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Update: Guidance reaffirmed
At a time of heightened concerns about the Chinese economy’s prospects, Firstextile has reported a decline in Q2 revenues and profitability. Unsurprisingly, the share price, already weaker after steep declines in June, has fallen further. Yet management confirms that capacity expansion is on schedule and on budget. It has reiterated its original FY15 guidance. On that basis, traditional metrics suggest the shares are inexpensive.
Outlook: New factory supports growth
Firstextile has built a leading position at the premium end of the Chinese yarn-dyed fabrics market. Its 2012 IPO raised the expansion capital to address capacity constraints. A new factory will commission in H2 this year, doubling capacity and enabling a period of sustained growth. The low valuation metrics appear to overlook this potential.
Update: Exceeding guidance
Firstextile’s preliminary announcement shows that the group has outperformed guidance on FY14 revenues and EBIT. With the sale of Varpum at the end of the year, Firstextile has focused its resources on its stronger and more profitable core businesses. The announcement of a share buyback programme indicates continuing financial strength. Yet the shares trade on an inexpensive 2.7x FY15e earnings.
Update: Accelerating momentum
A second consecutive quarter of strong operating momentum, especially in the Fabrics and Uniforms segments, gives us confidence that FY operating guidance will at least be met, if not exceeded. However, increases in interest costs and tax mean that while the shape of our forecast has changed, our earnings forecasts are maintained. With the acceleration in operating performance and assurance that the new factory will come on stream in Q215, at 2.6x 2015 P/E the valuation looks attractive.
Update: Stronger Q2 and improving outlook
A strong acceleration in performance in Q214 relative to Q114 signals the end of three consecutive quarters of decline for Firstextile, and makes full-year guidance look increasingly manageable. With the new factory scheduled to come on stream in Q215 and a more positive outlook in the Uniforms segment, having won shortlisted supplier status with China Mobile, the medium- to long-term outlook is also starting to look more certain. At 2.7x 2015 P/E and 1.6x EV/EBITDA the stock is inexpensive.
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