to the tune of 4.6 mil.

This year they turn to operating more japanese food and beverage business in Singapore and buying Malone’s Restaurant in Shanghai. I am not sure how much that would make up but it seems from my internet research Malone’s restaurant is a very hectic american restaurant in Shanghai.

All in all, i believe there is safety at this price. However, if you are looking for growth, you gotta punt in the believe that the management have after this 4 years of learning does come up with a good plan going forward.