A Load of Cobblers
4 December 2000
Last year, we began a long tradition (this is the internet, remember) of saying something nice about a local company for Christmas. 'Tis the season of "goodwill to all balance sheets" or one of them at least. First we'll do something you seldom see the professional analysts do - look back at how our previous recommendation performed.
Last year's Pick
Last year's pick on 5-Dec-99 was Boto International Holdings, which closed the previous Friday 3-Dec-99 at $0.206 per share, split adjusted. The stock closed today at $0.226, up 9.7% on the year. But that's only half the story. In addition, dividends during the year were 0.56 cents (ex-dividend on 28-Dec-99), 1.65 cents (3-Aug-00) and 0.6 cents (23-Nov-00). That's a total of 2.81 cents, or 13.6% return. Add those together (we'll keep it simple) and you have a total return of 23.3%.
At the same time, the Hang Seng Index, including reinvestment of dividends, has lost 7.0% between 30-Nov-99 and 30-Nov-00 (we only have monthly data). Put $1,000 in the HSI a year ago, and you'd have $930. Put $1,000 in Boto, and you'd have $1,233. So Boto has out-performed the HSI by 32.6%.
We still like Boto, and their new outdoor furniture business seems to be coming along nicely, giving them something to do when they are not making the largest share of America's plastic Christmas trees. On the downside, they indulged in a pointless 5 for1 share split this year, and also seem to be wasting a modest amount of money on a web site which is the brainchild of the Chairman's son. The spike in plastic prices (due to oil prices) dented the interim results for Sep-00 a bit, but we expect that will be passed on to customers next year.
This year's Pick
So what do we do for an encore? Well, look no further than your shoe cupboard. Do you have a pair of Caterpillar, Skechers, Stride Rite, Timberland or Wolverine shoes? How about Bates, Clarks, Great Lakes, Harley Davidson, Hush Puppies, Merrell, Paul Smith, Sperry Topsider or Tommy Hilfiger shoes? All of these brands are customers of this year's pick, manufacturer Kingmaker Footwear Holdings Limited (Kingmaker).
This company makes a specialty of what it calls "rugged footwear" (hiking boots) and shoes for babies and children. These products tend to have higher margins than your average sports shoes or trainers.
The company has 20 production lines in the PRC employing 8,500 people. At today's closing price of HK$1.16 per share, it has a market capitalisation of HK$668m (US$85.6m) of which 60.1% is owned by the directors. Four founders each with 19 years of service are on the board.
Net cash in the balance sheet at 31-Mar-00 (after allowing for the dividend) was $412m, or $0.72 per share with no debt. Strip that out and you have an enterprise value of $256m. Earnings before interest, tax and depreciation last year were $130m so the company's EV/EBITDA multiple is just 2.0x. In plain English, that's cheap.
Fully diluted earnings per share for the year to 31-Mar-00 were 22.3 cents (adjusted for a subsequent 1:4 bonus issue), for a p/e of just 5.2x. The company's earnings have exhibited steady upward growth in the last 4 years:
Kingmaker has been bumping up against its capacity limit with over 90% utilisation last year, but expansion plans are underway, with a factory in a Vietnam export zone expected to become fully operational with 3 production lines in early 2001. This new facility will allow up to 8 production lines so they have room to grow. Vietnam has not been an easy place to do business for many foreign investors, but the Chairman told us at the recent Annual General Meeting that he was confident that the export zone would make this a lot less problematic.
We'd expect higher oil prices to have a short-term negative effect on materials costs in terms of the soles of the shoes and boots, but much of this can be passed on to customers in the long run, since it affects all manufacturers. Around 70% of sales are to the US and 21% to Europe, so the company would be affected by any consumption slowdown in the US.
Buy-backs
Kingmaker went through a phase in 1998 of using some of its surplus cash (yes, it was cash rich even then) to buy back some of its shares, repurchasing 5.4% of the company in the year to 31-Mar-99, but they have not done so since then.
That's a shame, because when your p/e is that low, buybacks enhance earnings per share for the remaining shareholders. A repurchase of another 5%, or 28.8m shares, at the current price would cost HK$33.4m. If they are getting 5.75% interest on deposits, that would imply a profit reduction of $1.9m, but the reduced number of shares would produce an improvement in earnings per share of around 3.3%, justifying a higher price without any change in the p/e.
Kingmaker has excessive cash on hand and when you consider that it has annual operating cash inflow of over HK$100m p.a., there's no excuse for hanging on to such a pile. Public investors do not reward companies for sitting on cash, because that's a bad use of capital and outside their control. We urge the company to distribute any cash that they won't need for at least a year. That would boost the rate of return on the remaining capital, which would in turn help the share price. As a business, they've performed well in the past, so if they later needed to recall the distributed cash for expansion (by way of a rights issue), shareholders are highly likely to support it.
Meantime, we'll play King-maker to Kingmaker and suggest you put some under the Christmas tree.
© Webb-site.com, 2000
Organisations in this story
Topics in this story
Sign up for our free newsletter
Recommend Webb-site to a friend
Copyright & disclaimer, Privacy policy