JEL (Consumer Products, Distributor)

My investment in JEL... unfortunately again, it was influenced by the positive writings and investment made by Wallstraits.

My own projection of the intrinsic value of JEL in Sep'03 (pre-bonus issue) was about 33.95 cts vs my purchased price of 31 cts (PE = 9.8) for 8 lots on 19 Sep 03. This purchase was spurred by 05 Sep 03 WS purchase of 225 lots @ 32 cts and another 25 lots @ 30.5 cts on 10 Sep 03. However, my holding period for my first purchase was relatively short as I took a quick profit of $155.72 on 24 Sep 03 probably because I wasn't too convinced about its prospects.

WS took another block of 750 lots @ 35 cts and 80 lots @ 30 cts on 20 Oct & 12 Nov 03 respectively, self reinforcing its optimisim in this company. Encouraged by Sage's latest moves, I took up 8 lots @ 32 cts on 10 Nov 03 with short term view in mind, which I did sold at a profit of $115.44 on 15 Jan 04 @ 32 cts. However, with WS showing so much confidence in this company, I'm quite nervous about losing the opportunity in riding on the growth of this company. The price moved up after my latest disposal and I took another position at 40 cts on 12 Feb 04. In Mar04, the company gave a bonus issue of 1 for 5 stocks and I bought another 4 lots @ 28.5 cts on 24 Aug 04 to round up my stake to 10 lots, with a opportunistic view to take profit when chances arise. During this period, WS took one more purchase, last for year 2004 @ 32 cts for 32lots on 10 May 2004.

Perhaps, again, due to my lack of convictment about this company, I sold half of my stake on 13 Jan 05 @ 33.5 cts for a small profit of $61.12. Over the period, I received some dividends. However, I bought back the same lots @ 28 cts on 8 Mar 05 to round up my stake to 10 lots after the company annonced a 1 for 10 bonus issue.

The top line of JEL did grow nicely from 2003 to 2004, from $116M to $143M, however, its net profit did not fare as good, only increase from $6.22M to $6.58M. Since its IPO, the company had secured some new distributor rights and had completed a new multi-purpose building for office and warehousing, and sold it to REIT for a gain of S$4M this year. However, the share price languished probably due to the poorer than expected operating results and the unfavourable statements about its analog carmera business. The share price hit a low of 17 cts before rebouncing to 20 cts on 30 Dec 2005, on Sage's purchases and top-pick article open to public.

Sage has a intrinsic value of 52 cts (DCF) by project a 10-year 12% annual growth, which I find it to be overly optimistic. My own review only gives a 22.3 cts intrinsic value compared to my average price of 27.4 cts. Of course, I will be most happy if Sage's projection did come true but I shall not take up any further stake until the next result is seen, or until the share price touch the recent low again.

My major concern about this company is the increasing interest rates which is going to eat into its operating profits due to its business model of having short-term financing to purchase the goods no doubt the sales and lease back may release some cash back to the company for operating purpose.

Below are some interesting postings forumers in WS:

d.o.g. posted on 5-8-2005 at 01:23 AM
This is unfortunately quite likely. JEL is competing in a high volume, low margin segment. Not only does it have to deal with current competitors, but all of last year's name-brand mid- and high-end models, which are now discontinued, are still on retailer shelves, and they will be discounted and competing with JEL's cameras. To make things worse, digital cameras are still evolving rapidly, which means JEL has to make continuous investments into R&D, unlike film cameras, where improvements have slowed markedly and the products have a long shelf life.

The biggest strides the last few years have been in sensor resolution (megapixels). Going forward, sensor technology will continue to evolve (lower power, higher sensitivity, lower noise) as will lens design (less distortion, wider apertures), LCD technology (lower power, higher brightness) and battery technology (less weight, more power, faster recharge).

For the most part JEL can source components off the shelf, but it still has to design, prototype and finally (through subcontractors) manufacture the cameras. In other words, they're trying to be like TT International and its Akira brand - which IMHO isn't all that great a role model.

In a "value for money" strategy you never have pricing power - price just a few dollars too high, and consumers will reach for the familiar big names. Without pricing power, it is very hard to grow faster than the general economy - which in turn caps the returns that can accrue to an investor. Rapid growth must then come from operational efficiency - but this can happen only if the company is truly outstanding compared to its competitors e.g. Wal-Mart vs Safeway or Albertsons. Is JEL truly super-duper in this respect? IMHO they're good, maybe even very good, but perhaps not truly outstanding - and with margins so thin, they need to be head and shoulders above everyone else to really prosper. Otherwise, they'll merely survive and get by.

chigi posted on 30-12-2005 at 02:02 PM

I sincerely wish you all good luck with JEL. Who knows what is in store for JEL!

