@joewolf, Some of your points are well-made and reflect what are...

@joewolf,

Some of your points are well-made and reflect what are some structural limitations of this company. Make no mistake, in terms of being an increaser of intrinsic value over time, this is not that kind business.


In response to your points/questions:


Point No 1. - Growth

Growth fro KOV - whether organic, or by acquisition - is challenging.

In the case of the former, it requires a significant capital outlay and in the case of the latter it invariably takes the form of some kind of defensive measure (eg. buying your competitor and then shuttering some of that acquired capacity, which is seldom a smart long-term solution to a poor industry structure.)

Of course, they could go out and acquire a completely different business, but they tried that about 6 or 7 years ago, and it resulted in a whole lot of shareholder value being torched.


Point No. 2 - Major shareholders

I'm quite agnostic as to what other shareholders do at any given point in time. It has no bearing on the fundamentals of the business and doesn't impact cost of capital to the company, because it is a totally self-funding business and, in fact, generates surplus capital (and at all stages of its business cycle, at that).

PPT, specifically, have been a supportive shareholder for a very long time (as far back as I can remember) and it is quite normal for them to vary their position depending on where they perceive the company is in its business cycle. It's just what they do. And I don't think it changes anything; if anything PPT trading provides much needed liquidity for the stock at times.


Point 3: Returns of capital to shareholders

You would be 100% correct if it wasn't for the fact that there is very little effective free float in this company, meaning that any share buybacks will reduce what little liquidity there currently exists in the stock, which could reduce investor interest to a point where it is even lower that currently.


Point 4: Invest in Efficiency and Reduce Costs

Yes, you are right it is effectively a cost-out story. But not just on a one-off basis; it's an ongoing requirement when you operate in a highly competitive field where product differentiation is limited. Because if you don't keep driving out costs, you won't be able to compete and you will eventually die.


If that all sounds like a bit of a tough investment case, then that's because it is. It is not an easy business - deeply cyclical, capital-intensive and highly competitive.

All the ingredients for poor shareholder value creation outcomes.

But does that mean that the stock is not investment-grade?

Certainly not.

It is eminently investable because of its sheer durability and ability to generate surplus capital even at the absolute worst of times (which is why - despite it not being a pre-eminent business - it hasn't sought recourse to shareholders for funding in the near-20 years that I've followed the company [*])

But the way to invest in KOV is to buy it when the doom and gloom is maximised at the bottom of the cycle and to sell it when everyone is all agog and cheering the stock when demand for its products is roaring away strongly.

The bottom was clearly in 2017 but - based on the significant infrastructure pipeline that lies ahead - I think that the peak in KOV's earnings is still a year or two away, when I suspect the the business will be close to its peak earnings capacity of around $8mpa in EBIT.

Here's what that will look like, relative to the company's history:




It is when that sort of EBIT figure is in sight that the selling bell will start to ring for me.

Applying a modest 8x EBIT as the peak cycle multiple, that translates into a $64m EV or $72m Equity Value, so it translates to around ~$6.50 per share

So, if the price range is $2.00 (where it was at the bottom of the cycle) to $6.50, it means that while most of the upside (two-thirds of it) has been banked, there is still another one-third to be had.

And while I wait for that remaining ALPHA to be delivered, I get paid a +6%pa fully franked coupon on my capital-at-risk.



[*] They did raise $9m in FY2014, I think, but that was to fund a special dividend of the same amount - a move to expunge some of the ~$12m in excess franking credits they were carrying at the time.