ORL - OrotonGroup Limited

[VSntchr]

Anybody kno wen the results are out? Morningstar had last week penned down...

 

[clinta44]

Anybody kno wen the results are out? Morningstar had last week penned down...

I was expecting this last thursday. Can't seem to find a different date at this stage...

 

[clinta44]

Half Year Announcement released today. just a letter at this stage not accounts of yet.

EBIT of $24.2M Up &% and NPAT of $16.1M up 4%

on the surface it looks like quite a solid result in a really tough environment.

 

[McLovin]

The feedback in presentation about the current unsustainability of rising rentals and indexed leases against a backdrop of falling bricks and mortar customers, could be the canary in the coal mine for property trusts. If a company that is doing well is sighting that as a key concern, then what is the average retailer on struggle street thinking.

 

[ScottyfromAussie]

Not sure how much I like this one after a bit of research

1) Asia expansion performance isn't reported.

All the business segments are lumped into one consolidated report which is weird, you'd think if everything was going as well as they say it is they'd want to show it with numbers.

2) Asia expansion requirements.

Each store that opens will need a skilled manager + competent staff. This will likely have to be created from the ground up and thats costly. Furthermore whilst the labor costs are often lower in Asia, I doubt you could charge the same prices. I may be wrong here but it makes sense.

3) Expansion is funded by debt

This is a biggy, they have so much free cashflow, why are they increasing their debt facilities?

They should stop paying the dividend and reinvest the earnings into the expansion. Divs just create tax liabilities for shareholders. I'd much rather the company keep the money and compound it at 80% per annuam rather than give it out. They can return it later!

 

[VSntchr]

Furthermore whilst the labor costs are often lower in Asia, I doubt you could charge the same prices.

Forgive me for not providing the relevant report, but it has been stated before that ORL has initially encountered that the Asian market will pay MORE for its products than the Aussie market....

Disclosure: Sold at $8.15....

 

[McLovin]

Not sure how much I like this one after a bit of research

1) Asia expansion performance isn't reported.

All the business segments are lumped into one consolidated report which is weird, you'd think if everything was going as well as they say it is they'd want to show it with numbers.

It's too small to be reported seperately. AASB 114 has the rules on what is and isn't a reportable segment, it's usually 10% of profit, revenue or assets/liabilities. I'd say considering they only had four stores opened between late 2010 and May 2011 it was far too soon to be expecting any meaningful data.

2) Asia expansion requirements.

Each store that opens will need a skilled manager + competent staff. This will likely have to be created from the ground up and thats costly. Furthermore whilst the labor costs are often lower in Asia, I doubt you could charge the same prices. I may be wrong here but it makes sense.

I think you've missed the mark here. Prestige brands are coveted in Asia, they certainly aren't sold cheaper.

3) Expansion is funded by debt

This is a biggy, they have so much free cashflow, why are they increasing their debt facilities?

They should stop paying the dividend and reinvest the earnings into the expansion. Divs just create tax liabilities for shareholders. I'd much rather the company keep the money and compound it at 80% per annuam rather than give it out. They can return it later!

Interest cover is over 30x. Debt is like red wine, a little is good for the health. I think you're jumping at shadows if that debt concerns you.

 

[ScottyfromAussie]

Forgive me for not providing the relevant report, but it has been stated before that ORL has initially encountered that the Asian market will pay MORE for its products than the Aussie market....

Disclosure: Sold at $8.15....

Please kindly link the report as well as the source.

I'm more than happy to be wrong if I learn something or acquire a valuable resource.

It's too small to be reported seperately. AASB 114 has the rules on what is and isn't a reportable segment, it's usually 10% of profit, revenue or assets/liabilities. I'd say considering they only had four stores opened between late 2010 and May 2011 it was far too soon to be expecting any meaningful data.

I didn't know that before. Thank you , Do you know a website I could find out more about these rules? More specifically for investment purposes rather than the whole AASB guidebook.

I think you've missed the mark here. Prestige brands are coveted in Asia, they certainly aren't sold cheaper.

I see where you're coming from but I'm not sure how the argument holds up.

I convet Maserati's, but I can't afford one at the moment. I still covet it but that doesn't get me one

Last when I was in Singapore and KL, I brought a lot of spending money specifically because I knew I could buy stuff cheaper there. I think over the long term, the Aussie dollar will have strong purchasing power over its neighbours and thats a bit of a pain for ORL imho.

Interest cover is over 30x. Debt is like red wine, a little is good for the health. I think you're jumping at shadows if that debt concerns you.

Its not so much that I think the debt is too high, its not, its that they're using debt to expand rather than slashing the div.

By paying me the div, I have to pay income tax on it. Also the company pays interest on the debt they use. Basically its inefficient from an owners point of view.

They could've kept the div, saved me the tax, saved the interest expense, funded the expansion with it and compounded my money at 80%. Also they could've got a world of bigger tax benefits than just a deduction for interest expense.

As Bob Shaw said "You have to grow from earnings". Plus I'm much happier to pay tax on my div compounded a few times at 80%.

Finally if they do slash the div the stock will fall to $4/$5 and I could get a bargain

Cheers guys,
Scotty

 

[VSntchr]

Please kindly link the report as well as the source.

The source is ORL lol. I think it was in the second-latest full year report...

 

[McLovin]

I didn't know that before. Thank you , Do you know a website I could find out more about these rules? More specifically for investment purposes rather than the whole AASB guidebook.

You can try this. http://www.cpaaustralia.com.au/cps/...porting-toolkit-reporting-standards-2012.html

I still buy this when new editions come out (I used the second edition at uni)
http://www.coop-bookshop.com.au/bookshop/show/9780170181860
It's a really good reference, assuming you understand the basics of accounting.



