Sleep on KMD at your peril, page-9

UBS have just commenced coverage on KMD an released this note today.

A well-diversified global outdoor player, plus...

We initiate coverage on Kathmandu Holdings (KMD) with a Buy rating and PT of $1.70 as we broadenour coverage of the NZX50. KMD will likely continue to see pressure on short-term ANZ sales due tocontinued COVID disruptions. However, we believe its EBITDA (adj. for leases) should double over thenext 3 years as a result of a) re-opening of ANZ stores paired with increased consumer spending; b)growing global popularity for surfing; and c) solid margin recovery. Despite its strong growth profile, andpotentially less earnings volatility post the Rip Curl acquisition, KMD trades at a 1yr fwd P/E Multiple inline with its LT average, and a discount to ANZ retail peers of ~20%.

...solid recovery in the Australasian Outdoor segment from 2H22...

Following the Rip Curl acquisition in 2019, KMD’s well-diversified portfolio provides room for globalgrowth. Top-line growth in the outdoor segment is underpinned by a) UBS Evidence Lab data pointing tocontinued consumer preferences for athletic clothing; and b) solid medium-term consumer expendituregrowth forecasts to which Kathmandu sales are susceptible. Top-line growth in the surf segment isdriven by a) Google Trends data pointing to strong technical surf sales growth (~40% of Rip Curl sales);and b) UBS Evidence Lab data suggesting Rip Curl is one of the most preferred brands in NZ. EBITDAmargins should improve by >500bps for FY20 to FY23 as margins normalize from COVID-lows, pairedwith lower lease liability per store, and better pricing. KMD also has a strong balance sheet (Net Debt at$9m as at FY20).

...paired with margin improvement, drives NPAT CAGR of 34% to FY24NPAT should grow from $31m to $103m for FY20 to FY24.

We are broadly in line with FY23 consensusNPAT estimates (UBSe +1%), reflecting a solid earnings recovery; however we are slighlty belowFY21/FY22 consensus due to near-term COVID-pressure.

Valuation: NZ$1.70 based on 12x FY23 13.8cps estimate and DCF (11% WACC)

Our price target is the simple average of a 12m forward DCF ($1.73) and multiples analysis valuation($1.66). The target 12x P/E multiple is above KMD’s LT average of 11.3x (currently 11.2x), due to lessvolatility and improved global reach and earnings. Our upside scenario ($2.29) is partly driven by thesuccesfull launch of the Kathmandu brand outside of ANZ, and solid market share gains for the Rip Curlbrand.