Dream released its interim earnings for the first half of the year on 26/08/2019. When I did the previous analysis, I ignored the seasonality that Dream exhibits between the first and the second half of the year. To interpret the interim earnings we need to take this seasonality into account. In general, Dream does about 40% of total revenues in the first half.
Half Year 2019
Revenues grew by 15% compared to the first half last year. (See graph 1) This would be on track for the bullish scenario.
The gross profit margin however was only 18.5%, even worse than last year’s 20.4%. This translates into a Net Income of 112M (Profit margin = 7%). Net Income increased by 40% but last year was quite disappointing in itself and was impacted by a 10M higher Income tax charge. (See graph 2) Dream doesn’t provide much detail about why the gross profit margin was under pressure.
Prospects
Dream dropped a bomb in the Management Discussion and Analysis section:
The Group will consider investment opportunities for acquisitions of suitable companies with growth potential to boost revenue and profit. Through all these strategies, the Group is working towards the goal of reaching an annual revenue of US$700 million by 2021.
Given the history of Dreams capital allocation, I am a bit worried about this. Dream certainly has the capacity to make a substantial acquisition but it will be key to not overpay. I guess we will find out very soon.
Conclusions
It is difficult to draw conclusions based on this earnings release, so I will not update my valuation. However if I would change the Profit Margin to 10% in my previous base scenario, I would still value the company at 6.3 HKD per share. There is still a sufficient margin of safety to buy at current levels.
