Very good read. Capital allocation & a weak balance sheet are my major concerns with KITW. I think finance expenses and dividend payouts impede their acquisition firepower. I.e. they will pay out ~£9.8m in dividends this year & finance expenses are likely to be ~£5m. Compare that to the £16m available for M&A and the balance looks wrong.
Booker is the obvious comparison, they funded all M&A from a net cash position which makes a world of difference.
I think KITW's dividend should be rebased about 75% lower than the current level. If rates fall back to 2-3% that will reduce their finance costs significantly. The end result would be ~£10m PA more to spend on M&A. Compound that over 10 years and I suspect you'd have more chance of achieving a £1b market cap...
My view is the market valuation is telling them this at present, I.e. we don't believe you can execute this strategy as your debt will become detrimental. Time will tell!
I don't think the finance expenses are excessive given the size of the business, but the point about dividends is fair. Unfortunately, this is a common feature of UK-listed companies, where income is seen as important by many investors - or at least perceived to be. In Kitwave’s case, I wonder whether it’s also a legacy issue tied to the founder, who still owns 10% of the business and is effectively drawing a £0.5m income through the dividend. How happy would he be to see that cut to £125k? My guess: not very.
The dividend looks particularly odd when set against the equity-settled acquisition of Creed. The cost of capital is clearly elevated due to Kitwave’s low valuation, making it questionable why they’d opt to return cash rather than retain it. That said, I suspect the dividend is here to stay. Ultimately, though, acquisition spend will be determined by the opportunity set rather than the cash flow profile. I used cash flow simply as a plausible path to illustrate potential - mainly because it avoids the complexity of modelling a changing share count.
If a large, compelling acquisition emerges, I suspect they’ll issue more shares to fund it, thereby keeping debt levels in check.
Valuations across AIM are currently very depressed. Passive investing is on the rise, and AIM is largely excluded from that. Add to that the fading appeal of AIM’s inheritance tax benefits, and it’s no surprise liquidity is draining fast. As ever, market valuations are driven by liquidity flows - and right now, those flows are heading elsewhere.
Very good read. Capital allocation & a weak balance sheet are my major concerns with KITW. I think finance expenses and dividend payouts impede their acquisition firepower. I.e. they will pay out ~£9.8m in dividends this year & finance expenses are likely to be ~£5m. Compare that to the £16m available for M&A and the balance looks wrong.
Booker is the obvious comparison, they funded all M&A from a net cash position which makes a world of difference.
I think KITW's dividend should be rebased about 75% lower than the current level. If rates fall back to 2-3% that will reduce their finance costs significantly. The end result would be ~£10m PA more to spend on M&A. Compound that over 10 years and I suspect you'd have more chance of achieving a £1b market cap...
My view is the market valuation is telling them this at present, I.e. we don't believe you can execute this strategy as your debt will become detrimental. Time will tell!
Hi Tom,
I don't think the finance expenses are excessive given the size of the business, but the point about dividends is fair. Unfortunately, this is a common feature of UK-listed companies, where income is seen as important by many investors - or at least perceived to be. In Kitwave’s case, I wonder whether it’s also a legacy issue tied to the founder, who still owns 10% of the business and is effectively drawing a £0.5m income through the dividend. How happy would he be to see that cut to £125k? My guess: not very.
The dividend looks particularly odd when set against the equity-settled acquisition of Creed. The cost of capital is clearly elevated due to Kitwave’s low valuation, making it questionable why they’d opt to return cash rather than retain it. That said, I suspect the dividend is here to stay. Ultimately, though, acquisition spend will be determined by the opportunity set rather than the cash flow profile. I used cash flow simply as a plausible path to illustrate potential - mainly because it avoids the complexity of modelling a changing share count.
If a large, compelling acquisition emerges, I suspect they’ll issue more shares to fund it, thereby keeping debt levels in check.
Valuations across AIM are currently very depressed. Passive investing is on the rise, and AIM is largely excluded from that. Add to that the fading appeal of AIM’s inheritance tax benefits, and it’s no surprise liquidity is draining fast. As ever, market valuations are driven by liquidity flows - and right now, those flows are heading elsewhere.
WS
Great write-up. I like the way to start with the narrative and add numbers at the end.
Great article thanks for taking the time to produce and share