Business Quality Inspection on GAB (3255)

Franchise Quality Analysis (FQA)

- GAB able to score 40/40 on the FQA inspection.
-  The 10 YR CAGR of Net Profit is higher than the Revenue, and this show that GAB able to control it's cost efficiently from time to time.

Return on Equity (ROE)

 
 - GAB ROE is way above the WACC (59.53% vs 7.20%)
 - The ROE have been grew in 180.54% with a CAGR of  7.24% on pass 10 year.
 - The ROE was achieved with a moderate profit margin of 12.98%, high sales turn over and high equity multiplier. It show that it make full use of three components in order to achieve the high ROE
 - The financial leverage is a double edge sword it can hurt ROE badly in the bad times. And, high leverage can make a company’s balance sheet unhealthy and become risky during economy downturn.

Return on Invested Capital (ROIC)

 
GAB's Invested Capital grew by a CAGR of 6.52% while the NOPAT growth at a much higher rate at CAGR of 9.54%.

Owing to this the ROIC was improved from 32.97% to 42.41%, and it is far above the WACC of 7.2%.

Profit Margin & Quality

The revenue grew by 89.16%  (CAGR of 7.34%) but the COGS grew at a higher rate and this result a negative Gross Profit growth rate (CAGR of -1.98%). Even though the Gross Profit Margin was experiencing a negative growth rate but the actual gross profit margin was maintained on above 30%.

Compare to the revenue, Operating profit and Net Profit grew at a lower rate of  21.28% and 16.89% respectively. This number show us that the company's expenses is increase in a faster rate than the revenue.

The OCF is greater than the Net Profit in most of the time and this show a good earning quality.

Cash Flow

OCF is below NP in 4 out of 10 years, and this show that the net income was able to convert to the cash in most of the time.

The revenue was growing from  886M to 1.676B and it is equivalent to a CAGR of 7.34% while the NP was growing from 98M to 217M (CAGR of 9.22%). The growth was achieved with an average CAPEX of 28.1M (CAGR of 3.64%). This shows that the return of CAPEX investment is encouraging.

The OCF and FCF on latest FY is equivalent to 13.46% and 8.36% of revenue; 30.53% and 27.22% of the total asset. The average OCF/Revenue, FCF/Revenue and OCF/Total Asset, FCF/Total Asset is 12.28%, 9.88% and 24.49%, 19.78% respectively. This is way above of my require benchmark of 10%, 5% and 8%, 5% and it shows that the growth quality and earning quality is good.

Insider Pay

The director is drawing 0.16% of remuneration from the revenue and the ratio has been reducing from 0.33%. Based on the business quality as presented above, I think the director is not taking a fat salary.
 

Leverage & Liquidity

The debt is 29.78% from the total asset, and the cash is 31.49% of the total liabilities.
The current ratio and quick ratio is above the required benchmark of 2 and 1 respectively.
In view of the strong cash flow of GAB, it shouldn't have any issue to pay off it's debt.

References:-

• GAB Annual Result
• GAB Quarter Result
• GAB Dividend Records
• GAB Research Report

 

If you are interested on the fundamental analysis, you can perform further reading on below articles:-

• Financial Statement Analysis
• Income Statement Analysis
• Income Statement - Common Size Analysis
• Profit Margin
• Balance Sheet Analysis
• Balance Sheet - Comparative Analysis
• DuPont Analysis - Dissecting ROE
• Issues and Pitfalls of ROE
• Return in Invested Capital (ROIC)
• Total Enterprise Value (TEV) and Earning Yields (EY)
• Cash Flow Statement Analysis