Description

Introduction

Jerash Holdings is a microcap ($61 million) contract apparel manufacturer that operates six factories in Jordan. The company produces clothing for export for customers like VF Corporation (The North Face, Timberland), New Balance, Hugo Boss, Skechers, and others. Jerash (incorporated in Delaware) trades under the symbol JRSH and is the first and only NASDAQ-listed company that primarily operates in Jordan. I think there is roughly 50% upside from the current $4.85/share stock price over the next year. Note that Jerash uses a March-ending fiscal year, so it is wrapping up FY23.

Summary

Most of the world’s apparel production takes place in China and Southeast Asia, but multinational producers are diversifying into other low-wage regions for economic, logistical, and geopolitical reasons. Jordan is an emerging alternative because it has free trade agreements with the U.S. and the EU and is politically stable. Jerash opened its first factory in Jordan in 2001 with fewer than 100 workers. More than 20 years later, it is Jordan’s largest contract premium apparel manufacturer with six factories and nearly 6,000 workers.

Background/History

Jerash’s founder and CEO is 60-year-old Samuel Choi, who is based in Hong Kong. After working with apparel firms’ financing, Choi transitioned from banking to the apparel industry in 1995. He created Jerash in Jordan in Nov. 2000 to take advantage of a new free trade agreement between Jordan and the U.S. At first, Jerash operated just one factory that was mainly staffed by Chinese guest workers. Within a few years, Jerash had difficulty keeping these workers given the improving wages in factories in China. Jerash’s management considered pulling out of Jordan, but ultimately decided to continue by using a mixture of locals and guest workers from South Asia. Jerash opened two more factories in 2013.

Jerash completed an IPO in May 2018 through a direct listing on NASDAQ. The firm raised $10 million by selling 1.4 million shares at $7.00. At the time, it had about 2,900 employees and capacity to produce about 6.5 million units per year at its three factories. In the months following the IPO, Jerash acquired a factory in Jordan from a third party and built another, which opened in late 2019. The firm had intended to build another factory but decided to build a dormitory instead when the pandemic hit in 2020. In 2021, Jerash acquired a company called MK Garments for $2.8 million in cash, bringing its factory and labor force of about 500 workers on board. It also bought the land on which the MK factory sits for $2.7 million. Today, Jerash operates six factories around Amman (Jordan’s capital) and has annual capacity for 14 million units, about double the capacity at the time of its IPO.

Jerash’s management has discussed the possibility of acquiring more factories in Jordan or elsewhere in the Middle East or Africa. Given the turmoil in the apparel industry since the pandemic, it is likely that smaller producers are in financial distress, which could allow for attractive deals for Jerash.

About 75% of Jerash’s laborers are guest workers from Asia (including Bangladesh, India, Sri Lanka, Myanmar, and Nepal). The rest are local Jordanians and some refugees who fled the war in neighboring Syria. Jerash’s factory workers probably make about $250-$300/month, a wage that keeps it competitive with factories in Asia. Jerash’s guest workers live in a mixture of company-owned and rented dormitories. Long delayed by the pandemic and other reasons, the company is finishing up construction on a 189,000 square-foot dorm that will house 1,500 workers. The total cost of this project is $8.2 million, and it is expected to save the company $500K-$1 million/year in rent expense beginning in FY24.

Jerash has historically sourced most of its fabrics and other raw materials from China and other parts of Asia. Jerash’s supply chain was impacted by the global shipping delays and higher transportation costs that followed the pandemic. To deal with these risks, Jerash has been sourcing more fabrics from Egypt and Turkey. Although these sources are higher cost, they are less likely to be delayed and transportation expense is lower.

Revenue Sources

Jerash has produced clothing for a variety of multinational apparel firms over the years, but VF Corporation, which owns The North Face, Timberland, Vans, and other brands, is presently Jerash’s largest customer by a large margin. According to Jerash’s 10-K, VF issued 9,500 separate purchase orders to the firm in FY22. Much of the VF merchandise produced by Jerash consists of The North Face jackets (about 35% of Jerash’s total sales). Due to its exposure to The North Face, the firm’s revenue is slightly higher in the quarters that end in June and September as it produces jackets for the fall and winter seasons. Jerash also began to ship some Timberland merchandise (fleece outerwear) in Oct. 2022, and Jerash’s management has said that it is in the testing phase for two other VF brands.

