Pinned straw:
Looking back at my older KME straws, I can't help but feel like Maxwell Smart:
I won't re-litigate the issues the business has faced over the past couple of years, only to say I've maintained the belief the whole time that the issues were largely self-inflicted. The underlying business has weathered the impacts of the Covid storm and seemed to have emerged stronger on the other side.
If KME's issues were self inflicted, it appears that the 1H24 result may have been the "come to Jesus" moment for Storm and co. (Though the cynic will question whether that moment would have been realised without the "help" of some key shareholders to restructure the board to provide more shareholder oversight? Anyway let's move on.)
Certainly the commentary in the FY24 report and the increased disclosure is a welcome sight. The words "return on capital" and "delivering shareholder value" don't appear to be placeholders, with a business restructure saving $1m p.a. and an on-going focus on costs as incremental dollars are spent.
I'll sit down and better try to model and forecast what I think FY25 may look like, but it looks like 2H24 is a big step in the right direction (though with admittedly many more steps left!).
Look forward to reading your next update @Wini
I was a bit surprised at the market response after the result announcement. Not so much because I think KME has overshot fair value, more so that it didn't really respond to the announcement of a ~1.2NPAT forecast a couple of months ago, but a $1.3 NPAT announced this week saw it about 30% higher than where it was after issuing the guidance.
So assuming its not just the extra $100k profit that's got people inspired, I've been trying to figure out what, if anything, was surprising in the result. Of course we've still seen only a little over $100k worth of shares change hands the last few days, so happy to also put it down to low liquidity and a couple of more patient buyers just waiting for the results before committing.
In terms of the positives, I was pleased to see investment spend was down on the half and also, like you say Wini, the written rhetoric felt disciplined and encouraging, so perhaps the jawbone has been enough to convince a few buyers.
But on the downside, the cashflow was weak and their payments to employees and suppliers were substantially higher than they've ever been before, certainly more than I'd estimated. I'm hoping that there's a big unwinding in 'funds held on behalf of franchisees" - A$2.75m (note 13) included in there that will be close to the end of this unwinding - but I haven't been able to find any detail around this. If this is the case, then there's a nice coiled spring for improved cashflows there. If this isn't the case and the operating costs are genuinely up, or they're expensing some more product development etc, then its more of the same in terms of low quality, low margin growth. I'd love to hear some thoughts on this if anyone has done the forensics.
I was also a bit worried about the security of the UK profits, with government support for tutoring winding down, although they expressed confidence schools are picking it up. I also thought that no dividend might have hurt the share price, but it seems like those sniffing around KME now are happy to wait patiently for the dividends to flow again.
It still feels cheap on balance to me. Worth remembering back in 2019 before this company embarked on growth (maybe the buy-back of corp centres was forced growth and a reckoning for creaming too much from franchisees?) it paid $2.5m out in dividends. At today's price of 41c for a ~21m market cap that's potentially an 11.6% dividend could they just get back to where they were!