by winston » Wed May 14, 2008 2:25 pm
Not vested. From OCBC:-
Weak 3Q08 results. Eu Yan Sang International Ltd (EYS) failed to leverage on its seasonally strongest 3Q this year, posting a 45% YoY decline in profit before tax (PBT) to S$3.5m and a 75% YoY plunge in net profit to S$1.3m despite revenue improving by 12% YoY to S$61.4m. Its dire results were partly caused by one-off items involving the disposal of its bleeding
Australian clinics and the restructuring of ownership of its Red White & Pure (RWP) concept store. Excluding these items, PBT would have fallen by a smaller 16.3% YoY. However, adding to its woes, the continued strengthening of the SGD against other currencies such as the HKD resulted in forex losses amounting to S$0.5m in 3Q08, further wiping out the group's
revenue growth.
Freed of its burdens. To recap, EYS's Australian clinics and RWP concept store incurred losses of approximately S$0.5m and S$2.2m in 1H08, respectively, and have been causing a drag on the group's earnings. As such, EYS has recently divested these units. Although the restructuring of RWP from a fully-owned entity into a 20%-owned associate resulted in a painful S$2.9m impairment on EYS's FY08 earnings, this move will actually benefit the group in the longer term as it reduces the burden of RWP's losses on the group's future earnings. For the same reason, we view EYS's recent liquidation of its Australian clinics positively, as it will stem further losses on the group's earnings.
Expansion helps to grow revenue, but at a cost. EYS's rapid retail expansion has no doubt borne fruits in the form of revenue growth. However, whether the benefits of expansion outweigh its costs remain unclear. For 3Q08, revenue from its retail segment grew by 14% YoY, but distribution and selling expenses escalated by a quicker 22% on higher rental and manpower costs. As inflation takes its heat on the economy, EYS's sales growth must outpace escalating costs in order for further expansion plans to remain viable.
Trimming our fair value and rating. We have trimmed our FY08 earnings estimate by 15% to factor in EYS's weaker-than-expected 3Q08 results and one-off expenses incurred in its recent divestments, and as a result, our fair value estimate eases to S$0.485 (from $0.535 previously). At current valuations, this represents around 13% potential downside, as such, we
are downgrading our rating to SELL.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"