Although The North Face has generally been its strongest brand of late, VF had a terrible 2022 in which it struggled to get its inventory under control (its CEO “retired” unexpectedly). Consequently, it cut back on orders from Jerash and other manufacturers. On one earnings call, Jerash’s management mentioned that its orders for The North Face jackets had slowed in the peak season to 200K-250K/month from as high as 800K in a month in the past. VF accounted for 62% of Jerash’s sales in FY21 and 67% in FY22, but only 43% in the most recent (December-ended) quarter. It is likely that production for VF will be below normal in the March-ending quarter as well, but it should pick up as VF normalizes its inventory (and its sales recover, hopefully). I have no reason to believe that VF intends to move its manufacturing away from Jerash, but the dependence on just one customer is a clear risk.

Despite the recent drop off in The North Face orders, Jerash has been able to run its factories at full capacity by adding contract work for companies in Jordan and elsewhere (mainly Hong Kong). Typically, more than 90% of Jerash’s products are shipped to the U.S., but this percentage dropped to 77% in the December quarter as the firm accepted more contract work than normal. This is less than ideal, as contract work of this type generates lower profit margins than work for multinationals like VF. Moreover, a lot of this contract work has been shorts, crew neck shirts, and pullovers, which tend to have lower margins than the sort of higher-priced jackets that Jerash produces for The North Face. However, contract work is preferable to having to idle or even close factories, as has happened with smaller apparel manufacturers in Jordan recently.

Jerash’s second-largest customer (after VF) is New Balance, which accounted for $11.1 million in sales (12% of total) in FY21 and $34.5 million in sales (24% of total) in FY22. Jerash doesn’t make footwear, so it is manufacturing apparel for New Balance. Jerash’s management has said that New Balance moved production of these items from factories in Haiti because it was struggling with production and delivery problems.

A new customer for Jerash is Skechers, which accepted its first shipment from the company in the Dec. 2022 quarter. Jerash is producing women’s polos for Skechers. The process of ramping up of newer labels like Skechers and Timberland is slow. Over time, assuming the orders come in, they should generate higher sales and better margins.

Jerash is establishing a joint venture with Indonesia-based Busana Apparel Group. Busana is much larger than Jerash, with about 30 factories in Indonesia and Ethiopia, capacity for about 47 million units per year, and more than $450 million in annual revenue. In Nov. 2022, Jerash announced a memorandum of understanding with Busana to create a joint venture that will allow Busana’s customers to utilize Jerash’s factories to diversify geographically and take advantage of Jordan’s free trade agreements. Jerash’s management indicated that Busana’s primary motivation is that it believes it can get more orders from existing customers. From Jerash’s perspective, the joint venture should bring in new clients and increase its exposure to casual and performance activewear. Jerash will own 51% of the joint venture and Busana will own 49%, so Jerash will consolidate the financials.

The relationship with Busana is apparently already paying dividends with a contract with upscale German apparel brand Hugo Boss, a longtime customer of Busana. Jerash has been testing with Hugo Boss for about a year. On Jerash’s most recent earnings call, Choi said, “…Busana came in and they assisted us a lot on the technical area and how to do business with Hugo Boss.” Jerash is expected to begin mass production for Hugo Boss soon. Jerash currently generates negligible revenue from European customers, which is odd considering that Jordan is close to Europe and the same zero-tariff benefit as with the U.S. applies. Over time, the addition of Hugo Boss and others should allow Jerash to reduce its exposure to lower-margin orders and increase its geographic diversity. Choi also said on the earnings call, “…there are a lot of premium brands that Busana has been working with and those will come in.” If it happens, adding luxury customers would certainly provide a boost to Jerash’s margins.

It doesn’t seem far-fetched to suggest that Busana will acquire Jerash someday. This joint venture will be a way for Busana ability to evaluate Jerash’s facilities, workers, and ability to fulfill contracts. Acquiring Jerash would allow Busana to expand into Jordan without all the time and effort it would take to build its own factories or the hassle of buying them one by one from smaller producers.

The recent makeup of Jerash’s customer base is shown below. As can be seen, Jerash has recently had to bring in more contract work from apparel firms based in Jordan and Hong Kong as orders from VF have slowed. Dynamic Design Enterprise, Jerash’s third-largest customer in some periods, is a U.S.-based producer of private-label activewear, such as golf shirts. Under various labels, Jerash-made products have been sold in Walmart, Costco, Dick’s Sporting Goods, and other U.S. retailers. In FY22, Jerash’s sales by type were: 35% jackets, 17% crew neck and similar shirts, 7% polo shirts, and 41% pants and shorts.

