Kitwave (LON:KITW): Quality Management And Growth Potential

28th Jun '23 by Roland Head

17 comments 2423 reads

Summary

Wholesaler Kitwave (LON:KITW) specialises in supplying frozen, chilled and ambient goods to convenience stores and foodservice businesses across the UK.

The group floated on the AIM market in 2021 and continues to be run by founder Paul Young. The shares score well for quality and momentum factors but remain reasonably priced, in my view. I think this business has considerable growth potential and recently added the shares to my SIF Folio.

Bull points:

Strong record of buy-and-build growth
High ROCE and good cash generation
Experienced owner-management
Reasonable valuation

Bear points:

Significant exposure to a few large customers
Exposed to macroeconomic headwinds in foodservice
Acquisitive model could go badly wrong

Profile

About the stock

Kitwave operates in the Consumer Defensives sector and is part of the Food & Drug Retailing industry group.

The group floated on the AIM market in 2021 and the stock has recently traded at 290p, giving a market cap of £202m. Liquidity is reasonable for a small cap, with a 73% free float and recent average volumes of c.300k shares per day – about £900k.

The StockRanks show high quality and momentum ratings, suggesting Kitwave could possibly fit the adventurous growth profile Megan discussed last week.

Kitwave shares have doubled since their IPO, but a forecast P/E of 11 and 3.8% dividend yield suggest to me that the business may still be reasonably valued.

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About the opportunity

Stockopedia’s algorithms currently view Kitwave as a Super Stock.

The business delivered organic revenue growth of more than 25% last year, together with improved profitability and strong cash generation.

Consensus forecasts suggest another strong performance during the year to 31 October 2023, with growth expected to flatten out during the following year.

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At some point, I expect growth to slow as the business reaches a more mature scale. But the markets in which Kitwave operate are relatively fragmented and it may be possible for the company to continue expanding for some time yet.

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Derbion

28th Jun '23

Another thoughtful and comprehensive article, Roland. I wish I was like that!

WarrantStar

Roland. Thank you for another good piece of work. I agree with your conclusions and am a holder.

geoffish62

Hi Roland : great to see another great, balanced article. Am always amazed how a company with a low operating margin can generate such good ROCE & ROE figures. For how long ? - well the timescales you mention are convincing. However, having survived a few years as a shareholder in Conviviality as you mentioned (walking away with a small profit), I am still very wary of companies with low operating margins. They can work though. ATB Geoff

Saxonboy57

Thanks Roland. A very well researched and interesting article

JohnDoe2378

Good coverage Roland, i hold am very optimistic this can do well over the long term.

gmtrader

Good write up Roland. Thanks for sharing. Kitwave (LON:KITW) is also one that cockney rebel owns and like. He also did a write up https://cockneyrebel.substack....

1MCF

Thank you Roland. I'm soon to select another 6 shares for my NAPS portfolio and I noticed Kitwave (LON:KITW) came out in the QM screen, so this article is very timely.

Robbie Burns

A couple of points which make me think the shares are pretty much fully valued for possibly some time:

I didn't see net debt mentioned (it could have been as I'm a speed reader and easily miss stuff so sorry if this was covered)

Net debt rose from £35m to £44m (21-22) and lease liabilities from £13m to £18m. (Total net debt then is about £62m).

This isn't THAT bad - but I think this is why the rating looks too low but if you consider the debt then maybe the rating is enough for now?

It took ages to find the debt - it was right at the bottom of a very long statement. But maybe it will be easy to pay down some of the debt?

My other worry: It's done well but forecast is for £23.9m pre tax then next year only a rise to £25.1m - this is quite pedestrian. I think it would need a "well ahead of expectations".

Finally, the chart shows any effort to get above 310p immediately meets with sellers.

Overall then, while this looks like a decent company all right, valuation wise, up with events?

What do others think of these points? An interesting debate!

Hello Robbie,

Always good to look at the bear points!

Growth looks pedestrian, I would be hoping for a "well ahead", like you say. Maybe the "slightly ahead" will turn in to that?!

So forecast profits of 25M against a market cap of 200M, still room for upside at less than ten times profits to market cap?

I hold.

Also, would you not exclude lease liabilities from the net debt figure?

Regards.

DanTE

4th Jul '23

Fair point by classical metrics this looks below value, but your point on the market ceiling of 310p makes sense. The debt situation if kept under check would provide an entry point once it's reduced. It ticks most of the check points of a well run company, but it's also prone to be forgotten if growth is lacking and doesn't manage to expand at the desired rate, then the only return one can hope is through divs.

Rusty2

The share price is already 327p, today, so does not make sense to me. Do the forecasts include the recent acquisition? Forecasts look very conservative to me. Increased debt has come from acquisitions which should add profits straight away.

From todays update: "KITW posts 23% increase in H1 revenues to 275 mln pounds ($349.22 mln)

** Says profit before tax rose 48% to 8.3 mln pounds in H1"

I have not studied it in detail yet.

Re debt, Paul Scott's comment today: "Gross bank debt is £37m, slightly offset with £3m of cash, so net borrowings of £34m. The £64m quoted in the commentary includes £30m of lease liabilities, which I ignore for the purposes of net bank debt."

Higher than I like but if profits keep growing then should not be an issue.

Megan Boxall

Strong interim results from Kitwave today (ahead of expectations). Revenues up 23% to £275m - powered partly by the acquisition of Westcountry Food Holdings in December 2022. Debt has risen by £20m in the period owing to the additional loan taken out to fund that acquisition and operating cash flows down on the first half of last year.
Still there is a lot to like in the numbers with profits up almost 50% and a strong outlook for further revenue-boosting acquisitions.

Roland Head

I think the net debt of c.£60m includes lease liabilities. Today's interims show net bank debt of £34m plus leases.

I wouldn't want this to go too much higher, but I'm comfortable with it as things stand, given the history of decent cash generation.

(I hold)

Some large director sales, seems to have knocked the price down.

Edward Croft

Cashing in post IPO perhaps.

The signal on director sales is less clear than open market buys. I don't believe it's a strong indicator for a number of reasons, as people often have life reasons to sell.

What do you make of the large director sales Roland? Find it a bit off putting...

Kitwave (LON:KITW): quality management and growth potential

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Roland Head

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