Regency Affiliates Inc :RAFI-US: Earnings Analysis: Q3, 2017 By the Numbers : June 8, 2018

Regency Affiliates Inc reports financial results for the quarter ended September 29, 2017.

Highlights

  • Summary numbers: Revenues of USD 0.90 million, Net Earnings of USD 1.10 million.
  • Gross margins narrowed from 64.75% to 63.08% compared to the same period last year, operating (EBITDA) margins now -5.61% from -5.00%.
  • Change in operating cash flow of 75.74% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating (EBIT) margins contributed to decline in earnings, despite some positive contribution from one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-29 2017-06-29 2017-03-30 2016-12-30 2016-09-29
Relevant Numbers (Quarterly)
Revenues (mil) 0.9 1.7 0.66 0.88 0.8
Revenue Growth (%YOY) 12.95 155.09 0 0 0
Earnings (mil) 1.1 1.67 0.47 1.07 1.69
Earnings Growth (%YOY) -34.78 1015.39 -8.22 -19.61 23.95
Net Margin (%) 122.62 98.36 70.94 121.53 212.36
EPS 0.23 0.35 0.11 0.22 0.35
Return on Equity (%) 2.07 3.18 0.9 2.08 3.36
Return on Assets (%) 5.54 8.52 2.41 5.52 8.82

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, RAFI-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if RAFI-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -47.11% and earnings by -34.07% compared to the previous period.

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 64.75% to 63.08%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from -5.00% to -5.61% in this time frame. For comparison, gross margins were 63.22% and EBITDA margins were -18.16% in the previous period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

RAFI-US’s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days are now 470.69 days from 602.02 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company’s cash versus earnings numbers to gauge whether its performance is sustainable.

RAFI-US’s year-on-year change in operating cash flow of 75.74% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s earnings fell, largely because of the narrowing in operating margins, which decreased from -5.00% to -5.61%. The decline in earnings probably would have been worse, were it not for some one-time items that improved pretax margins from 187.55% to 207.79%.

EBIT Margin History
PreTax Margin History

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Company Profile

Regency Affiliates, Inc. invests in assets that generate predictable and sustainable returns on capital. The Company’s objective is to generate long-term value for its shareholders. The Company’s management seeks investment opportunities to meet its business characteristics and valuation criteria. The Company holds a limited partnership interest in Security Land and Development Company Limited Partnership (Security Land), which owns and operates approximately 34.30 acres of land and rental property of approximately 717,000 square feet in Woodlawn, Maryland. Regency Power Corporation (Regency Power) is the Company’s subsidiary. Regency Power holds interests in Mobile Energy Services Company, LLC, which owns an on-site energy facility that supplies steam and electricity to a Kimberly-Clark tissue mill in Mobile, Alabama.

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