LTC Corporation just released it’s FY17Q2 results today.
Yes, yes, I know I’ve finished analyzing and am writing an update report on LTC… on Valentine’s Day. But I’m married with 2 kids so V-Day is just another day to me, without the fancy dinners and flowers. Just a quick dinner at home, exchange presents (I only paid for the present, didn’t even have to actually buy it…), and it’s back to work for me. I hate the crowds anyway.
So LTC becomes my Valentine for tonight.
In any case, I am really excited to analyze the earnings release. I’m excited to share some of my thoughts too, cos I know there are some readers here who have done quite a bit of homework on LTC too. (From the emails I received previously)
Take a look, and please let me know anything that I may have missed out.
This is a continuation of my previous analysis of Q1 results:
Just to give more background, the post before that comparing LTC vs Asia Enterprises Holdings is also rather relevant:
And if that’s not enough, these are older but all related:
Gross Profit increased by… … 1,634%?!
Yup. That’s not a typo. Check this out:
GP, OP and PBT all increased by thousands of % points!
Now, that’s not a sight you see everyday. That really made me sit up.
Now, steel prices have gone ballistic in calendar Q4 of 2016. I was expecting this to be a positive for LTC, since the price they can sell their rebar steel at, is fixed by BCA, and the BCA figures reflect a massive hike up too:
Also, the net effect of a rising steel price means the inventory they are holding suddenly becomes more valuable, with 0 costs involved to achieve this gain.
Yet this massive jump in the form of thousands of % increase, is a surprise to me. It basically reflects what I’ve mentioned in the earlier posts.
Because LTC records the steel inventory via a weighted average price,
“What this means is that in an environment of falling steel prices, losses get magnified.
The converse is true: in an environment of rising steel prices, gains get magnified.”
On a different note, this kinda shows how much the steel prices have gained in Q4 2016. That’s obviously a good thing for LTC Corporation, but NOT good for Dutech Holdings, one of my other key holdings.
Ah, they are all linked one way or another. I’d like to think there’s a natural hedge inbuilt.
FCF Generation Thesis Is Still Intact
The whole investing thesis is centered around the fact that LTC’s business is actually generating a ton of FCF every quarter, but previously it used the FCF to pay down debt. Going forward, the FCF should accrue. I’ve described that in the later part of this earlier post: LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?
For FY17 Q1 & Q2, the company generated operating CF of $16.8mil, with pretty much negligible capex of around $100k.
FCF generated in 6 months = $16.7mil.
And all this FCF is starting to show up in LTC’s balance sheet:
FY16Q4 – Fixed Deposits $16.85mil, Cash $17.52mil. Total: $34.37mil
FY17Q1 – Fixed Deposits $26.96mil, Cash $25.11mil. Total: $52.07mil
FY17Q2 – Fixed Deposits $31.43mil, Cash $18.45mil (see BS below) Total: $49.88mil
Yes, I’m aware that the cash and cash equivalents actually dropped a little bit comparing FY17Q1 vs FY17Q2, but we have to take into account the massive increase in “trade debtors” from $16.4mil in FY16Q4 to $26.67mil in FY17Q2.
This means that LTC has been doing brisk business of late, we see the value of the inventories dropping while the debtors increasing. LTC doesn’t have a track record of writing off bad debts, so we can safely assume all this trade debts will eventually be collected and converted to $$$. Credit terms given is usu 6 months (I think. It’s in the AR)
Writing Off Of Goodwill Incurred From USP Acquisition?
This JV company is the 50% stake in USP. The value carried in the BS has been dropping every quarter.
The JV is recorded at $24.07mil as of FY16Q4.
Since the net assets of USP at the point of acquisition is given as $27.16mil, the 50% stake is worth $13.58mil on a net basis. The rest of this $24.07mil is made up of a goodwill amount of $10.49mil.
It is this $10.49mil that is being amortized each quarter. As of FY17Q2, the value has dropped by $1.55mil, so I am expecting the remaining goodwill portion to be $8.94mil.
Actually, all this is my assumption/postulation. LTC didn’t provide a breakdown or an explanation for the decrease in the value of the JV carried in the balance sheets.
Logically, it should be due to the write down of the goodwill portion. If it is, I’m happy. I like to be conservative. Keep writing down all the useless “goodwill” please.
There is a small chance though, that part of the drop is from the writedown of the net assets of the company itself, if the economic conditions are such that there is a material and permanent change in the assets of the company. (Better not be!!!)
I guess I wouldn’t know for sure until the AR17 is out in 6 months.
USP 50% Acquisition Still Sucks
Now for the bad news part. I’ve previously railed about how lousy the acquisition of USP is. Thus far, the results unfortunately, proved me right.
Oh, how I wish I’m wrong on this. How I wish USP can suddenly show tremendous profits and make me eat my words.
Yup. The 50% stake contributed… $6k of profits in the past 3 months. So the entire SOGO business earned $12k profits in the past 3 months. Right.
For the past 6 months, the 50% stake LOST $636k.
Zzzzzzzzzzzzzzzzzzz. Come on!
And this is basically the conundrum I mentioned previously. The business generates a ton of FCF each quarter. Debt is pretty much gone. Yet, how the management utilizes this FCF is the key. Thus far, it’s not been very inspiring.
Alright. That’s my dissection of the LTC FY17Q2 financials. Nothing earth shattering really. The massive jump in gross profits is nice, it remains to be seen if it can be maintained.
What I’m more interested in though, is how the management utilizes the cash hoard that’s fast building up in the coming quarters.
For those who think that the cash will be distributed, don’t count on it. I’ve been watching these guys for some time and somehow, I know that’s going to be really unlikely.
Let me know if I missed out anything.
As always, happy hunting. And happy Valentine’s.
Best Quote I’ve Read This Week:
Poonified: A reminder every time I speculate on stocks:
“Even if you survived after running through a burning building, you’re still an idiot”