Ann: Full Year Statutory Accounts, page-3

"Shareholders should be happy with some details in the review statement and the performance of this one. Expenses contained well, revenues up."


It is a little business (not an aesthetically pretty one, mind) that has for a long period of time churned out surplus capital, year-in-year out, through good times and bad:



That, I believe, is the essence of the investment opportunity that is KOV: not a growth company, by any means, but a veritable cash generating machine that should be valued as a sort of fixed income proxy (but one that from time to time gets offered to investors a prices which offer a prospective free cash flow yield that is 15%, 20% and at times even as high as 25%, above prevailing risk-free rates!).


But for those that are interested in KOV for its accounting profit potential (as opposed to its cash flows), the following chart shows the extent to which the company, despite the share recovery off a low base, is still under-earning currently compared to its true full earnings capacity.

It shows that when demand for KOV's products and services is running hot and the company's facilities are being operated flat out, the company can easily support Operating Profit (EBIT) in excess of $6.0m. That compares to the $4.1m EBIT result just reported.




So, despite the recovery in profitability in recent years after the dark and dismal 2017 year (which was without precedent), the company still has ample capacity headroom for further upside in earnings, I believe.


Now I'm not for one minute suggesting that EBIT this year, or even next year will be at, or above, that $6m capability level, but on the assumption that the company will be a beneficiary to some extent of the following outlook picture, I suspect we will see a >$6m EBIT number reported by KOV at some stage over the coming few years:





One of the more interesting aspects to emerge from the KOV result commentary was that a competitor on the east coast had exited the industry in April. That KOV sees fit to make specific reference to it makes it, one assumes, not a mere trivial matter.

While rationalisation of competition in this space has taken a bit longer than I had anticipated, this latest development is, I think, quite a statement about the competitiveness and durability of the KOV business.

Because, when some players in the industry are throwing in the towel, KOV is generating an ROE in excess of its cost of capital (viz. 11.3%, on an annualised basis, for the past half and 12.6% if the net cash cash is excluded). That is something not not overlook, I believe.

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