The Three Numbers That Stretch GMG Global

The UK has its oil explorers. Australia has miners. But here in Singapore, all sorts of farmers can be found on our stock exchange.

GMG Global (SGX: 5IM) is one of those farmers. It is a S$550m business that plants, cultivates, taps, markets and exports natural rubber. It produces rubber for car tyres and latex that is used in the manufacture of rubber gloves and contraceptives.

It is positioned in an industry that should, in theory, be in demand all year round. After all, who doesn’t need rubber gloves?

But at the same time it is also a commodity player, which means that it has little control over the price of the product it sells. It is price-taker.

When rubber prices are high, GMG Global can make decent margins. However, when the price of rubber is depressed, GMG Global can suffer.

Its susceptibility to prevailing rubber prices is highlighted by its wildly-fluctuating Return on Equity (RoE). Its RoE which has averaged 7% in the last ten years has been as high as 19.2% and as low as minus 5.7%.

Last year’s negative Net Income Margin (NIM) led to its lowest Return on Equity of -4.3% for over a decade. Its NIM of -4.3% implies that the company lost S$4.30 for every S$100 of sales that the company made. The disappointing number can be traced to an equally disappointing operating margin of -3.9%.

That said, GMG Global is quite efficient. It generated S$0.75 of revenues for every dollar of asset employed in the company. The average for Singapore’s blue chips, as measured by the Straits Times Index (SGX: STI), is around 0.5.

However, GMG Global is not quite as efficient as its peers. Halcyon Agri Corporation (SGX: 5VJ) reported an impressive Asset Turnover of 1.3, while Thailand’s Sri Trang Agro-Industry Public Company’s (SGX: NC2) generated S$1.80 of sales for every dollar of asset employed.

GMG Global is not heavily leveraged. It had S$241m of liabilities compared to S$1.03b of assets. In other words, it has a Leverage Ratio of 1.3, which is below the market average of 1.6.

By pulling apart GMG Global’s Return on Equity, it is easy to see why it looks stretched. The negative Return on Equity of 4.3% is the product of a negative Net Income Margin of 4.3%; an acceptable Asset Turnover of 0.75 and a Leverage Ratio of 1.3.

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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 Director David Kuo doesn’t own shares in any companies mentioned.