Taking a sip at Keytone Dairy, page-71

Does anyone have an opinion on capex needs going forward? On the surface, this looks like a capital intensive manufacturer in a highly competitive space - even apart from the contract manufacturing element.

Incidently (for what it's worth) - I note in the latest HY report that the reported PPE depreciation is very low relative to the PPE on the books.

@MarsC

Over the past two years, KTD have invested heavily into PP&E, either directly or through acquisition:

1) In Jan 2019, the option to acquire new land in NZ was exercised, and the construction of a second manufacturing facility in Christchurch was started; to give you an idea, the annual capacity increase (for powdered milk products) associated with the building of the second NZ plant is to the tune of +230%.

2) In Jul 2019, Omniblend was acquired, with the attached Australian manufacturing facilities.

3) In Sep 2019 Super Cubes was acquired, expanding KTD’s product capabilities into bars/smoothies.

4) In Dec 2019, Omniblend’s manufacturing and packing facilities in Melbourne got integrated into one large-scale site.

5) In May 2020, AusConfec was acquired, with the main purpose of taking over “state-of-the-art” equipment for the manufacturing of protein bars at a bargain price.

So, in the context of all the recent investment above, a depreciation run rate of ~1.2m$ pa (for PP&E only) relative to a carrying value of ~14.1m$ does not strike me as being excessively low. In particular, the Company has still significant headroom, before reaching full capacity on its current facilities and therefore requiring new investment into growth Capex.

In the long run, and assuming that execution continues according to plan, I agree that the business will become more capital-intensive to support ongoing capacity growth. Right now, I think the attractiveness of this investment proposition resides (among other things) in the fact that a) we are in a hiatus where the large capital investment has already been made, b) scaling up within the current capacity constraints has started, with further room to go, c) margins have started to structurally improve, but d) at current price, the market does not appear to have yet taken notice of that, thereby offering a better-than-average risk/reward profile.

Let me know if this answers your questions.