Globe International – Value trap? (GLB)

 

Are GLB investors in for a nice ride or a wipeout?

Market Cap: $19m

P/E: 8.6

P/Book: 0.37

Dividend Yield: 10.9%

 

Well-known surf and skatewear brand Globe also happen to be listed on the ASX, and fulfill many of the common metrics value investors look for.  Selling for a mere 1/3 of book value with no debt and a whopping $12.5m cash on hand, such a company should at least qualify as a Benjamin Graham “Cigar Butt”.

 

Delving more deeply into Globe’s business raises several red flags, summarised below:

Decline in revenues and book value:

GLB’s revenue per share has been declining for the past decade, and at $2.21 per share in FY10 is more than half what it was in FY01.  Similarly, book value has fallen from $2.74 to $1.23.  And while the company has returned to profitability in FY10, revenue continues to decline.  In the 6 month period from June 2010 to January 2011, NTA backing dropped from 74c to 67c.

Huge losses as a result of GFC:

The company has faced some major problems in the past few years, and only just returned to profitability; indeed the most recent 5c dividend in September was the first time Globe returned money to shareholders since 2005.  EPS for FY09 was a loss 21c, and FY08 was a huge 59c.  To management’s credit, Globe have effected a dramatic turnaround, ripping $15m of annual cost overheads from the business.

Reliance on American market:

More than half of Globe’s revenue comes from North American market, which contributes 65% of the company’s EBITDA.  One would expect this contribution to fall in FY11 due to the strength of the Australian dollar.  At a macro level I have no faith in the US economy and expect neither the US Dollar nor US economic conditions to improve long-term.

Weak HY11 performance:

While net profit increased slightly for HY11 compared to HY10, this was solely based on a change in inventories. Revenue and EBITDA fell, trading conditions in Australia worsened, and input costs increased.  No interim dividend will be paid for FY11, as HY11 operating cashflow was 1/3 that of HY10, and once accounted for the dividends became a net cash outflow of more than $1 million.

 

While Globe have reasonably strong brand equity and plenty of cash on hand, both of these things are nullified by the fact that the company’s value is rapidly decreasing and entirely dependent on a niche segment of the retail market.  Management have demonstrated that they can tighten their belts during tough times, but until GLB can demonstrate consistent long-term profitability and grow the company’s book value, they are too vulnerable for me to justify investing in.