The board’s decision is even more perverse once you consider that the company had net cash on its balance sheet of RMB333m at the end of June, or the equivalent of £31.7m at current exchange rates. That sum equated to Naibu’s market value prior to news of the axed 2p a share interim dividend in last Friday’s half year results report.
Moreover, the company has just reported net profits of £14.4m for the six months to end June so the £1.2m cost of the interim dividend equates to only a twelfth of those post tax profits. And even that doesn’t tell the full story because 52.55 per cent shareholder and executive chairman Huoyan Lin opted to receive his final dividend of 4p a share for the 2103 financial year in shares when it was paid last month. In other words, if the board had maintained the 2p a share interim payout, and Mr Lin had as expected opted for the script option again, then Naibu would only have needed to find £575,000 in cash to pay a 2p a share interim payout to the minority shareholders owning the balance of 28.7m of the 60.5m shares in issue. That’s a tiny sum of money for a company that made net profits of £14.4m in the six month period and one that house broker Daniel Stewart still expects will turn in post tax profits in excess of £26m for the full year.
It’s also a tiny sum in relation to the £102m of stocks, trade and receivables on Naibu’s balance sheet. True, the company’s receivables ballooned from £68m at the start of the year following the decision to extend credit terms by an additional month to distributors in May due to the competitive pressures the company is facing. However, if the company can make the £36m of pre-tax profits the house broker forecasts for both this year and next, and pay the £10m tax charge, there can be no justification whatsoever to axe the dividend for both financial years as Daniel Stewart now predict.
The decision is even more inexplicable in light of Mr Lin’s comments in his post results statement in which he notes: “As anticipated, consolidation in the sportswear sector has occurred and a number of smaller players have now exited the market. With a substantial clearance of inventory, leaner sales networks, stricter cost control measures and a prudent approach in placing and accepting orders, the stronger sportswear manufacturers are now in better shape and there are some signs of recovery in our end markets.” In other words, this is positive for Naibu’s profits and makes it an even greater outrage that the company should treat minority shareholders in this way.
I don’t buy the argument either that the £28.5m capital cost (over the next two years) of Naibu’s planned factory in Dazhu, Sichuan Province, is such a drain on resources either, certainly not for a company making the post tax profits Naibu has been generating, and is forecast to report. I have run through the numbers and this explanation simply doesn’t add up as the capital expenditure on the new factory equates to little over one year’s post tax profits so should be largely funded by internal cashflow. The decision to outsource production from the Quangang facility (due to labour shortages) is not a reasonable explanation either for Naibu to enter a cash preservation mode as this only leads to lower margins on sales and not a cash outflow.
In the circumstances, and as unpalatable as it is, the only rational conclusion I can reach for the board’s decision to axe the dividend is that the directors have decided to treat with distain the minority shareholders who have been holding the shares for the 6p a share dividend. That begs serious questions over the company’s decision a couple of years ago to list its shares (at 124p each) on the Alternative Investment Market (Aim). Put simply, if the company is not being run in the interests of all shareholders, and especially the minority shareholders who have backed the company since it floated on Aim, then it should not be listed at all. The only other alternative explanation for the board’s decision to preserve cash, and one that is equally worrying, is that Naibu’s cashflow is expected to deteriorate significantly worse than the reported profit forecasts and capital expenditure plans suggest. But even that is hard to reconcile with a company that reports no bad debts on those receivables despite extending credit terms to distributors.
So no matter which way I look at it I feel uncomfortable. Clearly, other investors feel the same way as Naibu shares collapsed from 50p to 30p on Friday, 12 September post the release of the company’s half-year results. It also means that having initially recommended buying the shares at 58p in my 2014 Bargain share portfolio, and even after factoring in the 4p a share final dividend banked, in the absence of dividend support the investment case has been shredded to bits. It also makes my decision to average down at 45p in last month’s article ill-timed (‘Bargain shares: new buying opportunities, 12 August 2014). Analyst Simon Willis at house broker Daniel Stewart has become less upbeat too, having slashed his target price from 200p to 50p noting that the “uncertainty over the timing of the next dividend payment removes the catalyst for an early rerating and we have moved from Buy to Hold.”
In the circumstances, I would recommend you exit your holdings too even though you can only recoup 30p a share of your capital. Sell.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
