Although pre-tax profits are predicted to be inline with analysts’ expectations for the 2014 financial year – analyst Matt Butlin at nominated adviser and brokerage Allenby Capital expects full-year pre-tax profits of £28.3m, down around 10.5 per cent on 2013, on flat revenues of £113m (using a current exchange rate of £1:RMB9.57) – this news has been countered by a weaker than anticipated order book for next year. A more cautious stance taken by the company’s 17 authorised distributors’ who supply more than 1,300 franchised retail outlets in the Fujian province in China, partly explains a 13 per cent year-on-year fall in orders for the 2015 spring/summer season, but also reflects a worsening macro backdrop in China and falls in consumer spending. These forward orders – taken at two major sales fairs – have historically proven to be an accurate indicator for the following season’s sales.
Investors are taking a cautious stance too as Camkids’ market capitalisation of £30m is less than two thirds of the company’s cash pile of £50.3m (at current exchange rates) reported at the time of the interim results at the end of September 2014. Allenby predicts a year-end cash pile of around £45m at the end of next month.
It’s also fair to say that Camkids’ focus on the children’s market is proving less of a product differentiator from the cut throat adult apparel and clothing market that I had predicted. I had expected that by offering value for money branded outdoor clothing for teenagers and children, and targeting tier three and four cities in China, the business would be more resilient.
Sensibly given this tougher trading back drop, the company is reviewing its cost base to try to protect its net profits. Bearing this in mind, it’s worth pointing out that gross profit margins have been maintained at around 35 per cent through tight control of production costs and by simplifying designs. That said, profits are set to head southwards next year which makes my decision ill-timed to recommend averaging down your holdings at 51p (‘Bargain shares new buying opportunities, 12 August 2014'), and to reiterate my buy advice post the half-year results (‘Cash rich high yield play’, 29 September 2014).
Earnings downgrades
Ahead of today’s trading update, Allenby had predicted that Camkids would increase revenues and pre-tax profits by around 2.5 per cent next year. Mr Butlin has subsequently cut his 2015 full-year pre-tax profit estimate by 20 per cent to £22m on revenues now predicted to be down 13 per cent to £98.5m (Camkids reports in Chinese renminbi, so I have converted the broker’s forecasts at the current exchange rate). On this basis, expect 2015 EPS of 22p, down more than a fifth on fiscal 2014. Mr Butlin has also cut the brokerage’s 2016 earnings forecasts by 22 per cent and now expects a similar outcome in that year to 2015.
Despite the downgrades there are some positives, the main one being that there is no reason at all why the company’s board should not maintain the 4p a share 12-month rolling cash dividend in light of that bumper cash pile. On this basis, the shares offer a dividend yield of 11 per cent. The company is also sensibly reviewing its capital expenditure plans given that the current production facility is operating at 85 per cent capacity. Camkids’ had been planning a £20m investment in a new plant.
I would flag up too that Camkids has reported that online sales from the Chinese Double 11 day, the country’s national shopping day on 11 November, have been “encouraging” with the company ranked only behind Anta and Nike in the children’s market. The launch of a range of cycling products strengthens the offering too.
It’s also worth noting that the shares are becoming very oversold once again with the 14-day relative strength indicator heading south of 30 and approaching the depressed levels that prompted a sharp bounce in September. So although the trading update is likely to weigh on investor sentiment near-term, there is still value in the company with the shares trading well below cash on the balance sheet and rated on less than two times prospective post tax earnings for 2015. If you followed my previous advice I would therefore recommend holding on for now.
Please note that a number of the companies on my watchlist have issued trading updates or financial results recently including constituents of my 2013 and 2014 Bargain shares portfolios: Barratt Developments (BDEV), Taylor Wimpey (TW.), Record (REC), Bloomsbury Publishing (BMY) and Trifast (TRI). Other companies reporting include SeaEnergy (SEA), GLI Finance (GLIF) and Communisis (CMS). Time permitting I will endeavour to update my view on all these companies.
■ Simon Thompson's 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 stockpicking'