However, I give JEL a miss and my reasons to avoid are -
1. Distribution is a second-grade business, highly dependent on principals.
2. It is a low-margin business. As the barriers to entry are low, the margins may most likely slide ever than rise.
3. Principals always go with multiple distributors. They have a cake and eat it too. Hence buy principals if you can.
4. I learnt some lessons from owning Telechoice (a huge distributor of handsets) and Thakral (a huge distributor of consumer electronics in China). I did not benefit much from owning them, although I collected decent dividends, no more vested in them now!
5. The business is prone to currency risks and also country/economy risks

I hope the above points help you in making more informed decisions/expectations on JEL!

Transview FY05 Results (31 Oct 2005)

Transview announced its results on 20 Dec 2005. Here's the update to my review that was done on 17 Dec 2005.

Without the impairment of goodwill of $889K due to the loss of distributorship by Winston, the operating results was actually in line with my expectations.

The revenue grew form 1HFY05 mainly due to higher retail sales while the golf management revenue was quite flat. There was a writeback of $120K stock prov which increased the "Other Revenue"

The impairment loss was higher that my original calculation probably due to more advances given to Winston to settle its liabilities.

Details of advances and purchase consideration $’000
Purchase consideration of $3/- -
Advances to the acquired subsidiary for its Scheme of Arrangement 411
Advances to the acquired subsidiary for its settlement with secured creditors 2,643
Advances to the acquired subsidiary for its working capital purposes 723
3,777

With this impairment loss booked in, essentially Winston becomes a empty shell company with its property being its only valuable asset. It also appears that the only reasonale way is for Transview to sell this property to free its cash, although it may choose to lease out for the time being.

Note
The Property is a 60-year leasehold 7-storey property of approximately 17,000 sq feet gross floor area, located at 49 Kaki Bukit Place, Eunos Techpark, Singapore 416227.

Transview may also continue to incur some staff costs on Winston until it is wound down completely.

Looking ahead, the company has the following comments:
Market environment is expected to remain challenging in FY2006. As the Group continues to expand our geographical coverage and product offerings, the management will continue to focus on controlling costs and improving efficiency.

Winston’s revenue contribution to the Group for the financial year under review was not significant. It is expected to contribute to the Group in FY2006. In view of the latest development, this is unlikely to materilise. Barring any unforseen circumstances, the Board is cautiously optimistic that the Group will continue to remain profitable.

The company has maintained its dividend payout of 0.6 cts and is likely to continue to do so given its high cash reserve. With cash of $10.8M or 7.6 cts/share, the share price is likely to hold above 10 cts unless its operating results turn in very badly for the next half year. Hence, I will still hold these shares in the near future unless I can cashout above my purchase price.

My revisit of the 2004 AR presented the following concerns:

Note 25 (b)

Under Exclusive Distributorship Agreements, the Group has annual minimum purchase commitments for certain golf clubs and related accessories.

Failure to meet these minimum purchase commitments may result in early termination of the Exclusive Distributorship Agreements. As at 31 October 2004, a subsidiary company had not met the required purchase commitments by approximately $369,000. At the date of this report, the subsidiary company has not received any formal indications from the principal suppliers on the outcome of these purchase commitment shortfall. Subsequent to year end, the subsidiary company has continued to purchase from the principal suppliers based on the existing agreements.

Note 25 (c)

A subsidiary company has successfully extended its licence to manage and operate a public golf course. The current licence agreement will expire on 28 February 2006.

Comments

It appears that there are alot of risks involved for those distributorship agreements and golf manage licence when comes to renewal.

As Transview does not have sizeable inhouse products, it is at risks of losing those distributorships if the principal decides to enter the market on its own (e.g. Mercedes Benz and LG products). This kind of risk appears to be most vulnerable for consumer products after the local distributors have established its brand name. Hence this kind of risk should not be discounted lightly. On the other hand, this contrasts the business model of OSIM which controls its POS as well as its own products.

Transview (Retailer/ distributor - golf equipment)

The company announced a terrible news on 15 Dec 05 - the loss of distributorship for its recently acquired subsidiary!

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The Board of Directors of Transview Holdings Limited (the "Company") wishes to
announce that its subsidiary, Winston’s Golf Pte Ltd ("Winston") has today received an
official notification from its principal, PING Inc. (USA) that Winston distributorship
agreement for PING brand of golf equipment would not be renewed upon expiry on 24
January 2006 due to a change in PING Inc. distribution strategy.

Transview management is currently waiting for further information from PING Inc. with
regards to transition details.

The management is now assessing the financial implications of this development and
the implication will be reflected in the Group’s full year results announcement due to be
released sometime next week.

