Company Report
Last edited 2 years ago
PerformanceCommunity EngagementCommunity Endorsement
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#58
Performance (50m)
0.9% pa
Followed by
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Straws
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#Convert to the cult of Kelly
stale
Last edited 2 years ago

Like a few people here Kelly Partners is one that I have been interested in for a while but never took the plunge as it was expensive, I also thought it was just another roll up that would implode at some stage and I wasn't confident that Brett Kelly wasn't a con, claiming to be the next coming of Buffett. I am now pretty confident that none of those things are true. This is clearly a Brett Kelly story and hats off to him as he has delivered on what he said he would do. Definately worth watching the strawman interview and the 2022 AGM presentation.

I am coming around to his viewpoint that this isn't really a roll up as he is just aquiring little engines that he makes more efficient and then they keep pumping away semi-independently from the larger group. I am seeing how he structures the debt deals so while the gearing ratio is high (1.36x currently), each office pays it off over time, and in a lot of ways this is a really efficent use of debt - buying productive assets. I trust them to buy the right buisnesses and they seem to have a good filter on how they do this, so I think the risk of poor buying is low. Their ROE ranges between high 30's low 40's and ROIC ranges between 20-25%.

I really like the way they present their financials and plans, everything is very transparent. Management quality is high, they are claerly aligned with shareholders, they focus on EPS as a measure of success and don't issue shares during acquisitions or as performance bonus's. The crazyness of how much shareholders give away to poor management teams, with low performance hurdles is only highlighted when you start to examine the group outliers like KPG.

I think KPG is part of that small group of buisnesses that are worth a premium and I don't think a PE ratio of 30-35 is unjustified, if planning on holding for several years, given their execution to date and expansions plans. They did get up around 45 earlier this year, which I thought was a bit steep, but I do think if we come back in another 10 years they will have probably doubled all of their key metrics at least once and probably twice. They have talked about expanding into the US (california) which I thought was crazy when I first heard it, but if you look through how they plan to do this and why California then it is easy to see the attractiveness to their approach and why they should be successful or at worst not a catastrophic failuire..

I am expecting that they will achieve or come very close $80M revenue this year, which will be 1-2 years ahead of their existing 5 yr plan. This is based on $65M made last year and the full year contribution of last years acquisitions which will add another $7-10.5M, and they will get another $3.8M from the acquisitions made this year and I expect a few more will be made over the enxt 3-4 months. They have been growing organically at around 3-5% once they acquire the buisness. I am expecting a EPS of between 17-18c. They have a 2-3% dividend yield. Its not a bargain but I think it is fair valued at its current price and I can't really see this getting cheap unless there is a major problem inside the buisness, in which case we should get an early indication from the reported numbers. I see this as a relatively low risk way to play an uncertain 2023 and potential recession effects.

Brett Kelly's salary has been increased from $360K to $800K from this year, but given how integral he is to this buisness I think this is ok, given that he doesn't have any share performance bonuses.