As a result of this negative sentiment, and through no fault of their own, a number of Aim-traded Chinese companies are being rated on eye-wateringly cheap earnings multiple. I for one believe that the deratings have gone too enough, which is why I included shares in clothing companies Naibu (NBU: 74p) and Camkids (CAMK: 68p) in my 2014 Bargain Shares Portfolio. The 20 per cent share price gain on the former has been wiped out by a similar size paper loss on the latter, so the holdings have yet to come good. However, I am convinced a higher rating will be forthcoming and so do the board of Camkids who are fighting back against the naysayers.
At this week’s annual meeting the company’s board noted that it is “aware of recent press articles about a small number of Chinese companies proposing to delist from Aim, but wishes to reassure investors that it remains fully committed to its Aim listing and continues to see a huge amount of value from it.” The board added that: “Camkids has been successful in attracting UK investors both at IPO and subsequently, and also receives a large amount of commercial and reputational benefit in China from its listing on Aim.”
Moreover, executive Chairman Zhang Congming, and majority shareholder of the Chinese designer, manufacturer and distributor of outdoor apparel company, has elected to receive his dividend under the scrip arrangements as he considers Camkids' share price to be “fundamentally undervalued and not reflective of the confidence he has in the future of the company”. Mr Congming owns 50m shares, or 66.29 per cent of Camkids’ issued share capital of 75.4m shares, so this vote of confidence means that he is in effect investing £1m of his own money by using the 2p a share final dividend to increase his stake in the company. That’s hardly the sign of someone who is not committed.
It’s also worth pointing out that Camkids issued a pre-close trading update at yesterday’s annual meeting which confirmed that “trading across all divisions is in line with market expectations for the current financial year”. In addition, Camkids showcased its autumn/winter 2014 collection to distributors in Beijing in February 2014 and reports that “the fair in Beijing was extremely well-attended and the order book is up by 1.2 per cent compared with the same period last year”. The company will issue a more detailed interim pre-close trading update to the market in early July 2014. Matt Butlin, head of equity research at broker Allenby Capital, currently predicts EPS of 25.8p in 2014, so on that basis the shares are trading on less than three times earnings forecasts.
Chronic undervaluation
However, the chronic undervaluation is even more extreme because Camkids’ net cash ended the year at £30m, or 40p a share. That’s the equivalent of 60 per cent of the company’s current market capitalisation of £50m. In other words, strip out the cash pile and the equity is being valued on just one times net profits. Moreover, with cash flowing into the business post the year-end as inventories have been turned into cash and distributors settled accounts, net funds reached £37m, or 49p a share, by the end of February.
The cash pile aside, the dividend is attractive: Camkids declared a full-year dividend of 4.3p a share and one covered six times over by post-tax profits. It also means that with the shares being offered in the market at 68p, the historic yield is chunky at 6.3 per cent.
Trading on a 25 per cent discount to book value, priced on a cash-adjusted PE ratio of one, yielding 6.3 per cent and with the trading update confirming profits are in line with analysts' estimates after five months of the current financial year, I can’t see how the shares can be anything other than a bargain buy.
The chart formation is also positive as it appears from my lens that the share price has based out and a further attempt to breach a former support level of 82p is on the cards. I would be buying now, as there is no reason on fundamentals why the shares should be so lowly rated. Moreover, if Camkids’ share price does rise above the 82p level, then the 88p listing price in December 2012 would be the next obvious target. My own view is that the company’s equity is worth at least double the current share price and I have no hesitation in repeating my previous buy recommendation.
Naibu worth buying
Also, I can only reiterate my previous buy recommendation on Naibu, a Chinese maker and supplier of branded sportswear and shoes. Not only is its market capitalisation of £41m well below net funds of £44.6m, 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-0tax profits were £29.3m, which means Naibu is being valued on just 1.3 times net profits with the cash pile thrown in for free.
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 no reason at all to alter my positive stance. There is even the prospect of a raised dividend as the prospective payout is 6.5p a share, implying a bumper forward yield of 9 per cent. Ahead of a pre-close trading update from the company in a month’s time, Naibu's shares rate a buy on a bid-offer spread of 72p to 74p.
■ 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'
