By Nigel Somerville, the Deputy Sheriff of AIM | Monday 20 March 2017
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 purveyor of all things fishy, Aquatic Foods (AFG), has updated on 2016 Q4 trading this morning. In a statement plastered with Red Flags it would appear that the company is nearing the final chapter of the China Norfolk playbook as we are warned that there has been a spot of bother getting cash out of China. Is it bye-bye to the dividend?
The playbook demands that the dividend be chopped for some spurious reason. I guess that having difficulty getting the wonga out of China works pretty well – just as it did with Sorbic (SORB) which departed the Casino in less than happy circumstances, although in that case it seems that the CEO ran off with the cash….and the factory. In any case, the company had that little hiccup getting its last interim payment made. So dividend concerns: tick.
According to the playbook we should have the resignation of the Finance Director (perhaps for personal reasons). Oh, er….that happened in February last year (see HERE) with a replacement not announced until August. Tick.
We might also watch for the odd NED departure, such as the chairman (John McLean, also of Sorbic, HERE) in July 2015 – just a few months after the IPO at 70p (as against 12.5p mid, last seen). Er….tick.
Other signs to catch one’s eye are things like a massive cash-pile way in excess of the market capitalisation. This morning the company, on a market capitalisation of just £14.2 million (source: ADVFN), tells us that it is drowning in cash, of approx. £44 million. Tick.
In fact, the figure is offered under the heading “Cash and working capital” but rather than a simple, plain vanilla statement of net current assets we are told that:
Most of the cash generated from trading activities had been absorbed into working capital as at the year end. In 2016, the Group's working capital requirement increased by approximately RMB 100 million, of which trade and other receivables increased by approximately RMB 30 million and trade and other payables decreased by approximately RMB 67 million reflecting in part the paying down of creditors ahead of the year end. The Group also paid the final dividend for 2015 and the interim dividend for the first half of 2016 totalling approximately £1.0 million (RMB 8.4 million) during the year.
Righty-ho, so most of the cash generation went into working capital. That suggests there was a bit left over – that the company actually generated cash. But we are also told that there was a cash outflow during Q4, with comparative figures for June 2016 showing that there was a cash outflow of about £6 million during the second half and looking up the FY15 cash figure of RMB 380 million, this morning’s figure of RMB 375 million as at 31 Dec 2016 means an outflow over the full year, albeit quite small. Yet we are told this morning that the company clocked up (before exchange movements) a net profit margin of around 10-11%. Profit, of course, being a matter of opinion….
Another step straight from the playbook involves how to explain away all the mountain of imaginary cash (which this company seems to be having a spot of bother getting out of China). With some of the Filthy Forty this involved building a new factory – in the case of Naibu (NBU), one which was junked as soon as it was built because of non-availability of workers to staff it. Or in the case of Camkids (CAMK) the attempted explanation was that it needed to pay off suppliers it was dumping by buying back stock which the suppliers hadn’t actually paid for.
This morning we are told:
Whilst the Board is mindful of the potential challenges that lie ahead, the Board believes that such a demanding business environment also presents consolidation opportunities. AFG's strong cash position has the potential to allow the Group to take advantage of this difficult time to grow via merger and acquisitions. Accordingly the Group continues to review potential acquisition opportunities in the PRC and overseas as well as the continued potential for organic expansion into a new site. In addition the Group continues to review growth and improvement opportunities in production capacity and efficiency through increasing process automation.
Aha – M&A (out in China, natch) and a new site too! But surely if the company wanted to increase shareholder value by the maximum amount possible it would just buy in its own shares! Let’s just recap the numbers: Market Capitalisation £14.2 million, cash of £44 million.
As for trading, out of this morning’s numbers we see that quarterly sales volumes during 2016 have remained fairly consistent at around 5,100 tonnes with the exception of Q4 volume of 6,600 tonnes. Oh, so Q4 sales volume was about 30% higher than each of the previous three quarters.
Add to that the figures for revenue: Q4 showed revenue improvement of 31.7%, 38.5% and 25.3% compared with Q1, Q3 and Q3 2016 respectively reflecting in part the seasonal strength of the quarter.
Yet gross margin, 24.2% for the year, fell in December to 22.7% in the face of massively increased volumes, revenues and “seasonal strength”. Well that makes perfect sense…..NOT!
Actually, none of it makes sense to me: I just don’t believe a word of it.
And judging by the market capitalisation, the market doesn’t believe a word of it either. The market does, however, have a pretty good track record in valuing China Norfolks. If the market is valuing a company at a 68% discount to cash I’d be paying good attention – and not as a signal that the company is cheap.
Suffice to say….BARGEPOLE.
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