Not only is Naibu’s market capitalisation of £41m well below net funds of £44.6m on the balance sheet, but this is a company that has just reported pre-tax profits of almost £40m on revenues of £184m for the financial year to the end of December 2013. Post tax profits were £29.3m which means the company is being valued on just 1.3 times net profits with the cash pile thrown in for free. All these figures have been converted from Naibu's reporting currency of the Chinese renminbi into sterling at the current exchange rate of £1:10.45Rmb.
Clearly, risk aversion to Chinese companies is primarily at the heart of this chronic undervaluation. But even making an allowance for the fact investors are currently shunning such small cap companies, a market capitalisation of just a third of book value (£122m at the end of December) is extreme on any measure. Furthermore, there is a dividend too. Having paid out an interim payment of 2p a share, Naibu’s board have just declared a final dividend of 4p to be paid out on 15 August (ex-dividend 2 July). So with the shares trading at 70p, the running yield is pretty chunky at 8.5 per cent.
True, the shares are up on my recommended buy in price of 58p in this year’s Bargain Shares portfolio, albeit the opening offer price on Friday 7 February was 62p after market makers marked up their prices ahead of the opening. However even after the modest rise, the shares still cry out value for those who are prepared to invest for when risk aversion towards Chinese companies eases. I still ascribe to the view that the share price could double or even treble, as analyst Simon Wills at house broker Daniel Stewart believes is fair value, and there would still be value in the shares. That clearly is going to take time. But with the current entry point so attractive, and the upside potential embedded in the share price so great, we are being paid handsomely to be patient.
Importantly, the business itself remains in good enough shape albeit the board are honest enough to admit that competition is likely to intensify in Naibu’s markets as other branded sportswear companies continue to push into third and fourth tier cities in China. In light of this the company is being more prudent with its store opening plans. That’s sensible as it’s far better to consolidate the company’s presence in existing territories when competitive pressures are set to rise, while only targeting regions in the country with the greatest growth potential.
Admittedly, the new production facility at Quangang should have come on stream at the end of February in order to expand production capacity from eight to 10 lines. This has not yet happened due to labour shortages, and if the company is unable to begin production by August then the facility will be sold. In the meantime, Naibu is continuing to produce shoes at its Jinjiang facility, and the majority of shoe production will be outsourced until the new Dazhu facility becomes operational in early 2016. That factory will have 12 production lines and will cost £28.6m to construct and bring on stream, a little less than last year’s operating cash flow, so can easily be funded using internal resources.
So with no financial concerns, and analysts pencilling in a further rise in current year pre-tax profits and EPS to £41m and 55p, respectively, I see little reason to alter my positive stance on the shares. There is even the prospect of a raised dividend as the prospective payout is 6.5p a share this year. Naibu may be unloved, but the shares are a bargain on a bid offer spread of 70p to 72p.
Please note that I am still working my way through a list of companies on my watchlist. I will try and clear the back log this week. The companies include: Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis Homes (BVS).
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