Have been watching this one for a while and was waiting for the...

Have been watching this one for a while and was waiting for the report to see how they were tracking. Pretty underwhelming vs my lowest case expectations. Revenue growth has really slowed, which is a concern. Operating cashflow was weak at $770k vs $2.4m PCP but they've invested in capacity so that could play out well in the medium term. The continued investment in the business has meant that dividends were debt funded during the period and cash has subsequently dipped lower.

The only broker that covers KME (below) has underlying NPAT of $3.8m for FY23 vs 1H23 NPAT of $650k - in other words they're no where near expectations or at least the expectations of this one analyst.

Best case scenario is NPAT grows 50% on 1H23 to generate full year NPAT of ~$1.6m. Even in that bullish case, it will still be trading on a PE of ~21x, which is just too high vs the market and an economy that will be absorbing higher interest rates. Better investments elsewhere at that price?

The lack of clear guidance other than a stronger second half suggests this is more a medium term play that has a while to go before meaningful returns kick in, while the reliance on perfect execution has increased, which means the risk profile has also increased at this price level.



Overall I do like the business model and see medium term upside given the unit economics but the execution risk is high. There's a balance sheet choc full of intangibles, so they're basically all in on expansion/execution, but given the high valuation I don't see a compelling reason to buy, which is probably what others will see too. If you own it you either bite the bullet to sell now to chase higher returns or you need to be very patient and run the risk that this drops lower before recovering in the future.

With the low liquidity and PIE and Regal essentially trapped, I see this drifting lower over the next 6 months until they report full year numbers. The business does not communicate very well so I can't see any other material catalysts that could surprise on the upside but even then it's just too expensive at these levels. Will check back in 6 months.