Saturday, 11 February 2017

KBSF Q3 Results Improve Value Proposition


  • Cash per share is $14.85
  • Working capital per share is $32.12
  • Q3 EPS (split-adjusted) is $0.92

We have good news and bad news for our followers and buyers of KBS Fashion Group Limited (KBSF). The bad news is we made an embarrassing oversight that we were alerted to by one of our followers. KBSF had released a set of financials in its SEC filing documents on November 7th, 2016. That set of financials was for Q2 and we assumed that was it. Turns out that the company had also released its Q3 financials on the same day and we just missed it. We aren't happy about the oversight but the good news is that Q3 significantly improves the value proposition of KBSF.

Here is the link to the Q3 SEC filing

First we will go through the balance sheet data:

For reference here is the Q2 balance sheet data that we posted yesterday:

Key highlights:

  • Cash improves from $25.9 million to $26.3 million from June to September. Cash per share increases from $14.61 to $14.85.
  • Working capital improves from $54.5 million to $56.9 million. Working capital per share increases from $30.80 to $32.12.
  • Total equity improves from $99.6 million to $102 million. Total equity per share increases from $56.27 to $57.62

While the balance sheet improvements increase the per share figures, it's the income statement that should get investors excited:

Revenue declined *only* 14% for Q3 which is good news considering that Q2 revenue declined over 40%. Q2 2016 revenue was $7.9 million and Q3 2016 was $11.1 million (compared to $13.5 million in Q2 2015 and $12.9 million in Q3 2015) so there was a substantial lift quarter-to-quarter in 2016 that wasn't there in 2015. Net profit improved to 6.13 cents per share versus 4 cents per share as the company has really decreased its costs from the closure of corporate stores. Gross margin took a hit because corporate stores have gross margins over 50%, but that higher gross margin isn't worth it if it costs a lot to run the store.

Remember that the 6.13 cents EPS is prior to the reverse split. Multiplying that by 15 leads to a $0.92 EPS for one quarter. In the Q2 statement the CEO made a promise that profit would in excess of $3 million or $1.69 per share. Q3 shows that is well on its way to happening with $1.6 million in profits. Retail clothing is highly seasonal so it's not a simple matter of multiplying the Q3 number by four and assuming that EPS will be nearly $4 per year going forward. However, at a closing price of $10.87 on Friday, the stock is still cheap fundamentally and should be worth at least $15 to $30 per share.

For those who are in KBSF early like us, you might be wondering about an exit strategy. Here is our advice. Fundamentally we know that this company is sound and worth at a minimum $15 to $30. Even more if the company shows growth and increases communications to the North American investor. However, right now the stock price is controlled by day traders. It's hard to say how high KBSF will go, but a run to $30 like ETRM is definitely possible. Our recommendation to the people who got in early at $3-$5 is to take profits in very small amounts by placing limit orders at unusual prices all the way up to $30 or higher. This is what we will be doing. Don't pick price levels like $15, $17.50, $20, $25, $30 etc., because if everyone did that this will create walls of shares and slow the potential short squeeze (we know short interest is low prior to the reverse split but it must be higher after yesterday). Use random numbers like $15.28, $21.92 etc. as your take profit levels. Don't try to pick a top to sell all your shares either. You will absolutely fail at doing this. ETRM's price history is posted below for reference.

Those people who tried to pick a top on day 2 of ETRM's run on January 6th might have been happy that they sold at $9.50 by the end of the day and very unhappy they did that by the next trading day. Anyone who had a limit order sell on all their shares at $31 on January 10th would be kicking themselves two days later and selling for half that price. The ones who left the trade happy are the ones sold small increments from $10-$30 and when the stock price started coming back down either held their remaining position for the longer term or existed completely.

No one can predict what will happen with KBSF with exact precision. At least us longs know that the financials are strong and justify a much higher stock price. Shorts are playing with fire because they mindlessly see a stock go up 200% without trying to figure out the dynamics behind the move and are secretly jealous that they missed such a profit so they try to trash the stock and push it down. That is ok. They will be the ones who help fuel a violent short squeeze.

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