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.

Regional Express (REX)

You want to know how to become a millionaire? Be a billionaire, and buy an airline.
You want to know how to become a millionaire? Be a billionaire, and buy an airline.

My biggest blunder of the year has definitely been Regional Express (REX).

The initial attraction for investing was the relatively high net profit margin of REX compared to other airlines like QAN and VBA. Running with a load factor (how full their planes are) in the 60% range and still being reasonably profitable made Regional Express worthy of further investigation.

Despite these and other promising elements, such as low earnings multiple, manageable debt, and access to low cost pilots through their in-house training school, REX has been overwhelmed by fuel costs and the downturn in regional Australian tourism to post lower profit guidance for FY11.

My doubts finally confirmed, I offloaded my stock for a 19% loss. What stings the most is that if I was more disciplined I wouldn’t have gotten involved with such a dog in the first place.

Lessons learned:

1. Avoid the airline industry altogether

Mad Hedge Fund Trader does a nice job of outlining the key reasons why investing in airlines is a recipe for disaster, even though he recommends some stocks as a hedge against lower oil prices.

2. Uncertainty about future earnings

When I bought shares in REX in late 2010, the most recent shareholder presentation stated that management could not provide profit guidance – which should have been a huge red flag. I should have doubted investing in a business the management couldn’t share a short-term expectation on.

3. Vulnerabilities

Even though REX was exposed to some decent upside if passenger numbers grew, and had a reasonable margin of safety thanks to their low debt and good profit margins, I didn’t account for areas where the business was vulnerable to factors outside management’s control. Fuel prices and the potential for instability in the middle east sending oil prices into orbit meant that REX was never a safe bet because of its downside exposure.

My approach to Value Investing is to find business which are robust to any major downside exposure and selling for a discount to fair value. REX might be cheap, but getting into a business with such huge downside exposure ran contrary to everything I supposedly stand for.