Aquatic Foods, an Naibu waiting to happen

Introduction

In the past decade, there were 80 listings which originated from China and over this period 45 companies have left the market leaving shareholders empty.

Back then, China was the engine of economic growth for the world economic and was growing four times faster than the UK.

Therefore, it made sense to invest in China because it equates to higher stock returns.

 

The UK investors had learned their lessons and stayed away from Chinese AIM businesses, even if it has a significant cash balance and orbital growth prospects, these financial results can’t be trusted any longer!

They have stayed away!

 

You don’t need to talk to the fishes to know Aquatic Foods smell fishy

Despite a lack of interest from the UK investors, the Chinese did not shy away from the UK stock market, especially the AIM market. One of these companies, in particular, is called Aquatic Foods, which is today’s assignment.

 

So, a twenty minutes skim at Aquatic Foods statements and annual reports tell me several worrying things.

These are:

 

  1. Strange asset turnover numbers

 

Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

Aquatic Foods monstrous sales growth didn’t stop its asset turnover from declining at an alarming rate since 2012.

On a separate measurement, Aquatic Foods grew sales by 354%. Therefore, measuring against Property, Plant, and Equipment (PPE) showed the opposite result it jumped by 400%, before declining slightly.

That led me to question how it was possible to triple sales, but not add additional capacity because the value of its PPE has stayed the same.

Unless fish prices jumped by 300% or Aquatic Foods were operating at a 20% capacity, I can’t see how this could happen!

 

  1. Dodgy dividend policies

If a business grew cash in the bank at a compounded rate of 46% per year in the last five years to £50m, but paid a million pounds in dividends since its IPO, this raises a major red flag.

A bigger alarm is Aquatic Foods paying a much larger dividend three years before its IPO (See it for yourself):

 

Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

*2011-2013 dividends total £9m.

A normal growth business pays higher dividends in future years, not in past years!

 

  1. Deposit rate + Finance income not matching

Aquatic Foods earn 1/10 of what it should make if it invested in a 1-year deposit rate account in China.

Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

 

Aquatic Foods’s cash balance earns less than 1% in interest in the past five years, while Chinese 1-year deposit rate is four times as large.

 

  1. Working capital mismanagement

An assessment of Aquatic Foods working capital management reveals a somewhat surprising revelation.

Back in 2011, its working capital turnover was 6.12 meaning management is highly efficient, as it optimises their operations.

Over the years, its working capital turnover has declined to 1.85 meaning it either has too many receivables or inventories, but loaded with “excess” cash.

They should return the cash to shareholders. Instead, it is earning less than 1% from the bank.

 

  1. Market Value

Aquatic raise £9.3m in the AIM Market. The IPO price is 70p/share = £79.3m. Today, its 12.5p/share = £14.15m, a fall of 80%!

This is a company with net earnings growth of 29%/year for 5 years. Its latest annual profit of £15m is greater than the market capitalisation!

On a free cash flow basis, it generated £21m in 2015.

 

Where is the logic

With a valuation this low and its earnings so high, its value should exceed £100m (easy), instead we got a business that is trading for “FREE” to market investors.

This is because liquidating the firm would realise £35m (after debt repaid) earning shareholder 2 and a half times its money back.

 

But, investors wary of other Chinese firms like Naibu and Camkids, both reported large cash positions suddenly went bust!

So, this is a company showing similar symptoms.

 

 

Fun Facts logic

  1. Cash grew from 57m RMB to 153m RMB in 2011-13 when it paid out 78m RMB in dividends in the period.

But cash balance increased from 193m RMB to 380m RMB in 2014-15 but manages to pay ONLY 7.6m RMB in dividends.

 

  1. Aquatic manages to grow cash balance faster by not collecting from its receivables which have increased by 750% compared to net sales 354%.

Also, it pays its suppliers, as payables grew by 265%.

The only explanation is the 85m RMB raised during its IPO.

  1. For a business that relies on processing plants to turn raw fish into frozen products, its CapEx appears non-existent, till it raise money from AIM investors and it decides to invest in capacity.

 

Verdict: Avoid the stock at all costs, because delisting is its next stop.

Disclosure

I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Plus, I do not own the stock of the company mentioned, unless stated.

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