Ann: Appendix 4E and Full Year Statutory Accounts, page-7

"Given the significant poor performance, I wonder what is your investment thesis on this one to continue investing?"

@zaidi675,

The following extract from an earlier post might give you some idea how I think about this business:

"The thing I think (the market) is missing is - and I'll use a horse ownership analogy - that it is measuring KOV against the standards that befit thoroughbreds, when what KOV really is a bit of a nag: docile, and a bit lazy, but will always respond in a friendly manner to a few carrot sticks and is always patient for the kids learning how to ride. And also doesn't protest when harnessed to a cart or a carriage for a bit of work around the farm or for some gentle recreation.

In summary, she will never win a race, and her bloodline is also no good for breeding purposes. But she's just a good old-fashioned, family horse of a mild nature, happily lolling about the paddock.

So, sure, she's not the most prime equine specimen around.
But then again, but she's not valued that way.

In fact, she's not even valued as the friendly family horse that she is; instead, she's valued like she's off to the glue factory any day now. And she isn't; she still has a few more years of good rides in her yet.

KOV is an acutely cyclical business:

When there is demand for its products/services and its production facilities are kept busy, the company spews cash, generating annual Free Cash Flow (FCF) of $6m, $7m and more. For a business whose Enterprise Value today (of $24m) is a mere 3 or 4 times higher than that level of annual FCF.

And when there is no demand for KOV's products and services and its production facilities are standing idle (like now) the the business makes less profit and FCF (note, not zero FCF or negative FCF, just not as much positive FCF).

So, unless the cycle is dead forever, and KOV's capacity is idled permanently, then - sure - EBITDA will continue to be just $2.0m or $2.5m forever. In which case the ~10x EV/EBITDA multiple would not be considered cheap.

But, assuming that the sky doesn't fall on our heads over the foreseeable future, then the "normal" operation of the cycle will mean that KOV will - once again at some stage - be generating $7.0m, $8.0m or $9.0m pa in EBITDA.

At the current share price, that equates to a mere 3.0x EV/EBITDA multiple, on average.

I am prepared to say, with a great degree of conviction, that once demand for KOV's products and services recovers (and, unless the cycle is dead forever, it will) there is no way the stock will be priced at such a level for very long.

In summary, its not a 9 out of 10 company.
Nor even a 8 out of 10. Heck, it's not even a 66 out of 10 business

But its not priced like its any of those: I think it's probably a 4 out of 10 business, at best, but is valued like its a 1 out of 10."