"Can I pick your brain about the ‘few proxy clues’ for the worst...

"Can I pick your brain about the ‘few proxy clues’ for the worst being over, or management earning their keep. Obviously the profit is back in the black and revenues are rising but I’m sure you’re referring to specific lines on the financial statements."

@Just_a_guy ,

There were few things I found to be of interest:

1. Gross Profit Margins

Increased to 38.5% (JH2017 = 37.3% and DH2016 = 36.5%). This surprised me a bit, because there were some meaningful GP Margin headwinds during the period, such as higher steel and zinc prices, as well as much higher power prices; and they also undertook a concerted stock liquidation program during the period. Usually, aggressively reducing excess inventories - to the extent that it is finished goods - is not usually a margin-accretive exercise.

2. Sales/Marketing Expense

Increased by 15% on DH2016 and 10% on JH2017. Now I'm not too sure exactly what goes into this number (and if it includes rebates or discounts), but to the extent that is appears to represent increased representation and market presence, and getting in front of clients, I take that to be a positive... an example of a "good" cost, if you like.

3. Working Capital Management

While Working Capital @ 31 Dec 2017 increased to $17.7m (30 June 2017 = $16.3m and 31 Dec 2016 = $15.8m), Inventory fell to $10.1m (30 June 2017 = $10.7m and 31 Dec 2016 = $11.6m). Period-end Inventory to Sales was 34% (still high, but vastly improved on JH2017's 46% and DH2016's 54%).

So what they have done is liberated capital from stock and invested that in trade terms with their customers (Receivables @31 Dec 2017 was $11.9m, significantly up from 30 June 2017 = $9.5m and 31 Dec 2016 = $7.8m). Expect operating cash flows in the current half to be strong as these receivables are collected.

4. Admin Expenses

Came in at $1.32m for the half, up $165k on pcp, which is not as bad as I thought it would be, given that they would have incurred ongoing restructuring costs during the half, including downsizing at Powerstep and Titan, as well as costs associated with the disengagement of the former MD. So, all-up, looks like they are watching the overheads.


Of course, all of this is a mere snapshot of one particular 6-month period, and one swallow does not necessarily herald that summer is here.


On a less upbeat note, one thing that has become clearer to me over the past 6 months is the competitive environment; I've come to learn that the commodity boom spawned a number of competitors to Ezystrut... mostly small operators acting as local distributors to offshore manufacturers.

The unusually strong A$ since the commodity boom has kept those competitors in the game, whereas commodity downturns in the past would have sent the A$ a lot lower than it has been in recent years, thereby removing KOV's offshore competition.

For this reason, I think we can forget about KOV's GP Margins ever returning back to their "glory day" levels of >45%, unless the market tightens considerably.

But for that to happen, things would need to truly "boom" once again.