By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 2 March 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
ShareProphets AIM-China Filthy Forty play Aquatic Foods (AFG) released a trading statement yesterday for its full year to Dec 2015. I commented that the last trading statement had more holes than a fish-net and yesterday’s serving of fishiness lowers none of the Red Flags previously raised.
We are told:
Unaudited Group revenue for the FY 2015 increased by 14.3% to RMB 978.7 million (c£107.4m) (2014: RMB 856.1 million)
Well that’s jolly good. H1 revenue was RMB 444 million, rising to RMB 679 million at the 9-month point. So Q4 was, we might deduce, was RMB 300 million. That’s jolly impressive given that Q3 clocked up just RMB 235 million and H1 averages out at RMB 222 million a quarter. It rather looks as though quarterly revenue has suddenly jumped by about RMB 70 million – around 30%. One wonders where this sudden increase in income has come from: surely such a surge would warrant an RNS a little earlier than two months after period end? Or has the company only just noticed?
The company did report a $15.4 million US export contract at the end of Sept. That was in Q3 although the RNS stated that the contract would benefit Q4. How has the company accounted for the (approx.) RMB 99 million revenue contracted over the life of the one-year contract and how much cash has actually been received? One might think that this one contract accounts for the increase in trading but yesterday’s update states, under “Export markets” that revenues from exports came in at just RMB 69 million for the year (representing 7% of total revenue). I’m really confused.
Unaudited profit after tax for the FY 2015 is expected to be similar to that achieved during 2014, which is slightly down on previous expectations
Ah, so a miss versus expectations (whose?) Last year it reported profits of RMB 137 million – call that £13.7 million. The shares are trading (last seen) on a whopping spread of 7p bid to 15p offer - wide enough to fit a school of blue whales through. That the spread is wider than the bid price is of itself a Red Flag. But the market capitalisation of £13.2 million (source: ADVFN) puts the shares more-or-less on a PE of just 1. Another Red Flag.
Unaudited cash balance at 31 December 2015 of RMB 380.2 million (c£41.7m) (2014: RMB 193.9 million), the growth in cash reflects the net IPO proceeds of £8.3 million received in February 2015 as well as cash generated from operations during the year
My word that’s a whopping great big pile of cash - £41.7 million means the shares are trading at a discount to cash of some 68% for a profitable, cash generative and growing company. If we believe what we are being told – which naturally we all do. Obviously.
Aquatic came to AIM just over a year ago at 70p a share and the shares are now 7p bid. In that time it lost its Deputy Chairman and Senior Independent Director last July – just six months after listing - and the FD left the board with immediate effect “for personal reasons” last month, on the first anniversary of the listing. More Red Flags, anyone? The company says it is has been reviewing potential candidates for the post.
On cash and working capital, the company states: The Group has not been required to provide for any bad debts at the present time but given that the numbers presented are unaudited perhaps we should await the full audited accounts and see if this remains the case.
Now much of this may seem to fit a familiar Filthy Forty pattern: share price collapse in the face of booming business, departure of FD, joke PE, shares trading at a massive discount to cash. And there is another piece of the now familiar jigsaw – a proposal to build a new factory. According to the company this seems to be on hold for the time being:
As previously noted, the Group is currently awaiting final regulatory approval for its expansion plans from the relevant regional authorities. Due to the current demand environment the Group has not been actively chasing this consent although it is expected that as demand increases the Group will still seek to acquire additional processing and cold storage capacity.
So perhaps we won’t be explaining away all that cash in the immediate future. Better still the company is promising a full-year dividend. Previous indications suggest that this will come in at 0.7p per share (at least) to make for a total pay-out of 1.4p for calendar 2015. Let’s see: mid-price of 11p means a dividend yield of almost 13%.
So we can add a joke dividend yield to the list of Red Flags.
But I’ve got a better idea. If I were running a growing, cash-generative and profitable listed business trading on a PE of 1, at a discount to cash of 68% and on a yield of 13% - and especially if the current demand environment was a bit challenging – I’d be looking for alternative ways in which to enhance shareholder value. At the current share price it appears as though the company could buy its entire share capital twice over and still have change left.
So while all that cash isn’t needed for the proposed new factory, how about a share buy-back?
It would be earnings enhancing, the NAV per share would rise, the cost of a dividend would fall (or more could be paid out per share) and it would demonstrate that the claimed cash was all for real. Every penny of it. Surely the effect on shareholder value would be far greater than any new factory could possibly achieve?
Why has there been no mention of that?
Answers on a prawn cocktail crisp packet…..
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