RE: IC Article13 Aug 2014 13:16
Part 1 - A first half trading statement from Naibu (NBU: 45p), a Chinese maker and supplier of branded sportswear and shoes, has not been taken badly by investors with shares in the company falling 20 per cent in the days following the release. The news was mixed. On the plus side, revenues increased by 8 per cent in the first half, and marketing of the company’s autumn and winter collections has gone well. In fact, sales orders are 5 per cent higher than at the same trade fair last year.
However, labour shortages have driven up labour costs in the coastal regions and the company has been unsuccessful in recruiting enough staff to operate six production lines at its Quangang facility. As a result Naibu is abandoning production at the plant and is in negotiations with third parties to rent it out. It is also being marked for sale.
The net impact is that Naibu’s original equipment manufacturer suppliers will now supply the company’s branded shoes that were due to be produced at Quangang until Naibu’s new Dazhu facility becomes operational in the second quarter of 2016. But there will be a financial cost due to the lower margins earned on the outsourced production.
Analyst Simon Willis at broking house Daniel Stewart now expects the company’s gross margin to decline by two percentage points to 25 per cent this year, and has edged down his volume growth estimate from 7 per cent to 6 per cent. This leads to an 11 per cent pre-tax profit downgrade. Also, a 3 per cent strengthening of sterling against the Chinese renminbi since the spring will impact profits once they are translated into sterling, resulting in a further hit to net earnings. Daniel Stewart now pencils in 2014 EPS of 46.1p on a fully diluted basis, down from 54.2p in 2013. This means with the shares falling from my recommended buy in price of 58p to only 45p, they are trading on less than one times earnings!
That valuation implies the company has gone ex-growth which it has since Daniel Stewart’s hefty 17 per cent downgrade to 2015 profit forecasts means next year’s earnings are now predicted to be flat against the downgraded 2014 forecast. That said, post tax profits cover the 6p a share dividend more than seven times over, so the £3.5m payout looks secure enough especially since the company had net funds of £44.6m at the end December, or the equivalent of 76p a share.
To put the valuation into some perspective, investor distrust of Chinese companies is so acute that the company now only has a market capitalisation of £24.6m, implying a negative value of £20m to the business itself. In fact, Naibu shares have derated to such an extent that its equity is being valued by the market at only 20 per cent of the company’s net asset value of £123m. Furthermore, with the share price bombed out at 45p, the 6p a share dividend equates to an historic yield of 13 per cent.
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