Popular Holdings reports 1QFY12 results (DMG)

The news: Book retailer cum boutique property developer Popular Holdings reported a net profit of S$10.2m for 1Q FY12, up 25% y-o-y, boosted by higher earnings from the publishing and property divisions. On a segmental level, turnover for the retail and distribution division rose $0.9m to $101.8m while PBT declined $1.6m, from $4.6m in 1QFY11 to $3m in 1QFY12, mainly due to start-up costs incurred on the opening of 6 new stores and higher operating expenses. With a net addition of four outlets, Popular ended the quarter with a total of 143 retail outlets spread across Singapore, Malaysia and Hong Kong. The publishing division posted a 7% improvement in pretax profit to $6.2m with turnover flat at $23.8m. Property division contributed pretax profits of $3m from the sale of additional units at 18 Shelford while construction of 8 Raja is in progress and expected to obtain tOP by end 2013.

Our thoughts: Popular’s balance sheet is rock-solid with net cash of $105m, or 12.5

cents/share, representing 80% of its market cap of $132m. This is the result of: 1) a highly cashgenerative book retailing and publishing business that is the market leader in the pre-school textbook space in Singapore and Malaysia; 2) Two rounds of rights issues in recent years that further boosted its cash position; 3) Profit contribution from its property ventures. Cash should continue to pile up given the steady sale progress at 18 Shelford and impending completion of 8 Raja project, which should be well-received being located in the popular Balestier enclave, near CDL’s The Arte. Yet the stock continues to trade at a steep discount of 33% discount to NAV, even before factoring in potential profit contribution from 8 Raja. We believe the discount is due to the group’s venture into the property development business, which it has designated as a new core business. In today’s market, ‘pure-plays’ are in vogue and given Popular’s lack of track record in the property development business as a listed entity, it is not surprising that the market has accorded a discount to the stock for its business diversification. An alternative way of managing its surplus capital, via a more generous dividend payout policy, could perhaps do more wonders for the stock. We do not have a rating for the company.