Friday, 11 August 2017

Sapphire 1H'17 Results - Turnaround Continues

As the saying goes, it never rains but it pours - unfortunately for myself, a few of my holdings had chosen to announce results today just as I am scheduled for a busy weekend. 

Faced with a list of counters which I would ideally like to look at, I have nonetheless prioritized the review of Sapphire's results as this will be my first review since establishing a position in this counter (here).


Year-on-Year Comparison

Source: Sapphire's 1H'17 Financial Statement

Despite a 11.8% year-on-year revenue growth, Sapphire's operating profits had slumped 12.1% over the same period. This is largely due to a fall in gross profit margin. CEO Teh Wing Kwan details the difficulties in the commentary section:

Source: Sapphire's 1H'17 Financial Statement

The company pledges to manage costs more cautiously over the next phase of construction in 2H'17.

Quarter-on-Quarter Comparison

Source: Sapphire's Financial Statements
NOTE: Ranken's first full contribution is in 4Q'15

While Sapphire's bottom line looks atrocious year-on-year, they are actually pretty decent quarter-on-quarter. Outperformance in 2Q'16 appears to have painted Sapphire's 2Q'17 performance in an especially bad light - Ranken's 1H'17 gross profit margin of 12.3% is actually also pretty similar to its FY2017 gross profit margins of 12.2%. 

The Good

Some important points to note: 

1) Sapphire's order book had grown from S$478 million to approximately S$530 million. This provides earnings visibility over the next 2-3 years.

2) Largely as a result of Sapphire's sale-and-lease-back deal (announced here), their cash balances had more than doubled to RMB109 million (S$22.3 million). This increased cash pool allows Sapphire flexibility to tender for even more projects, thus increasing order book further.

3) Management had managed to stabilize trade payables as turnover days had decreased slightly from 221 days to 217 days.

The Bad

A) Mancala continues to be a loss-making with 1H'17 operating loss of RMB3.2 million (S$0.65 million). While this no longer affects P/L (as Mancala's effects Sapphire's net profits through the statement of comprehensive income), it is hardly ideal for Sapphire's plans to offload the remaining 19% stake in Mancala.

B) Sapphire's 3Q'17 results are likely to look worse on a year-on-year basis due to 3Q'16 outperformance. Given their weak technicals, share price might fall further this year before the release of full year results next year.


Sapphire is currently my only investment in the red. Unfortunately for myself (again), this fact appears unlikely to change anytime in the short term despite my anticipated pick up in net profit margins in 3Q'17. 

While the current situation is clearly less than ideal, I am not overly concerned as long as Sapphire continues to execute on its turnaround plans in accordance to my investment thesis. I continue to like Sapphire's long term potential as an Asian infrastructure play and look forward to reviewing their fundamentals again when Q3'17 results are out.

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