Categories
Investing

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.

Categories
Investing

Kathmandu (NZX:KMD) Quick Overview

The aim of this overview is to try to work out if there’s any value to be gleaned in the current Kathmandu Holdings Limited (KMD) share price. To be clear I’m only doing a quick overview – I don’t expect to be diving very deeply into KMD to determine what’s the most appropriate type of valuation for this company or the nuances of it’s operations, which an investor should probably be interested in. I’m simply skimming over this to see if there’s any value to be had, and on what terms.

So, as an investor rather than a trader, I’ll be looking at a longer term investment. I’m not looking to gamble on the short term prospects of state of the economy, market sentiment or the development of COVID19.

Therefore my approach will be to try to see if there’s any value in the current share price, based on the premise that in 2-3 years time KMD will be trading as it did in 2019. And in determining value in the current share price, I will be considering the opportunity cost of 2-3 years of investing lost to get back to the state of play in 2019, and whether there is likely to be another capital raise.

Working Out If KMD Will Do Another Capital Raise (CR)

KMD recently did a $207m CR and made ~$15m cost reduction initiatives, including rental costs and employer subsidies in NZ, AU and EU. I see that they managed to get just under $4m from NZ wage subsidies.

2018/19 Operating Expenses were $225.7m and $234.0m, respectively.

2019 Net Debt was $19.3m (down from 2018 by about $10m).

Gross Product Margin is about 60%.

The average NPAT over the last decade was $37m, not accounting for inflation. The past 2 years results were abnormally high compared to former years – probably should research why that it if I was going to dive deeper, but I won’t.

It looks like prior to the $207m capital raise, they didn’t have much in the bank to get them through (about $25m + $4m wage subsidy that’s not listed on the balance sheet) – out of which there are a bunch of current liabilities ($81m), which seem to rely on inventory being sold, as I understand the balance sheet.

A crude calculation suggests that they might have about $151m in cash + $123m in inventories ($65m of which need to be sold) to cover $219m worth of costs in the coming year.

The more I delve into this, the more I feel that it’s difficult to have any idea if they will likely need to raise capital (CR) again next year because there are too many variables to work out if they’ll be covered for the following year.

Nevertheless, they seem like they’re probably covered for this year, and the security of the following year will entirely depend on how well they do this year, or they’ll need another CR.

Finding Value In The Current Market Capitalization

Lets increase the current MC by 8% to account for the required rate of return to cover opportunity cost, then lets pessimistically assume that they do another CR next year, which dilutes shares, effectively increasing the price of them today by 30%. Then lets increase the MC by 8% again to account for the opportunity cost / required rate of return for investing for that year. This gives an effective current MC of $1,060m at todays price.

A MC of $1,060 against a future NPAT of $37m (which is the average across the past decade – a little low, I know, but coming out of a recession, profit won’t be amazing, so this value might be prudent), gives a ratio of 28 (3.5% dividend after tax, at best). Assuming that the year after, things return to recent year’s NPAT of ~$50m, this would be a ratio of about 21, which equates to a less than 5% dividend (after tax) in a couple of years time.

The prospect of a future 3.5 – 5% dividend (after tax) is not enticing enough to risk my money for, and get no 8% return for a couple of years prior.

Of course, this is the pessimistic view. Without a CR and with a small profit this year and a return to $37m NPAT the following year would give a ratio of just over 20 (5% dividend next year after tax, at best), or a ratio of ~15 if NPAT returns to $50m next year – giving a dividend of up to ~6.5% (after tax).

So, is there any value in the current share price? For me, not really, but it’s not that bad in a portfolio that wants a reliable OK (but not too exciting) dividend in a few years time. Addendum: Looking back, I originally said that there wasn’t value for me, but that was based on the belief that there wasn’t much growth in KMD. I now believe that this is wrong, making my projected PE a bargain (and still a good option for someone looking for a reliable dividend).

There’s a bit of a dividend trap there on the NZX website, which suggests that you could get a 15% dividend (before tax) based on previous dividends and today’s share price.

For me to be interested, I would want to be investing in KMD at about $0.50. Of course, it entirely depends on what your exit strategy is – someone buying as a trader may well find value here. Or someone looking at the numbers in their own way might find value – after all, this was a quick overview and I didn’t delve very deeply into any of the numbers, history or other factors that may effect my perception of value in KMD. Moral of the story, you may wish to do your own investigation to see if there’s value in KMD’s share price today.

Addendum: If KMD return to recent years NPAT, based on a Comparables Market valuation, one would expect that in a few years time, KMD would return to pre COVID19 share prices. If we assume no dilution during this period, an investor could see themselves doubling their money based on an exit strategy of a sale. If there’s a dilution of 30%, this could return only +40% (100% – 30% = 70% x 2 = 140%, or a 40% increase) during this period (Of course a 40% increase over 2 years is only 18% increase pa, compounding).

The downside risk would be two consecutive years of dilution, or no return to recent years performance. Alternatively the downside might be performance returning to recent years results, but not market sentiment. In which case, the above dividend return would be the exit strategy. Clearly any investment in KMD would be a sale with the view of a trade (depending on market sentiment) or an investment of 1-2 years, the fail scenario being if there were multiple consecutive years of capital raises before return to normal (100% – 30% = 70%, 70% – 30% = 49%, 49% x 2 = 98%; aka -2% change in value to portfolio).

Categories
NZX

Kathmandu Holdings Limited (ASX:KMD & NZX:KMD)

Kathmandu Holdings operates in New Zealand, Australia and parts of Europe. They own the brands:

  • Kathmandu – A clothing retailer, specializing in the outdoors.
  • Rip Curl – A clothing retailer, specializing in water sports.
  • Oboz Footware – A shoe manufacturing and retailer, specializing in camping and hiking shoes.

Historic Performance

YearNPAT GrowthBasic EPS (Cents Per Share)Basic EPSEPS Growth (Percentage)Share Price At Start Of YearShare Price At End Of YearShare Price GrowthOrdinary Dividends Paid Or Declared Per Share
FY2010$9.4mNA$0.30NA$2.13$2.05-3.80%$0.07
FY2011$39.1m316.00%$19.50650$2.05$2.207.30%$0.10
FY2012$34.9m-10.70%$17.40-10$2.20$1.59-27.70%$0.10
FY2013$44.2m26.60%$22.1030$1.59$2.3749.10%$0.12
FY2014$42.2m-4.50%$21.000$2.37$3.3340.50%$0.12
FY2015$20.4m-51.70%$10.10-50$3.33$1.70-48.90%$0.08
FY2016$33.5m64.20%$16.6060$1.70$1.805.90%$0.11
FY2017$38.0m13.40%$18.9010$1.80$2.2726.10%$0.13
FY2018$50.7m33.40%$24.0030$2.27$3.0835.60%$0.15
FY2019$57.6m13.70%$25.5010$3.08$2.13-30.80%$0.16

More information about Kathmandu Holdings Limited…