Kathmandu (NZX:KMD) Overview – A Redo

After a bit of consideration, I’ve decided that I got my last valuation of the Kathmandu (KMD) stock price wrong. Initially I viewed KMD as a stock that doesn’t grow earnings, but looking at it’s history, it does. So I decided to redo my previous exercise of looking for value in the stock price with the perspective that KMD is a growth stock.

First thing I decided to do was to see how the company has grown earnings per year, so I can assign an appropriate target PE to determine value – because a company with higher growth deserves a higher PE.

Upon doing my research I noticed that Kathmandu seems to have grown earning significantly in the past 2 years. I decided to look into this so I could understand the growth story to try to judge how well it might continue. After a little research, it seems that KMD has grown NPAT by doing CR funded acquisitions. Outside of this, growth (positive and negative) has been very erratic.

Consequently, I’ve decided that I won’t view this as a growth stock, but instead view them as a dividend stock to be bought when they’re having a bad year in order to on-average get a higher dividend. Realistically, this stock is probably one that should be traded, rather than invested in. To that end, a trader could probably trade this stock based on a CM valuation or simply standard TA. Alternatively a cautious trader could apply some FA to the stock to determine when the trades are safe.

However, lets look to see if there’s any value in the current share price for an investor looking for dividend return.

Finding Value In The Current Market Capitalization (MC)

I will use the same methodology as last time, but with consideration to the new MC and higher NPAT, which I had previously averaged out across numerous years because I wanted to do a quick analysis to see if it might be worthwhile putting time in to do a full valuation.

Lets look at the figures: Current NPAT is $57.6m with Operating Cash Flow at $61.7m. I don’t want to spend time researching why there’s a difference when the two numbers are quite similar, so I’ll use the value of $60m profit because I’m feeling lazy. MC is currently $964m.

Given that they’re scrapping by this year, lets assume that there’s no dividend, so we’ll increase the MC by 8% to cover the opportunity cost of investing for the year. We’ll assume optimistically that they’ll return to generating $60m of free cash flow the following year. That gives a ratio of ~17.5, or a potential maximum dividend (if they pay out all cash) of about 5.7% after tax.

Probably not bad as a dividend play given the likely ongoing low interest rates (Term Deposits can be considered an alternative return for dividend income stocks). Alternatively this is also pretty good if you’re buying with the view to trading the stock when it increases in value down the road. If you believe that this stock is a growth stock, there is a lot of value here.

Personally, I think the above numbers are a little optimistic, given that they are unlikely to return to $60m FCF within a year, tourism is predicted to be reduced; and there is the possibility of another CR, which would be damaging if not used for growth. I do believe that this is probably a good stock to buy at this price for a trader looking at a 1 – 2 year time frame.

If we look at a slightly more pessimistic view to try to find value as an investor, we can assume the upcoming free cash flow will be $40m (30% reduction, which is what the airlines are predicting for 2 years time on tourism), that gives a ratio of 24.1 against the current MC. Of course, you could then view that as a growth stock until they return to their more usual trading. A stock at a ratio of 24 would have to only grow by 10% a year to make it good value in my opinion, making KMD a good purchase for an investor who wanted to buy and hold for however long the growth story lasted.

In summary, there is too much volatility to be sure of anything with KMD, and any investment would depend on an investors opinion of whether KMD is a growth stock or the term of the investment, and appetite for risk.

Addendum: Looking at historical performance, EPS growth from 2012 to present has been (on average) exactly 10% pa, meaning that a ratio of 24.1 puts them at about good value.


One reply on “Kathmandu (NZX:KMD) Overview – A Redo”

I ended up buying 1,000 KMD shares @ $1.45 each, plus $30 brokerage fees on the back of this analysis.

I bought these as an investment punt that they will recover without further capital raises required to sustain the company. I don’t have the confidence in the economy to buy more at this stage.

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