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Fragrance Group Limited Sees Profit Drop By 18% – Should Investors Be Concerned?

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One of Singapore’s largest property developers and hotel operators announced its second quarter results yesterday evening and saw its profit for the first half of 2014 drop 18% compared to a year ago. 

Of course, I’m referring to Fragrance Group Limited (SGX: F31) here. With that tumble in its bottom-line, should investors in the company panic or is there more than meets the eye?

Fragrance Group is most well-known for its Fragrance-branded chain of hotels in Singapore. Apart from that, the company also operates the Parc Sovereign brand of premium hotels. These hotel operations were housed under Global Premium Hotels (SGX: P9J), of which Fragrance Group owned more than 50% of.

But in March 2014, Fragrance Group had announced its intention to distribute “substantially all” of the Global Premium Hotels shares that it owns to its shareholders. With the distribution completed in May, Fragrance Group thus no longer has any hotel businesses and would instead concentrate on two main segments: Property Development; and Property Investment.

Even when it had hotels under its wing, Fragrance Group had already been an active residential property developer in Singapore, having completed more than 50 projects till date.

For the first half of 2014, Fragrance Group achieved 10.4% year-on-year growth in revenue to S$257.7 million. Most of the revenue is coming from its Property Development segment, which brought in S$242.8 million; meanwhile, the Property Investment segment clocked sales of only S$14.9 million.

Unfortunately, due to the lower selling price of its properties, Fragrance Group’s gross profit experienced a drop of 13.5% to S$80.97 million compared to a year ago. Coupled with higher operating costs, the company ended the first half of 2014 with a net profit from continuing operations of S$52.2 million, down 18% year-on-year.

Fragrance Group currently has four investment properties in Singapore. The company is working on renovations with its property on Alexandra Road and also busy developing its property on Sims Drive. Furthermore, the company has entered into a deal to buy four more properties in Australia. Once the renovation, development, and purchases are completed, Fragrance Group might be seeing a huge boost in revenue and profit contribution from its Investment Property segment, which might help with overcoming the profit-decline picture that’s taking place currently.

However, there’s one other important thing to note. As of 30 June 2014, Fragrance Group has a net gearing ratio (net debt divided by total assets) of 99.3%, which is rather high for a property developer facing a slowdown in its main property market (that’s Singapore). There’s also the possibility of the company’s net gearing ratio being driven higher with the purchase of the four Australian investment properties.

If the company finds its finances under strain, it might need to raise more equity capital from existing or new shareholders to strengthen its balance sheet. Such a risk ought to be thought through by both existing and prospective investors of Fragrance Group.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.