Disclosure: The author owns shares in both of the companies mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Founded in 1961 AIM listed Bagir Group Ltd is a maker of innovative tailored garments for men and women throughout the world. Their clothes are sold by leading private retail labels and under well-known retail brands such as H&M and Brooks Brothers. If you have ever bought a suit from either of those stores there is a good chance Bagir made it.
Bagir has had its fair share of troubles in recent times which began with the loss of Marks & Spencer back in 2014. At the time Marks & Spencer was its largest customer and revenues and margins have struggled since the loss.
With the end of the month approaching Bagir looks set to finally turn the corner and put the recent turmoil behind it. Back in November 2017 Bagir announced a Strategic Partnership with Chinese based Shandong Ruyi one of the world’s largest textile manufacturers. As part of the Strategic Partnership Shandong Ruyi is set to invest $16.5 million to acquire c.54%1 of Bagir’s enlarged share capital at a price of 3.5p per share. Although the Strategic Partnership was announced back in 2017 due to regulatory delays (a common occurrence in China) the deal has yet to close. All regulatory hurdles related to the deal have now been passed and all other conditions have been completed, all that Bagir is waiting for now is for Shandong Ruyi to make the final payment following that the deal will be closed, the deadline for completion is the 30th of May so the deal is expected to close imminently.
The Strategic Partnership will be transformational for Bagir as it vastly improves its ability to compete and win major apparel manufacturing contracts from the world’s largest retailers. Shandong Ruyi has been on an acquisition spree of late as it looks to transform itself from a textile manufacture into a global provider of affordable luxury, the opportunity is there for Bagir to become a key supplier to many of Shandong Ruy’s purchased brands.
The regulatory delays which held up the strategic partnership have presented a significant opportunity for investors, with Bagir’s share price currently hovering around the 2p mark it’s still well below Shandong Ruyi’s purchase price of 3.5p. Even at 3.5p Bagir still looks significantly undervalued, if as widely expected contracts start to flow through from Shandong Ruyi’s partner companies I would expect the share price to re-rate significantly and they could certainly be headed back towards the pre Marks & Spencer loss prices.
You may ask if Shandong Ruyi are buying in at 3.5p why do the shares currently sit at 2p, I believe the current undervaluation exists because the market had doubts that the deal would actually close and the longer the delay dragged on the more worried investors became. But as per recent announcements these doubts have now been eased, with all the conditions of the deal now completed it’s now simply just a case of waiting for the final payment to arrive. The share price has been recovering strongly over the past couple of months as investors are waking up to the situation. With the deal expected to close by the end of the month now certainly looks like a good time to invest.
London listed Sirius Minerals PLC is a UK based fertilizer development company focused on the development and operation of a polyhalite mine in North Yorkshire. Sirius Minerals mine when complete will be the world’s largest and highest grade polyhalite resource. Polyhalite is a multi-nutrient fertilizer which can be used as a source of Potassium, Sulphur and Magnesium. Production from Sirius’s mine is expected to start in 2021, initial production will come in at 2mt per annum but is expected to increase steadily potentially rising to 20mt per annum by 2029.
Sirius Minerals share price has disappointed recently with the shares having lost 25% in the last month alone, the disappointing performance is the result of the companies stage 2 financing plans. The stage 2 financing was originally supposed to be completed by the end of last year and consist of debt only, but following on from an increase in the expected capital cost of the project the stage 2 financing was put in jeopardy. Sirius was eventually able to get the financing off the ground but at the cost of significant dilution to existing shareholders. Shareholders have suffered a double hit of dilution with $425 million raised through a placing at 15p and a further $400 million to be raised through the issue of convertible bonds.
Whilst the dilution is painful the long term prospects of the project remain robust, the potential gains in the share price are now reduced due to the dilution but long term holders should still see significant returns. Whilst the long term potential of Sirius Minerals looks good with the overhang of the placing I would expect the shares to tread water over the next few weeks.