KPG: Buffett on the Brain

Occasionally when looking through the wide selection of socks available onthe market you come across one that looks and feels different than the rest. With this backdrop, I am covering Kelly Partners group (ASX:KPG) today.

KPG is a listed accounting firm with 35 offices in 28 locations all around Australia.

There were a few distinct features that piqued my interest.

First, since 2019, the company has been very open and transparent about its 5 year vision of doubling revenue and NPATA. It has openly communicated its progress toward achieving that goal to investors. In fact in the most recent business update the company is well on track to achieve that goal.

The other thing that interested me is that this stock pays a monthly dividend which it proudly says it has done since 2021. The company aims to maintain a through-the-cycle payout ratio of 50% - 70% of underlying NPATA whilst also growing dividend at greater than 10% per annum! A lofty goal indeed. Though I note, with interes,t that the company has said over the next 6-12 months it will review its policy as it may move to a "no dividend policy" if it feels that the optimal capital allocation is to keep those profits in house and keep reinvesting into the business. Something it should consider given the +40% return on invested capital the company says it is achieving. Also given the yield has fallen so much on account or the price rise no one will notice anyway.

Finally their level of transparency is commendable and it is not uncommon for quotes from famous investors to be intermingled with business goals and objectives. In fact reading the company profit results are both a fiscal insight and investor education bundled into one. On the surface they have a strong investor focus and readers may wish to gain a sense of that by reading the “Owners Manual” for the company which they make public on their website and you can read it here. This is a MUST read!!!!

This is a company who on the surface and on past behaviour has the investor front of mind. (Even their newsletter is named “Quality Shareholder”. They also champion the inclusion of well versed academics and students of investing including Lawrence Cunningham (author of 'The Essays of Warren Buffett: Lessons for Corporate America') who is now a Non-Executive Independent Director of the Company from 1 July 2022.

Further, they proudly display the following graph of almost all presentations showing that the amount of shares since IPO have not changed.

The company has no hidden executive options as it looks to make cash based performance payments only. Like I said, this is not your usual ASX listed business, and I encourage investors (and many leaders of our other listed entities) to do some thorough research into the business.

StockRank

The company historically has maintained a strong track record of an overall StockRank above 80 and during the time the price experienced extraordinary growth, however that has dipped a little following the release of the companies 2022 annual result and coincidently the price has remained flat since.

At the time this was likely two main contributing reasons. The first was Bankruptcy score and Health Trend moving unfavourably. This actually continued into the first half of 2023. The company as you would expect has tackled this issue head on saying, “Net debt / Underlying EBITDA of 1.93x (FY22 1.36x) as a result of increased term debt taken out to fund acquisitions. Net Debt / Underlying EBITDA of operating business (ie excluding parent additional investment) was 1,61x. Debt is repaid from profits generated in acquired businesses over 4-5 years” It then goes to say that ROE for the group is 43.4% suggesting plenty headroom along with cash flow that continues to grow.

The second reason we have seen the StockRank score moderate is on account of the stellar run the company has had since IPO which has seen its Value metrics erode. Investors for now are sticking around as the company prepares to expand globally and at the same time has ambitions of becoming a top 10 accounting firm in Australia (which it will do if it doubles its business from here).

Unsurprising to see Quality and Momentum rate quite highly for the business given the high ROE, Operating Margin and strong price performance.

This stock interests me as it is not well covered (one covering analyst), produces excellent financials and has a clearly defined runway for growth. Much of the traits of this business fall under the Compounding Quality style business model discussed by Megan in one of her contributions to the Strategy Map that you can read here.

For those more focused on price moves, should the price stay above $3.49 it will be fine, though those who want to see it break out of its range will likely wait for a breach of $5.35 which will see it achieve a new all time high. This sideways move has gone for two years now and it would appear a case of the price waiting fir the fundamentals which the company continues to deliver.

ASX:KPG Daily chart 2 years

It is also important to stress here that notwithstanding the dividend being paid monthly, it is still only a low yield, forecast to be 1.9% next full year. However I point to the previous statement from the company above therefore investors will be hoping it grows “into” a higher dividend. However with such consistency in ROE, investors would also be happy if the company chose to re-invest funds.

Partner-Owner-Driver model

I know many may commence their investigation of KPG and immediately dismiss them as a roll-up vehicle, though that would be a little unfair. Yes, the company is aggressively seeking to acquire businesses, however they do so through their proprietary. Without going into too much detail, they prefer their acquisition to maintain significant stakes in the businesses being acquired (some 49%) of the company.

Unlike tradition roll up, the business is wrapped in the PFG network. Though a new KPG is established to own the 51% containing any risk to just the single entity. The 49% original owners maintain operational control, improved business margins , network support and a clearly defined exit for the original owner at the appropriate time based on the value of the business to the broader group.

While no guarantee, the rigour placed on the strategy and their almost formulaic approach provides confidence, provided they stick to script of course.

Ownership

Another key part of this story is Brett Kelly, Founder and self confessed larger-than-life Buffett tragic and self made accounting poster boy. He maintains a 50.6% interest in the business he founded in 2006 and has a very strong hand in running this company as one may think Buffett would. He also frequently says he sees no need to issue shares to dilute interests and he is constantly aware of the power of margin expansion.

He has big targets for the company and often says his BHAG ( Big Hairy Audacious Goal - a term borrowed from corporate academic Jim Collins) is to over the next 25 years, become the first choice accountant for private businesses globally. Given they are starting in 20's hear in Australia, that is some growth ahead of it.

A goal like this could only be achieved with laser like vision and passion driven only by a founder. While there is a lot of water to pass under the bridge, you can't help but feel that you are part of something bigger than just being a regular stock holder. He has an outward personality, is always keen to tell his story, and is his firm's biggest fan.

That said, as a result of the tight holding, the stock does not trade all that much so investors need to appreciate possible risks associated with that. However with the founder and CEO strongly aligned to the interests of investors investors may be willing to concede on this.

Outlook

At the time of its half year report the company sounded supremely confident of meeting its five year objective. Further it is very excited by the potential of the global opportunity- sighting the UK and US as having large ex-pat communities which they believe will work in their favour.

Since the half year result the stock has been admitted to the All Ords index and has made more acquisitions under the partner-owner-driver model, including its first Californian office.

Suffice to say the outlook looks good and the runway for continued growth looks strong if they are able to execute their strategy.

Conclusion

This stock was first brought to my attention by a past client and reminds me of the power of community when it comes to investing.

It is unusual to hear a company talk the way an investor thinks which is what made KPG standout to me initially.

Founder driven, big goals and open transparency are attributes to be admired. While not the most 'exciting business', when you combine its traits with performance, you see the results the company has achieved over the last 5 years. Hopefully egos take a second place to the business objectives.

A big challenge for investors is not to fall in love with the stock, its ambitions or PR. We need to assess it on its merits. And to date, even Mr Buffett would be impressed… if not flattered.

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The authors hold interests in the following stocks mentioned in this article: KPG. This position can and will change at any time without notice.