Why I Think KMD is a great opportunity!

Hi there,

I have come to the conclusion that I’ll be better at « stock picking » if I write down my thinking before buying parts of a company. Also, by publishing on this forum, I am allowing myself to be judged. And hopefully receive some insight on my thinking.

This is not an « analysis » nor a recommendation, I am no genius nor a pro and have not the pretension to be better than most. Also, I definitely think that you should do your own research as we all have our own bias.

I hope that this little input of mine would engage in quality discussion around the stock.

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The Company:

Kathmandu Holdings (KMD:ASX) is the owner of Kathmundu, Rip Curl and Oboz.

Rip Curl was born in Torquay in 1969.

Kathmundu was born in Melbourne in 1987.

-> Both born in Victoria, Australia

Oboz was born in Montana, USA in 2007.

Acquiring Rip Curl in 2019 made Kathmundu Holdings Stronger...

While Kathmundu is usually thriving in colder seasons, RipCurl is the other way around. Providing revenues all year round on both north and south parts of the world.

While Kathmundu only got stores in Australia and New-Zealand, Rip Curl also got stores in Africa, Asia, Europe and Americas. Kathmundu will benefit from the existing commercial network of Rip Curl. Both company would be able to save from sourcing together and will could share cost of R&D.

I think the current CEO, Xavier Simonet put it best « The combination of Kathmandu, Oboz and Rip Curl achieves diversification in product, channel, geography and seasonality, and creates a platform for the acceleration of our brands’ global expansion into new channels and markets, »

Kathmundu and Rip Curl had built brand recognition for dozens of years, and one of the best way to tell their story is via they own shops. Their are currently more than 530 branded stores (fully owned, licensed or joint venture). They also sell products to 7,500 wholesaler worldwide.

Their online sales are also on the rise, they know account for 13% of total sales.

... but cutting debts made it even stronger

I truly think that the Management of the company made a strong move by acquiring Rip Curl. But they have been even cleverer by raising 200M$ AUD in equity and by cutting dividends to save cash. The net debts has been cut in half (to 9M$ AUD).

If those moves are prejudicial a changer for shareholders in the short term, long term holders could only benefit from them. Trop vague

Management:

Xavier Simonet has been the CEO of Kathmundu Holdings for over 5 years. He should be leaving in 4 months to join the Australian Public Service.

But I am confident for the future:

• The company evolves in the clothing business. While it’s not an easy industry, it’s not Rocket Science either.
• Xavier Simonet currently owns 1 312 733 shares (worth 1,6M$ AUD). It will be strange for him to not do anything in his power to chose his successor.
• Kathmundu and Rip Curl have been around for dozens of years. A decline in customer loyalty shouldn’t happen overnight.

Directors in the company (including the CEO) own 2 366 966 shares or 0.3% of the company.

Charts:

As we can see, KMD isn’t back at pre-covid levels on the contrary of lots of stocks.

Financials:

Revenues are up 43% to 744M$AUD (Only 9 months of revenue from Rip Curl)

Profits are down 86% to 7,5 M$AUD

-> We should note that acquisitions expenses of 11,125 M$ AUD were made.

The operating margin are at a 8 year high of 21.1%.

Comparing Kathmundu Holdings to Accents Group is interesting. Accents Group is way bigger (market cap is 40% higher) but they basically have the same job of managing brands, both are listed on the ASX and both have strong sales in Australia and New-Zealand.

	COMPANY	KMD	AX1
1	P/B	1.19	3.12
2	P/S	0.8	1.6
3	P/E	22.52	18.21
4	Price Performance (1 YR)	-40%	33%

On two of the « value » metrics, Kathmundu Holding is the underdog.

Altought, it’s P/E is higher, we shouldn’t forget the once in a lifetime 11M$ AUD cost of acquiring Rip Curl.

Why I think that Kathmundu Holdings Limited share price is undervalued?

• Uncertainty due to departing CEO Xavier Simonet
• Uncertainty due to acquisitions (latest annual report only included 9 months of Rip Curl)
• Uncertainty due to the lack of dividends (dividend cut during Covid)

Future:

We can expect a 1 000 M$ AUD revenue company in a few years:

• Kathmundu brands may expand via the existing Rip Curl network
• In a post-Covid world, hiker and surfers will go back outside and will need gears

Kathmundu Limited is even stronger:

• Profit margin are at a 8 year high of 21%.
• Debt has been the lowest in 3 years
• Cost should be lowered in the future (more revenue = more buying power)

Given those elements, I won’t be surprised if the shares clim back to 2$AUD in less than a few years. (+60%)

Sources:

https://www.kathmanduholdings.com/wp-content/uploads/2020/10/KHL-Annual-Report-2020_online.pdf

https://www.kathmandu.co.nz/kathmandu-appoints-ceo-xavier-simonet

disallowed/business/companies/rip-curl-sold-to-kathmandu-in-350m-deal-20191001-p52wfg.html

https://www2.asx.com.au/markets/company/KMD