"KOV appears on many technical analysis to be significantly...

"KOV appears on many technical analysis to be significantly undervalued. Is this an old fashioned dividend paying small cap that will benefit from surge in building activity and amongst current challenges in trading with China?"

@bigbrass100 ,

I wouldn't know good from bad technical analysis if they took turns slapping me in the face for a few times.

But I think that the business fundamentals for this "old fashioned" [*] business look healthy, for a few reasons:

1. Short- Term (12-18 monhts): Import competition has weakened: The weak A$ in recent years has reduced the commercial appeal in the eyes of offshore competitors of selling product into Australia.

2. Medium-Term (3 to 5 years): Massive infrastructure spending: While infrastructure cycle is already experiencing an upswing, the acceleration of infrastructure construction has been flagged as one of the very important avenues to kickstart the economy post-Covid (and with the RBA now also having unambiguously jumped on the Modern Monetary Theory train, money will be no object for the federal and state governments)

3. Longer-Term (3 to 10 years) Re-industrialisation of the Economy: One of the most significant structural economic changes that are likely to arise from the global Covid pandemic is that developed countries - which had effectively trans-located their manufacturing capacity into the developed world - are likely to reverse that process as they seek to bring their supply chains home for national interest reasons. This trend won't occur instantaneously, but it could commence sooner than many people think. Re-tooling and re-industrialising Australia will provide many years of demand for KOV's products and services.


At the height of the mining construction boom, between 2009 and 2012, KOV averaged Pre-Tax Profit of around $7.5m, with a peak of $8.8m in FY2012.

I have little doubt that the company will repeat such an elevated earnings streak at some stage commencing over the next 18 to 24 months.

And when that occurs, the market value of the company will be a lot higher than its current $45m.

For context, a modest 12x to 13x P/E multiple on NPAT of $5.6m (corresponding to PBT of $8.0m) would result in a market value somewhere between $65m and $70m.

That works out to around $6.00 per share.

And while we wait, we get paid a dividend in excess of 6%pa.

(Just one caveat, though: this company's earnings are not nice and granular; they tend to be lumpy, depending on the timing of supplying major contracts. And DH2019 was particularly strong, with Revenue and PBT up 24% and 88% on pcp, a result of the completion of a large infrastructure contract being supplied by KOV. This means that the current half could be a bit soft, aggravated by possible Covid disruptions. So, while its not something I'd bother doing, tactically, some might want to frame their investment in the stock around what the full-year result looks like.)


[*] Apt description... but under-stated, if anything. "Dickensian" might be a better adjective.

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