Ann: KPG FY21 Full Year Results Commentary, page-5

I like this company, though was a bit late off the mark and didn't get an entry price I liked. It definitely was super cheap earlier this year, and even Brett / KPG were doing share buy backs at $1.41. At the current share price of $3.60, 13% growth is basically baked into that share price. I don't think that's completely unreasonable when you look at underlying EBITDA growing at 18% and NPAT growing 30%.. buut.

It's an accounting firm. So they know the tricks. So you need to really look at the numbers carefully. A couple of things have jumped out at me. First, the outlook is for $8 NPAT in 4yrs, and they are 'on target' at $5.1m. While it is ~30% NPAT growth in FY21, the long term trajectory and outlook is for 11.9% NPAT CAGR until FY24 ($8m). No outlook is provided after that, and not so clear they will maintain the same momentum. If you bake in 11.9% growth in NPAT, then you're looking at $3.20 being a fair price.

Second, what's the runway of acquisitions look like? They pay good prices at ~4.5x EBITDA with ~20% EBITDA margins, and are able to improve margins towards 32% EBITDA. So that's the basis of their growth, which is great. However in FY21 there were no major acquisitions, only tuck-ins. Moreover, they included three acquisitions in July 2021 (FY22) in their FY21 calculations, which accounted for around a third of their EBITDA acquisitions. This concerns me that maybe it's not easy to find the acquisitions at the right price? And if that's the case, then I would want some margin of safety in the share price before I start buying in..

Third thing that gets my goat a little bit is that Brett/KPG report +40% CAGR on 'total shareholder return'. Yes that's technically correct, but it assumes a huge amount of multiple expansion that is not sustainable. Indeed, their FCF CAGR has been 21.5% over past 5 years, and this is really what should be reported. Businesses that take credit for share price movements always concern me, they should be focused on the underlying earnings instead.

GLTAH.