This is almost entirely down to a number of factors, none of which reflect the operational performance of the company. The cancellation of the dividend at Chinese rival Naibu (NBU: 23p) clearly spooked investors and prompted me to exit that particular holding, but it also had a negative effect on sentiment towards Camkids. To compound matters a suspected fraud at Frankfurt listed Chinese company Ultrasonic has created further concerns and highlighted the potential for financial irregularities in companies from the region. It’s hardly a surprise then that some investors have tarred Camkids with the same brush and dumped the shares.
But these worries have proved wholly unjustified. For starters, the company has just declared a 4 per cent rise in the interim scrip dividend to 2.4p a share. Shareholders can alternatively opt for a cash dividend of 2p a share, the same as the final dividend declared earlier this year. The company can easily afford to make the payment because in the latest six month trading period its operating profit rose 3.5 per cent to £12.6m (using a sterling Renminbi exchange rate of £1:RMB9.99) on revenues 5.8 per cent higher at £45.9m. Net profits of £9.1m covered the £1.5m cash cost of the payout almost six times over.
Furthermore, with the first half of the financial year strong for cashflow as distributors settle accounts for sales made in the seasonally stronger second half, the company’s net funds increased from £31.1m at the end of December to £48.6m. That’s the equivalent of 64p a share, or 10p a share more than Camkids own share price. Or put it another way, with Camkids commanding a market capitalisation of £40m, or half its net asset value of £80m, we are getting a free ride on half the company’s assets and £8m of its own cash. It’s worth flagging up that the company has no bad debts amongst its distributors too. That’s important because Camkids’ extends credit for 120 days and had trade receivables of £33.3m at the end of June.
Extreme undervaluation
Such an undervaluation seems extreme to say the least, even after factoring in the negative sentiment towards Chinese companies, given that Camkids’ board are able to easily fund that 4.4p a share dividend in the future. The rolling 12-month yield is 8.4 per cent. It’s clear to me too that the company’s planned investment in a new production facility at a cost of £20m – the current one is running at 85 per cent capacity – can largely be covered by cashflow over the next couple of years without eroding that bumper cash pile.
It’s also worth pointing out that Camkids’ focus on the children’s market is a key differentiator of the business from the cut throat adult apparel and clothing market. Based in the Fujian province in China, the company sells its merchandise to 17 authorised distributors operating over 1,300 franchised retail stores. True, the children’s branded clothing market is still highly competitive and a number of global brands are offering larger discounts on their product ranges in China. But by offering value for money branded outdoor clothing for teenagers and children, and targeting tier three and four cities in China to expand its reach – the number of retail outlets has increased from 1,100 since June 2013 – the business has been able to withstand these pressures.
Addressing shareholder concerns
A key issue concerning investors, and weighing on Camkids’ share price, has been the 66.9 per cent shareholding of chairman Zhang Congming. That’s because if he continues to take up the dividend as a scrip option, and other investors opt for the cash payment, then his holding will eventually increase to 75 per cent of the 77m shares in issue. It is at this level at which a delisting of the shares from the Alternative Investment Market could take place, if he so desired. Mr Congming was issued with 1.58m scrip shares in lieu of the final dividend of 2p a share in July which raised his stake from 66.28 per cent of the issued share capital.
It’s therefore worth noting that although Mr Congming will opt for the scrip option for his interim payout, the number of the scrip shares issued will be capped so that his percentage shareholding in the company will not increase. The balance of the dividend will be paid in cash to him. I feel this is a wise decision and one that should help allay investors’ fears about Camkids’ Aim-listing and the motives of the majority shareholder.
Another issue affecting sentiment has been selling by some Chinese shareholders who backed the company before it listed on Aim. But I understand that the stock overhang has now cleared which could be significant given this has been a dead weight on the share price.
Value on offer
Post the half-year results, analyst Matt Butlin at nominated adviser and brokerage Allenby Capital edged up his 2014 EPS estimate by 3 per cent to 26.6p, reflecting recent weakening of sterling against the Renminbi. This is based on full-year pre-tax profits of £27.3m, down around 10 per cent on 2013, on relatively flat revenues of £109m.
True, there is a strong second half bias to Camkids’ sales (58 per cent of the full-year revenue estimate), and even if that forecast is hit then profits are still expected to decline for the 12-month period. However, I feel that this is more than reflected in the current valuation as the shares are only rated on a miserly two times earnings estimates. It is also fair to say that such a rating would imply the company has gone ex-growth. That is close to the mark as Allenby forecasts 2.5 per cent uplift in revenue and pre-tax profits next year. But even taking that into consideration, such an earnings multiple is simply too harsh for a profitable and cash generative operation.
Other investors may be starting to see things my way too: the shares jumped 18 per cent post results, albeit only back to the level of my update last month. Admittedly, it’s going to take time for sentiment to improve to the extent that Camkids can command a more sensible rating, but I still feel it will eventually and on a bid-offer spread of 52p to 54p, I remain a buyer of the shares.
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