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Vibrant Sees 14-18% ROE Potential
Corporate Digest | 08 December 2014
By: Shane Goh
Articles (99) Profile

Following our tug-of-fools series on Vibrant Group, Shares Investment had the opportunity to speak with the firm’s management on the outlook and concerns highlighted in our bull and bear articles.

Present in the meeting were Vibrant’s chief executive officer, Eric Khua Kian Keong, chief corporate development officer, Henry Chua Tiong Hock, and chief financial officer, Simon Sim Geok Beng.

Shares Investment: Vibrant’s freight and logistics arm has been the key revenue contributor for the group. Could you share with us the key drivers and competitive advantage of the business?

Henry: The business segment can be broken down into three parts: International Freight Forwarding, Chemical Storage and Logistics as well as Warehousing Operations and Logistics.

Global trade is the key driver of the business. We provide both sea and air freight forwarding, with the former contributing the lion share.

The key differentiator is our wide global network through its offices in Malaysia, Thailand, Hong Kong, Taiwan, Korea, China, Dubai and 120 international agents which connects customers to approximately 600 destinations worldwide.

We have a proven track record of more than 30 years of providing integrated and broad-based logistics services to our customers. Our competitive strength is our ability to provide customised logistics solutions for customers with specialised requirements, including customised space solutions for build to suit, transportation, distribution as well as financial solutions.

SI: While the financial services arm provides about 9 percent of Vibrant’s revenue, it contributes about 41 percent of its pre-tax profit. What are some steps the firm is taking to grow this segment?

Eric: Presently, we have stakes in Sabana Shari’ah Compliant Real Estate Investment Trust (Sabana REIT) and Sentosa Capital. We receive management fees and dividends from them. It’s important to note that the management fees and dividends are recurring in nature. As such, we view them as important contributors to both our top and bottom lines. At the same time, we expect to grow our financial leasing and structured financial services in China.

SI: Could you share the rationale behind the foray into commercial properties in Singapore as well as industrial and residential projects in China?

E: We view the acquisitions of both Equity Plaza and Cecil House as good opportunities to participate in strategic investment of commercial properties in the heart of Singapore’s Central Business District where the group can derive both rental returns and gain from subsequent sale of property on strata lots basis.

The same can be said for our investments in high tech industrial park development in Changshu, China, and government-approved resettled housing development in Jiangyin, China.

SI: Revenue growth has been impressive in the past five years. However, we’ve noticed a fluctuation in gross margin. Could you share with us the reason behind this?

Simon: Our gross margin (GM) was relatively stable on a year-on-year comparison. The higher GM recorded in FY14 of 31 percent as compared to 27.9 percent in FY13 was due to higher margin contribution from our financial services.

However, if we were to look at our pre-tax profit and net margins, we would notice a sharp increase from FY11 to FY12 for both margins from 16.7 percent to 25.4 percent and 10.6 percent to 21.6 percent respectively, and both have maintained their FY12 levels for the past two years.

SI: Vibrant’s return on equity (ROE) has fallen from 17.6 percent to 11.9 percent in the past three years, mainly due to an expansion of equity as a result of an issuance of perpetual securities and an increase in retained earnings. Do you expect it to continue falling?

S: No. Moving forward, we target to achieve a return on equity of between 14 percent and 18 percent. However, we like to be flexible with regards to the equity figure as raising equity to pay off debt is a possibility if it makes financial sense.

E: The key thing for investors to focus on would be the earnings per share (EPS). Over the past five years, our EPS has risen from $0.0062 to $0.0172 in the year ended April.

SI: Vibrant has recorded two years of negative cash flow from operations over the past five years, underpinned by the accretion of deferred revenue. How long more is the accretion expected to persist?

S: The negative accretion of deferred revenue line item seen in the cash flow statement is due to an amortisation of the deferred gains arising from the sale and leaseback of properties to Sabana REIT. This figure is expected to persist until end 2015.

Additionally, the cash flow from operations in FY14 was also impacted by a $15.9 million increase in inventories. This was mainly attributed to the residential development project in China. As the properties will be sold back to the municipal government, we will be receiving the payment and will expect a reversal in our operating cash flow statement once the transaction is completed.

SI: Street consensus expects an interest rate hike sometime in 2015. Could you share on Vibrant’s exposure to interest rate changes and how the company is addressing it?

S: Based on FY14’s figures, $100.7 million of our total debt position of $217.5 million is based on a fixed rate of 4.6 percent. The remainder is a percentage (ranging from 1 to 2.5 percent) above a prevailing rate such as the Singapore Interbank Offer Rate. This means that about half of our debt is hedged on a fixed basis and only half is exposed to changes in the market.

SI: If you had to sum up one key takeaway for Vibrant’s investors, what would it be?

E: It will be “Value”. We believe in building a sustainable and long-term profitable business.

SI Research Takeaway

While key concerns regarding the property ventures and negative cash flow from operations were addressed during the discussion, half of the firm’s debt is exposed to market forces and may be a cause of concern for investors.

Disclaimer: The author has a stake in Vibrant.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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