An alternative view

Hi all,

Gonna jump in here and provide my thoughts on SBB.

I sold out of SBB six weeks ago in the high 5’s due to concerns about a) the general slowdown and worries about China and b) the share price going nowhere until either a small divvy was declared or a bolt on value add to the business is announced with part of the $30m cash (less stat. reserve in trust) SBB have at their disposal. I also believed at the time that better opportunities existed in other sectors and in the end that was proven to be the case.

However I will admit that I was wrong in my assessment that the SP would go largely nowhere, when fact it has declined another 40% since I sold out.
And although I had no intention of buying back into SBB so soon, the fundamentals vs current M/Cap were (and still are) at a point where unless one believes the business and/or it's reported figures are fraudulent, tremendous bang for your buck currently exists IMO and more so than it ever has since listing on the ASX. That is not just my opinion, it is fact when you study the financials from one half to the next and overlay the share price. In lieu of this fact, I jumped back in and purchased a fairly large percentage of the total volume traded last week.

As some will know, I have been researching, analysing and commenting on SBB for well over 12 months now. I don’t think I am one-eyed or deluded and am fully aware of the pros and cons of this company and feel like I have performed adequate due diligence to assess SBB with confidence. I am not emotionally attached to SBB or any other stock, commodity or other investment (including real estate) and therefore would have no hesitation in selling SBB again or changing my sentiment, particularly if I believed that the company was either being investigated for dodgy behaviour, in some sort of financial trouble or simply overvalued in the current market. But none of the above is the case right now and probably for the foreseeable future, so I am not planning to sell my recent purchases (at a 50% discount to cash backing and a 70% discount to NTA) anytime soon.

Apart from the deep discount on offer at present, here is my brief assessment and rationale for buying at this time.

1. Fundamentally SBB’s balance sheet is in better shape than it has ever been. All company debt has now been extinguished. Assets are still on the increase whilst liabilities have substantially decreased in a tough market. This is mainly due to the full repayment of borrowings. Consequently NTA continues to rise and is currently the highest it has ever been at 12.23c per share as at 30th June.

2. Declining sales are said to be due to a challenging physical retail environment and to a lesser extent the rise of online competition. Declining sales are my main concern, although there are some signs that sales could be beginning to stabilise. Declining NPAT is another concern, however this also appears to have stabilised (many probably don't realise that June 2015 half was an almost 25% improvement vs the Dec 2014 half NPAT result) so I don't expect to see another NPAT result under $2million for a) the half we are in and b) future HY reports.

3. Sentiment for SBB is at an all-time low. This is a contrarian’s No.1 buy signal, but only when the fundamentals of a company are sound enough to warrant a turnaround. The recent 40% decline in the SP is IMO the result of a mix of fear mongering, extremely poor sentiment and ongoing complaints about management reneging on a divvy. I understand the sentiment surrounding the company's decision not to pay a dividend at this time, however most of the other concerns that I’ve read are IMO either overblown or pure speculation without facts to back up any argument.

To those that are still concerned about Xu choosing to preserve the $30 million cash balance in a challenging environment, I say to you that SBB could have reasonably purchased another $15-$20 million Chinese apparel retailer (as an example only) 6-12 months ago with cash. However had they done so, then based on the performance of the Shenzhen and Shanghai stock exchanges in recent months a $15-$20 million addition to the business back then would potentially be worth only @$8-$12 million today and the company would also have little in reserve for working capital to cover the day to day running of the business and any other anomalies that could occur.

So perhaps now is a better time to start looking for internal and external value accretive opportunities potentially at a deep discount to NTA, but I don’t believe that management should be ridiculed or punished for preserving the balance sheet in what has been an incredibly difficult year for many Chinese and global retailers.

I agree with PB's assessment that Xu is a tight a.., but IMO he has done the prudent thing for himself and long term shareholders by preserving the $30 mil in cash. No doubt Xu would understand the phrase ‘cash is king’ in a deflationary environment, as it effectively increases the company’s purchasing power. You read this correctly, the fact is the company has more purchasing power now than ever before because they have preserved a pile of millions. I’ve heard complaint after complaint from investors (like kids in a candy shop) wanting to deploy this cash ‘spend it on us, spend it on that’, but hardly ever any applause for preserving the balance sheet when asset/stock prices are clearly falling.

On the subject of dividends, I agree with others that it was a PR mistake for the company not to declare a small dividend, particularly after the board’s apparent willingness to consider one at the AGM (even a 0.2c dividend would cost less than the exchange rate gain in recent quarters and would represent >5% return to shareholders based on the current SP).

However in fairness to Xu and the board, the market outlook in China did deteriorate considerably not long after the AGM & I suspect that a potential accretive purchase or heavily discounted investment in the near term could be the rationale behind preserving 100% of the current cash balance for the time being.

As for the argument to initiate a buyback, I agree that on paper that option looks like a simple cure for investor woes. However the problem in this instance is that a buyback would also increase Xu's holding in percentage terms (which would then generate an unfriendly signal to larger potential investors IMO) and create further liquidity issues for the stock. Remember that there are only 212.5 mil unrestricted shares on issue, and I don’t believe Xu would be stupid enough to sell any of his 259 mil shares under cash backing let alone NTA backing, once they are released from escrow next month. So all in all I do not support a buyback at this time.

4. The Q3 (July-Sept 15) result won’t be anything spectacular IMO. I expect YoY sales for the quarter (i.e. vs Q3 2014) to decline (perhaps at a slower rate) and this will probably limit any upside to net operating cash flow. However even if there is no increase to the company’s net cash position from operating activities in Q3, exchange rate adjustments should add @$1.5million AUD to the cash pile (and therefore the balance sheet) by my calculations. That means the company should now have @$31.2 million AUD (less $6.75mil stat. reserve in trust) to deploy when Xu deems the time is right.

Note: A $1.5mil AUD cash increase represents 0.3c in added value and therefore NTA (though not reported in Q3) should now be @12.5c, assuming there are no major changes to other items on the balance sheet during Q3.

Regardless of whether you are buying, selling or holding, I encourage everyone to DTOR and take the emotion out of their investment decision. This is easier said than done of course, however when a business is undervalued by the market but still reporting sound numbers and making a profit, then whatever your decision is please DON’T let the opinions of others (particularly if they are continuously argumentative and speak without substance), fear of the unknown and the ‘what ifs’ overpower your gut feel and keep you awake at night. Just make an informed decision based on an acceptable level of risk and accept that all investments carry risk and even the likes of Soros and Buffet get it wrong from time to time.

GLTA and note that my opinion should not be relied upon nor considered as advice of any kind. Please DYOR.