Re-focus its growth on KWB

Almost all of Joyce results come from KWB* (kitchen and wardrobe renovations, via Kitchen Connection and Wallspan).

In FY 24, KWB revenues :
- completed kitchen sales (111.7 m$), for around 4,000 kitchens completed or around 28,000 $ per kitchen (design and installation)
- and wardrobes (9.7 m$), around 2,100 wardrobes or around 4,600 $ per wardrobe.

Joyce has invested around 1 m$ (via CB) to take 51 % of KWB between FY 13 and Nov 13.
In FY 24, this 51 % of KWB generated a net profit of 9 m$ (similar profit in FY 23).

Since its first full consolidation by Joyce in FY 15, KWB had a regular increase of its sales and EBIT margin :
- sales went from 40.7 m$ in FY 15 to 121.3 m$ in FY 24 (X 3 during that period), while the number of showrooms went from 12 initially to 25 in FY 24,
- EBIT margin went from 11.8 % in FY 16 to 20.8 % in FY 24 (EBIT X 5.2 during that period).
EBIT went from 1.7 m$ in FY 15 to 25.2 m$ in FY 24.

Quote from KWB MD during FY 19 : "historically, new stores in our group have returned their initial investment in the first year of trading".
Given the large improvement of margin since then, I suspect that KWB must have a quick return on investment with its new stores.
Apparently, a new showroom costs around 400 K$ to compare with the average showroom revenue of 4.8 m$ and EBIT of around 1 m$.

KWB has exceptional results with ROE of 159 % in FY 24 (135 % in FY 23).
Nick Scali, considered as one of the best listed retailers in the ASX, had a ROE of 56 % in FY 23 (before investing in the UK).

KWB ROE is explained by 2 elements :
- a low basis of capital employed, due in particular to a negative working capital**,
- and a high margin (EBIT margin of 20 %+ in FY 24, like FY 23). Gross margin : around 50 %.

I am surprised that KWB can have such a high margin***.
KWB has proved to have a good pricing power during the last couple of years, as they were able to recover the cost increase via pricing.

KWB had a very good resistance during the covid period and has continued to maintain its sales/profit in FY 24, despite all the challenges that retailers had to face (decrease of traffic, inflation...).
Since FY 15, KWB has increased its sales and margin every year, except a slight decrease of sales in FY 24 (- 2%).
I do not have in mind another retailer which had a similar performance.

KWB had only 25 showrooms at June 24.
Its target is to double its number of showrooms and could be done over 5 to 10 years (source : Arcata Capital in Dec 23).
Such a target makes sense as KWB indicated in the past that they were covering only 25 % of Australian population with 21 showrooms.
In June 24, Kitchen Connection had 12 stores in QLD and 10 in NSW, while Wallspan had 3 stores in SA.

The problem so far was that Joyce tried to develop some diversifications, which may explain why the excellent results of KWB were diluted in the other activities of Joyce.
After the failure of its last 2 diversifications (auctions and house staging), Joyce has decided to re-focus its growth on KWB, with the opening of 4 to 5 showrooms during FY 25 (mainly focused on NSW in FY 25 and FY 26).
Between FY 21 and FY 24, KWB had a stable number of showrooms.

Joyce has an interesting profile :
- company which has already a high level of return,
- and great opportunities to reinvest its large cash pile in shops with a good visibility on future returns (as it focuses on KWB).

Given this profile, the valuation still looks reasonable as the free cash flow yield is around 6.4 % (excluding minority interests), while the company can still double its number of KWB stores and earning basis.
Another way to look at the valuation : JYC has now a yield of 4.9 % (excluding special dividend), which corresponds to a payout of 80 %.
Given the stability of KWB growth in the past and its potential in the future, such a dividend looks interesting.

In the short term, KWB could have a decrease of its revenue and EBIT during H1 25, like during H2 24 (- 10 % yoy for revenues and - 23 % for EBIT).
But the main element is probably the medium term potential of the group if it doubles its number of KWB showrooms.

* KWB had 12 showrooms at that time vs 27 in FY 24.
** very low inventory (0 for KWB ?) and customers pay 40 % of their orders in advance.
*** their competitive advantage according to Arcata Capital :
"The strength of Kitchen Connection compared to competitors is that they operate in a vertical manner sourcing the materials, selling the product,
taking measurements, and to an extent constructing the kitchen.
Competitors such as Freedom Furniture don’t manage the whole process. In addition, very few competitors operate their showrooms in standalone retail locations and instead operate inside of home improvement retailers".