"I'm very happy with this result. The news that the order book grew in 1H23 from an already elevated 2H22 ; that Feb 23 price increases will recover margins; and that the infrastructure pipeline for the next 3-5 years remains strong - perhaps a higher PE than 10 is justified."I suspect that not many people will look at this result and of the even fewer that do, almost none of them will appreciate just what a resilient result it was under the circumstances of very aggressive inflation of input costs (steel, transport, zinc, power).
For operating margin to still be close to 12.5%, which is in the top decile of historical levels after all that cost pressure strongly suggests a degree of pricing power and a concomitant absence of competitive pressures in the industry.
View attachment 5002954(Note: Ignore the 17.5% EBIT margin number recorded in DH2021; that was due to some non-recurring, ultra-high margin sales as a result of a competitor being unable to supply a contract and the client called on KOV to fill the gap.)
As for the application of an appropriate valuation multiple, that depends on the shape of the cycle and where we are in that cycle.
If we are at a point where the work is going to ease off, which will cause a reduction in earnings (there's a lot of operating leverage in this kind of business, and it works both ways: on the way up as well as on the way down), then 10x is probably right.
But if the current cycle looks something like the mid- to late 2000s (i.e., with some longevity, akin to 2005 to 2009), then arguably a higher multiple can be justified (nothing outrageous; maybe 12x or 13x), especially considering some of the favourable changes in the industry structure that occurred in the intervening years.
Twelve months ago I would have thought that it was 50:50 odds as to whether Revenues and Earnings had peaked; today I'm 25% chance, the former; 75% the latter.
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