Profit at Eu Yan Sang International Has Fallen By 38%: Here’s What Investors Should Know

Eu Yan Sang International Ltd  (SGX: E02) reported its fiscal third-quarter earnings yesterday evening. The reporting period was for 1 January 2015 to 31 March 2015.

Eu Yan Sang is a traditional Chinese medicine (TCM) purveyor with 288 retail outlets (258 company-owned; 30 franchised) in Hong Kong, Singapore, Malaysia, China, Macau, and Australia. You can learn more about the company here, and catch up on its previous earnings report here.

Financial highlights

Here’s a rundown on the firm’s latest set of financial figures:

  1. For the third quarter of the financial year ending 30 June 2015 (FY2015), revenue for Eu Yan Sang was relatively unchanged on a year over year comparison, coming in at $110.4 million.
  2. That said, Eu Yan Sang’s profit for the quarter fell significantly, plunging 38% to around $5.4 million when pitted against the same quarter a year ago.
  3. Consequently, earnings per share (EPS) fell 38% from 1.98 cents a year ago to 1.22 cents in the reporting quarter.
  4. Cashflow from operations was $14.3 million for the third quarter of FY2015, with capital expenditures coming in at $14.3 million. This meant that Eu Yan Sang had generated no free cash flow for the quarter. This was an improvement from the negative free cash flow of $22.4 million that was logged in the second quarter of FY2015.
  5. As of 31 March 2015, the company had $27.9 million in cash and equivalents and borrowings of $172 million. As such, the company is in a net debt position of around $144 million. This is a step backwards from the net debt position of $79.6 million seen a year ago.

In all, Eu Yan Sang had a quarter with revenue coming in flat compared to a year ago. On the other hand, the company had suffered a sharp fall in profit and had generated $32 million in negative free cash flow for the first nine months of FY2015. Further more, Eu Yan Sang remains in a net debt position.

Operational highlights

For the third quarter, sales in Hong Kong suffered a 21% year over year drop (in HK dollar terms) – an occurrence that management attributed to lower Chinese consumer spending. This was offset by revenue increases in Singapore, Malaysia, and Australia. Australia was again the standout performer with a 28% year over year jump in revenue (in Australian dollars).

For the quarter, Eu Yan Sang added two company-operated outlets each in Hong Kong and Malaysia. It also closed two outlets in Singapore. All told, Eu Yan Sang ended the quarter with 288 outlets, including 30 franchise outlets.

The company’s Chief Executive Officer, Mr. Richard Eu, gave some commentary in the earnings release:

“Despite the challenging retail environment in Hong Kong contributed by a slowdown of spending and visitation restrictions imposed on mainland Chinese to Hong Kong, most of our key markets have shown resilience.

Singapore, Malaysia and Australia markets have reported revenue growth. We see long-term opportunities especially in rising health awareness as consumers are becoming more discerning and better educated about wellness issues and are actively seeking for healthy food and natural health remedies.

This is a space where we differentiate ourselves from others, where consumers understand product quality over pricing. Rising disposable income in the region also played an important role to our business. In addition, our wellness offerings are easily accessible through ongoing introduction of new, exciting products and the extension of our wholesale channels”

Looking ahead, the management team expressed concern about the economic outlook for two of its key markets – Hong Kong and Malaysia. New regulations to limit the number of visitors from China to Hong Kong is deemed to be a headwind for sales. Meanwhile, the new Goods and Services Tax (effective 1 April 2015) in Malaysia may lead to softness in consumer retail activity. On the flipside, management expects moderate growth in its other geographical markets.

Foolish summary

At its closing price yesterday of $0.67, Eu Yan Sang traded at around 29 times its trailing earnings and has a dividend yield of 3.3% (based on its dividend over the last 12 months). With the firm’s negative free cash flow and a net debt position, Foolish investors should not assume that the Eu Yan Sang’s dividend will always be maintained, moving forward.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.