Jerash’s Sales by Customer and Region

Income Statement

Jerash has roughly doubled its revenue over the past five fiscal years (to an estimated $141 million in FY23) as it has added capacity and customers. However, FY23 sales will be approximately flat with FY22 due to a general slowdown in the apparel market over the past year.

Due (in part) to the decline in orders from VF, Jerash’s gross margin will come in at about 17% in FY23, down from about 19% in the prior two years. There has also been an increase in the cost of raw materials. Further, I forecast its operating margin at 4.6% in FY23, below typical 7%-8% levels of past years. I expect its operating margin will rebound to about 6% in FY24. Cost savings (such as the new dormitory) and orders from Hugo Boss and other new multinational customers should lift Jerash’s margins. There should also be some benefit as commodity prices (such as cotton and oil) have declined over the last few months. The U.S. apparel industry isn’t in the best shape now but could improve in the second half of calendar 2023.

Jerash’s tax rate has increased to the mid-20s recently. For many years, the company operated in an economic zone in Jordan that exempted taxes for exporters. The law that allowed for this exemption expired at the end of 2018, so Jerash became subject to taxes in Jordan in 2019. Then, there was a tax increase in Jordan in 2021. In addition, the firm has been impacted by the GILTI tax that was passed in the U.S. in 2017.

Despite the current challenges, EBITDA should be about $10.3 million in FY23, up from $7.6 million in 2019. Jerash has about 12.5 million shares outstanding, so the current market cap is about $60.6 million.

I am estimating 7% sales growth, 8% EBITDA growth, and 54% EPS growth in FY24. My FY24 EPS estimate is $0.57, up from $0.37 in FY23. Jerash reported $0.67 in EPS on lower sales in FY22, so I assume that the company does not fully recover to FY22 margins in FY24. FY22 (calendar 2021) was a strong one for the global apparel industry, but I have no reason to believe that Jerash cannot achieve the margins that it posted in FY22 again.

Balance Sheet

Jerash has a solid balance sheet, with $47 million in working capital at the end of December (its Q3 FY23). The company closed the quarter with net cash of $19.2 million, or about $1.55/share. Its tangible book value at the end of the quarter was $5.69/share. Thus, Jerash is trading below its tangible book value, even though most of its assets are cash, inventories, and property, plant, and equipment.

Jerash’s inventories have risen in FY23 due to delayed orders and requests from customers to delay shipments as they work through their own inventory problems. The apparel industry was beset by shipping delays and other logistical issues in parts of 2021 and 2022. Then, consumer demand for apparel began to slow in the second half of 2022. Consequently, VF and other firms have canceled and delayed orders, a situation that is likely to persist through the first half of 2023. However, Jerash’s inventories declined in Q3 as it shipped some delayed merchandise and accepted piecemeal contract work.

Jerash borrowed $4.4 million under a credit facility with DBS Bank (Hong Kong) to fund short-term needs in FY23.

Cash Flow Statement

Jerash has continued to generate positive operating cash flow in FY23.

There has been a noticeable increase in property acquisitions in FY23. In June 2022, Jerash bought an office building in Hong Kong for $5.1 million. This space is used by Jerash’s CEO and was formerly leased by the company. I don’t see why an apparel manufacturer in Jordan needs to own an office building in Hong Kong, but I don’t believe this was a self-dealing transaction. When asked on an earnings call, Jerash’s CEO suggested the board approved the purchase due to the potential for price appreciation and to save on rent.

Jerash’s total capex in FY23 is expected to be $16 million due to the Hong Kong office deal, the dormitory construction, and other projects. Unless something changes, capex should be much lower next year as most of Jerash’s large projects are near completion – the company projected FY24 at just $500K in its most recent 10-Q.

To partially fund the acquisitions and other projects, Jerash sold 1 million shares of stock for $6.3 million in Oct. 2021. I don’t believe any further stock sales are planned, and it has since authorized a $3 million share repurchase program.

Ratios

Jerash’s efficiency and margins have declined as the company has increased in size and it has felt some of the effects of the pandemic. However, it has remained solidly profitable, and I think there is upside from recent results.

