Koh Brothers Group Ltd’s Latest Earnings: Should Lower Gross Margin Be A Worry?

Koh Brothers Group Ltd (SGX: K75)  had just released its fiscal third-quarter earnings yesterday evening.

The company was started in 1966 and from its humble beginnings, it has multiple businesses today in fields such as construction, property development, and civil engineering. With that, let’s dig into Koh Brothers’ latest results.

Financial highlights

For the quarter ended 30 September 2015, Koh Brothers’ revenue increased a healthy 13% to S$93.08 million from S$82.20 million on the back of growth in its Real Estate and Construction divisions.

But, a lower gross profit margin had dragged its gross profit down by 23% to S$12.65 million from S$16.33 million a year ago. While effective cost control by Koh Brothers during the quarter (for instance, administrative costs had declined by 40% year-on-year) had managed to result in just a 6% year-on-year dip in net income to S$6.5 million, a big spike in minority interest had led to a 29% slide to S$5.0 million in profit attributable to owners of Koh Brothers.

As at September 30, 2015, Koh Brothers is in a net-debt position with cash & equivalents of S$34.7 million and borrowings of S$257.4 million. This is a significant deterioration compared to a year ago when there was S$63.9 million in cash & equivalents and S$241.8 million in total borrowings.

Koh Brothers’ net gearing ratio is currently at 89%, which is worth keeping an eye on as it’s not a low number. Investors may also want to take note of any interest rate increases as it may eat into the bottom-line.

Future outlook

Francis Koh, the managing director and chief executive of Koh Brothers, gave some insights on the construction sector and property market in the earnings release:

“Although the construction industry is expected to remain challenging, we’re cautiously optimistic on our ability to seize viable opportunities such as that of our recent S$1.12 billion contract win from Changi Airport Group with our joint venture partner, Samsung C&T Corporation. Armed with our strong fundamentals, BCA A1 Grade and robust track record accumulated over the past five decades, we hope to be able to work with such reputable partners and undertake mega-projects of similar scale,”

“We expect residential prices to moderate further as it is unlikely for property coomeasures to ease in the near-term. While the local property market continues to be lukewarm in the short-term, we will continue to aggressively push sales of our remaining units, while seeking opportunities to strengthen our recurring income streams so as to ensure our sustainable growth and enhance shareholder value.”

The lower gross margin in the reporting quarter may be a sign that Koh Brothers’ various business divisions are facing headwinds. While the company has done well to clinch new deals, such as the recent Changi Airport Group contract, investors should continue to monitor the gross margin picture.

At its closing price yesterday of $0.30, Koh Brothers is valued at 4.5 times its trailing earnings.

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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 James Yeo doesn’t own shares in any companies mentioned.