I see where you're coming from but I'm not sure how the argument holds up.

I convet Maserati's, but I can't afford one at the moment. I still covet it but that doesn't get me one

There's a bit of a difference between a $1,000 handbag and a $400,000 car. I know girls who will happily go and spend $2,000 on a handbag or $500 on a pair of shoes but could absolutely not afford a Maserati. ORL is clearly trying to target this fast growing demographic in Asia.

Its not so much that I think the debt is too high, its not, its that they're using debt to expand rather than slashing the div.

By paying me the div, I have to pay income tax on it. Also the company pays interest on the debt they use. Basically its inefficient from an owners point of view.

Sounds good in theory but in practise the largest providers of capital in Australia are super funds. They're income investors and it would be unlikely they would approve of the company "slashing the div".

That's ignoring the argument that the relative cost to the company of debt maybe cheaper than equity.

 

[ScottyfromAussie]

You can try this. http://www.cpaaustralia.com.au/cps/...porting-toolkit-reporting-standards-2012.html

I still buy this when new editions come out (I used the second edition at uni)
http://www.coop-bookshop.com.au/bookshop/show/9780170181860
It's a really good reference, assuming you understand the basics of accounting.

That really is excellent. It'll take me a while but I'll need to plough through that

There's a bit of a difference between a $1,000 handbag and a $400,000 car. I know girls who will happily go and spend $2,000 on a handbag or $500 on a pair of shoes but could absolutely not afford a Maserati. ORL is clearly trying to target this fast growing demographic in Asia.

I like this idea but is there evidence/studies to back it up?

Sounds good in theory but in practise the largest providers of capital in Australia are super funds. They're income investors and it would be unlikely they would approve of the company "slashing the div".

That's ignoring the argument that the relative cost to the company of debt maybe cheaper than equity.

Is it worth paying out divs now when you could pay much higher divs in the future? There's a huge cost attached to obeying the institutional imperative as Hagstrom calls it. Usually the result is a stagnant company value.

Slashing the div would depress the stock price in the short term, there's little question about it. However in the long term, it would be much better off. Also as I pointed out, the investors will save a lot of tax.

 

[McLovin]

I like this idea but is there evidence/studies to back it up?

To back up what? That someone on a middle class income can afford an expensive handbag but not a Maserati?

 

[ScottyfromAussie]

To back up what? That someone on a middle class income can afford an expensive handbag but not a Maserati?

ah no..I mean evidence that this market segment is understood by Oroton and that their strategy will be tailored to these consumers?

Also whether these consumers would even want the Oroton bags over those made by say Prada or other brandnames.

 

[McLovin]

ah no..I mean evidence that this market segment is understood by Oroton and that their strategy will be tailored to these consumers?

Also whether these consumers would even want the Oroton bags over those made by say Prada or other brandnames.

Well I'm sure they haven't just gone and invested in these new territories without having done market research.

 

[ScottyfromAussie]

Well I'm sure they haven't just gone and invested in these new territories without having done market research.

I wondered about this myself, I couldn't find any R&D on their financials.

I was hoping they would have a regular R&D expense.

The only mentioned of research in the FY11 was refering to the market in Asia which they researched. But "research" could mean a lot of things and research isn't free.

There is a marketing expense which I guess I could see them putting research dollars under but usually these are separate.

 

[McLovin]

I wondered about this myself, I couldn't find any R&D on their financials.

I was hoping they would have a regular R&D expense.

The only mentioned of research in the FY11 was refering to the market in Asia which they researched. But "research" could mean a lot of things and research isn't free.

There is a marketing expense which I guess I could see them putting research dollars under but usually these are separate.

It's unlikely the amount is material and therefore doesn't need to be disclosed as a seperate item.

 

[clinta44]

Also whether these consumers would even want the Oroton bags over those made by say Prada or other brandnames.

I've just come back from a holiday from malaysia and singapore. The only oroton store I ventured into was the Marina bay sands one. had a few people in the store and customer numbers were simular to orther stores... Although it was a quiet morning...

In malysia I didnt go into any of the oroton stores but I didnt notice any knock offs in the markets but there was plenty of LV, Prada, Chloe etc but no oroton...

This Is good and bad. Good that there bags are not getting knocked off... Bad that it would seem they are not as popular as other brands and not worthly of being knocked off.

 

[Ves]

The Ralph Lauren license is now gone. That's a third of their NPAT effectively wiped out!! They will lose some meat off their balance sheet too. It will be interesting to see what the next step will be for them. Does this put a big dent in their cash flow to hurt the Asian expansion plan?

Earnings risk strikes again. Look out below.

 

[McLovin]

I guess it gives some colour as to why they are doing this...

http://www.vogue.com.au/fashion+sho...first+ready+to+wear+collection+at+mbfwa,17781

NB: I am not a Vogue reader but I do find the Vogue forums very handy for tapping into the market that companies like ORL, PMV etc are targetting.

 

[skc]

The Ralph Lauren license is now gone. That's a third of their NPAT effectively wiped out!! They will lose some meat off their balance sheet too. It will be interesting to see what the next step will be for them. Does this put a big dent in their cash flow to hurt the Asian expansion plan?

Earnings risk strikes again. Look out below.

They lose 1/3 of NPAT, but they gain some meat on their balance sheet as they free up the capital that was supporting the licence previously. Their announcement tried to cast a slight positive spin on the event, that this freed-up capital can be used to grow their own brand more aggressively.

Things won't look too good for tomorrow, however.