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The company has just acquired the financially distressed Winston in Jun'05, for its prized USA distributorship for the PING brand, a distributorship that has been held for 35 years. For the acquisition, Transview paid the following:

1. Loan to Winston for settlement with credit $411K
2. Payment to DBS $2.8M

Hence, a total outlay of $3.2M

Winston asset acquired:
Total asset of $6.3M, with total realisable value of $3.1M on a going concern basis, of which $2.6M is the market value of its property in Eunos Techpark.

Assuming that due to the loss of the distributorship, Winston is forced to be liquidated, it is likely Transview would have to make a loss provision, but the question is how much. Since Transview's consideration for acquisition was $2.8M, NRV is $3.1M, there is a negative goodwill of $300K, against the $411K loan, a difference of $111K. Hence, the minimum loss should be $111K and should not exceed this value by very much unless the value of the property drop significantly over the past 6 months.

The management probably can foresee some problems on this acquisiton hence the lower consideration was paid. However, having said that, it is important to note that distributors for consumer goods can be quite at risk for a loss of the distribution rights as the principal can easily switch to another partner or even enter the market on its own (case of C&C for its Mercedes brand cars). Perhaps, distributionships for non-consumer goods may be subject to a lower risk in this area due to more specialised knowledge required and probably more value add.

In view of such development and the recent decreasing sales trend, it is likely that Transview would experience difficult years ahead although it still has a huge cash backing of $13.6M or 9 cts/share as at 1HFY05 (2HFY05 would be less due to payment for Winston). Hence, I should be looking for an opportunity to divest my stake unless the up coming results could come in a positive surprise on its sales and GP numbers. Without the results and hence know actual impairment loss, it may not be wise to dispose off my shares as the results may not be as bad as write-off the whole investment.

Price @ 11.5 cts (-0.5) as at 16 Dec 05)

Diversement of Lifebrandz at a Loss

Following my portfolio review on lifebranz on 26 Nov 2005, I sold off my 8 lots at a loss of S$920+. Despite downgrading my earning expectations after the Profit Warning fofr 1QFY06 results issued on 17 Nov 2005, the actual came way below my expectations.

The company only managed a mearge S$1.99M revenue compared with S$12.7M same period last year and S$5.98M for 4QFY05. The loss was a whopping S$5.7M! This was quite was shock to me... the turn of tide could be so rapid in a matter of months.

On Q1 results, the company cited the following:

Sales

Q1 FY06 sales are comprised entirely from the sale of products classified under its Beauty/Fashion/Wellness product category.

As mentioned above, the substantial reduction in sales was largely attributed to the slowdown in demand for the beauty and health supplement industry which the Group’s products occupy, the increased number of low price competitors, and the marketing delays as a result of changed regulations in the overseas markets.

There was no recognition of sales under the new LifeStyle product category for Q1 FY06 as the Group’s first lifestyle concept, The Balcony, was opened in November 2005, i.e., Q2 FY06, with the next offering, Ministry of Sound, scheduled to be launched in late Q2 FY06.

Prospects

With reference to the overall outlook statement for FY06 provided in conjunction with the announcement of the Group’s FY05 results, the underlying challenges and trends in the operating climate of the Group remains the same.

Unfavourable operating conditions for the Group’s Beauty/Wellness products are likely to prevail over the next two quarters in FY06.

In addition, the Group expects to incur additional expenditures for setting up premises and A&P costs to position its new Fashion and Lifestyle brands prior to launch. In light of the above, the Group expects its financial performance in FY06 to be negatively impacted.

The Group will continue to monitor closely the operating climate for each country and product while focusing on building selective brands with a longer term perspective, especially new brands under its Lifestyle product category. The Group is pleased to announce that it has launched on schedule the first Dashing Diva Nail Spa & Boutique at Suntec City Mall and The Balcony, a 24-hour bistro-cum-chill out lounge at the Heeren. The Group also remains on track to launch its first international entertainment brand Ministry of Sound at Clarke Quay in late Q2 FY06. Other LifeStyle concepts in the pipeline, e.g., Café del Mar, Fashion TV and Bice
Restaurant, are progressing according to plans and will be announced at the appropriate times.
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The company did not mention much about how to improve the existing business but rather, talk about its new plans... this shows that existing business may be dying off. The new investments are unlikely to ba paid-off in the short-term and due to new concepts involved and new business to the existing management, the execution risks could be rather high. The balance sheet also weakened considerably, negative cashflowm, AR increased despite much lower sales, borrowings increased from S$1.6M to $9.5M to fund the new business (although it still has cash of S$18M). The dividend is likely to be cut. Despite this negatives, the share price still manage to rebounce from a recent low of 5 cts to 8 cts before dropping to 7cts on this results. I sold at 7.5cts to close the chapter on this bad investment so that I can better focus on studying and following other companies.