Jerash Holdings - Finding the Right Fit — The Profit Investigator

Originally Published September 12th, 2022

This week on the Value Finder we have a company that:

Sits at a PE ~8
Is priced at ~3x cash
Pays a dividend of ~4%
Has a market cap under $80 million dollars

So what tiny company are we talking about?

Jerash Holdings (JRSH)

Jerash holdings is a clothing manufacturing company that is based out of Jordan. They produce goods for companies like VF Corp, New Balance, G-III (Calvin Klein, Tommy Hilfiger), American Eagle, and Sketchers.

This small company employees just under 6000 people between its six factory units and four warehouses. The company began in 2000 with a single factory and 100 workers, but has quickly transformed into the largest premium apparel contract manufacturer in Jordan. In 2021 they acquired their sixth factory and are fully booked through December of 2022.

Why JRSH should be on the Watchlist

Revenue Growth. Jerash does a lot of things really well, one of which is growing revenue. Since 2015 it has tripled its revenue per share while almost quadrupling its book value per share. This company has been growing its sales at a 5 year AGR of 22%. This is exactly what I like to see.

Jordanian Base. But why does am I highlighting a company that works out of Jordan? Well that is because in 2001 the Jordan-US Free Trade Agreement was put into place and then fully implemented in January of 2010. This is the fourth FTA country that the US has dealings with, the others being Israel, Canada, and Mexico.

After this all was signed, Walmart, Target, and Hanes established factories there so they could cut costs on tariffs. Since the initial implementation of the agreement Jordan’s exports to the US have skyrocketed. The chart below shows the increases.

Of these exports, 1.42 Billion of the 1.75 billion in 2020 were various articles of apparel. There is no doubt that until the step back in 2020 that the Jordanian apparel industry was looking up.

Premium Niche. So where does this put Jerash? Well there is a big difference in apparel going to Walmart and apparel going to premium brands. While everyone else was running to move their factories over to build cheap goods, Jerash took a different stance and went with quality over quantity.

Recently Jerash has added to their portfolio with their first European premium brand and continues to look for high quality brands to partner with that are outside of the US as well.

Why you shouldn’t add it

The Insiders. For one, insiders have been selling. While this isn’t necessarily a bad thing, especially with a recession looming, it also isn’t encouraging me to purchase a significant stake in the company. Add to this that this company is mainly managed from Hong Kong which is a wrinkle that could be keeping many institutions away as there is a close relation to China.

Customer Concentration. This could be a significant risk moving forward. In the last quarter, 66% of revenue came from VFC Corp and 23% from New Balance. This is almost 90% of Jerash’s revenue! This means that not only is Jerash dependent on their own business decisions, but the business decisions of the previous two companies.

Recession. Don’t look now but this third point is the same as most arguments. In a recessionary environment the consumer discretionary industry can be hurt more than most. The premium brands, such as those that Jerash works with, could be set up to get pounded, which in turn would do the same to Jerash’s revenue. Watch this closely as you make a decision.

My Conclusion

This one is a no-brainer add to my watchlist. Jerash is a company that took advantage of a niche in an advantageous country to work with the US. They have shown tremendous growth and balance sheet control, but have had to dilute shares and have a somewhat questionable amount of shares being awarded.

Even with a reduction in revenue as a real possibility over the near term due to recession, Jerash actually may be poised to gain revenue as companies look to pull some work from China. The dividend is sustainable at its current rate, and could even see a raise in the near future as the company increases its footprint.

While I have some concerns about the company, taking a small position in the portfolio, around 2%, seems like an advantageous option at this point. I don’t necessarily see myself adding more than this but if it stays under its fair value (I estimate it at around $7.50), then it could have a higher weighting.

Let me know your thoughts!

As always, thanks for reading and happy investing!

The Profit Investigator