Capital Returns/Options/Other

Jerash has authorized a $3 million share repurchase plan. In the first nine months of FY23, it repurchased 157K shares for $772K (average price of $4.93). Jerash’s ability to buy more shares is hampered by the low trading volume of about 30K shares per day. As of the last report, three people own 52.6% of Jerash’s outstanding shares. In addition to the buybacks, the company pays a quarterly dividend of $0.05/share, providing a current dividend yield of about 4%. This dividend has been static since 2018.

Insiders hold stock options to buy about 1.1 million shares of stock. Most of them were issued around the time of the IPO in 2018. These are five-year options at $7 strike prices, to they will soon expire worthless. There are also a small number of warrants outstanding which are also out-of-the-money.

Jerash’s stock price hit its all-time high of $11.00 on the day of its IPO in May 2018. The stock traded above $9 as recently as Sept. 2021.

Jerash will appear at a D.A. Davidson conference in NYC on 3/21/23 at 2:45 PM ET. There will be a webcast.

Risks

• Jerash operates in the Middle East. The usual risks regarding the region apply. Fortunately, Jordan is relatively stable and an ally of the U.S.
• Jerash’s business is dependent on the free trade agreements between the U.S. and Jordan and the EU and Jordan. Jerash would likely go under if the U.S. pulled out of this agreement for any reason.
• Jerash is highly dependent on VF’s The North Face. The North Face has been VF’s best-performing brand of late, but the firm is struggling. My assumption is that Jerash’s business with The North Face will pick up in FY24. If that doesn’t happen, then my estimates are at risk.
• The parent company of Jerash is registered in the U.S., but it has subsidiaries in Jordan and China, so there are the usual concerns with a foreign company. Jerash’s executives are scattered between the three countries. There are some insider transactions (“consulting” nonsense).
• There is widespread competition in the apparel manufacturing industry. Jerash can lose customers to others for cost, performance, demand, or other reasons. The company has limited visibility into future orders.
• A pandemic or other crisis in Jordan could disrupt Jerash’s operations. As Jordan shut down for only a brief period when COVID-19 hit in 2020, the direct impact on Jerash’s staff and factories was minimal. However, there was impact on supply chains and customers.
• Three insiders own > 50% of the outstanding shares so the influence of minority shareholders may be limited.
• Jerash is a microcap with a share price < $5.

Valuation

Jerash, as a contract manufacturer, will probably never achieve a high valuation. However, trading below tangible book value, I think it is oversold. Its stock price has dropped 27% over the past year as its results have taken a hit from a weaker U.S. apparel market. Specifically, Jerash experienced a drop in EPS from $0.67 in FY22 to an estimated $0.37 in FY23.

Despite lower earnings, Jerash is cheap by most measures on an absolute basis. The firm has a $60.6 million market cap and $19.2 million in net cash (as of December), so its EV is $41.4 million, or about $3.30/share. Thus, its EV/Revenue and EV/EBITDA are only about 0.3x and 3.5x, respectively, based on projected FY24 results.

I forecast Jerash’s EPS to rebound to $0.57 in FY24 as apparel demand picks up in the 2^nd half of calendar 2023, orders from newer customers like Hugo Boss and Timberland increase, and new capacity ramps up. Using a 10x P/E and adding the $1.55 in net cash yields a share price of $7.25, which is 50% above the current price. Jerash has traded at P/Es above 10x in the past. At $7.25/share and based on my FY24 projections, Jerash would still be trading at modest EV/Sales of about 0.5x and EV/EBITDA of about 6x. For comparison, Jerash traded at about 8x EV/EBITDA just two years ago.

I think there’s a good chance that Busana buys Jerash someday. This would be an easy and inexpensive way for Busana to buy production facilities and workers in Jordan. Busana’s annual revenue is about 3x that of Jerash. I think $7.25/share would be a bare minimum price if Jerash were to be sold.

Conclusion

Jerash Holdings is a consistently profitable apparel manufacturer with growth prospects as it ramps up production for new accounts. Jordan’s free trade agreements are a competitive advantage. I think the risk/reward of an investment is very favorable given its low valuation (net cash, trading below BV) and likelihood for higher profitability in FY24. There is also a 4% dividend yield. My 12-month price target is $7.25/share, or 50% upside from the current price of $4.85.

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice, nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author has a position in this stock and may trade this stock.

Catalyst

new customers, improving apparel market, possible buyout