Ann: Half Year Accounts - Appendix 4D, page-7

@Alltypes, Thanks for putting up the charts. Appreciated.
They certainly tell a woeful tale!

Thanks also for your additional comments, to which I've taken the liberty of penning some of my own thoughts below.


"Sorry, I should have clarified my reference of expenses by defining them as a percentage to sales, ie the expenses continue to rise as a percent to sales (this would have been clearer if the graph was visible)"

Yes, that is precisely what happens to largely fixed cost businesses that experience cyclical Revenue decline. One would have to be naive to expect anything different.


"If as you suggest, that ‘Korvest is indeed a cyclical business’, then this becomes a vitally important measure, competent management would manage to the cycle to ensure ongoing profitability."

I'm not merely suggesting KOV is an inherently cyclical business, I'm shouting it from the rooftops.

With such deep cylicality being the nature of the beast, what would you do if you were managing such a cyclical business and the inevitable downturn struck? Sack a whole bunch of people, only to have to re-hire them when the cycle turned favourable again at some point? Or just sit tight in the knowledge that it is actually not in the long-term interests of the business and its owners, for the cost base to be aggressively flexed up or down, depending on prevailing business conditions?


"However, i do not subscribe to that theory, other than the obvious mining boom which was exceptional for a period in time, Korvest is underperforming the broader market."

Under-performing, in what sense? If you are talking about the financial performance of the business, then yes, it is indeed under-performing other companies. Under-performing very badly, at that. But again, anyone who expects anything different would be either deluded or uninformed.


The legacy of poor performance is largely attributed to the stream of incompetent management decisions, you only have to review the past actions and outcomes to validate this statement.
If you have followed my posts, you would know that I am making these comments based on an intimate understanding of the internal business as well as the external operating environment.
I know precisely what went into making those big EBIT numbers, and it is managed vastly differently today and therefore is unlikely to ever produce a moderately comparable result.

Yes, it is your direct reference-ability with the company that makes me interested in what you have to say.

But the charts you have put up is information that is all known to the market; in fact, the reason I have been buying KOV over the past 12 months was not despite those charts, but because of them, because it is that very dismal performance that has driven the market value of the business to under $25m, when it was once $75m.

Same business.
Just different points in the cycle.


Still, to help me avoid making investing mistakes, I like to listen to those who are cynical, like yourself, and who might see potential problems where my own confirmation biases limit me from doing.

Given the scope for any acquisition misadventures appears to be firmly off the cards, given the chastisement delivered to the board following the ill-conceived and top-of-the-cycle acquisitions of Titan and Power Step, the only ways I can see KOV's profitability recovering over the foreseeable future is:

1. if the natural demand cycle for KOV's products and services ceases to exist (i.e. demand remains depressed to perpetuity), or
2. if demand does indeed recover, that it somehow fails to translate into improved Revenues, Profits and Cash Flows for KOV.

So, from your inside knowledge of the business, do you think there is any reason that these two adverse outcomes will occur?


As I said before, and as your charts demonstrate with absolute clarity, as a business, KOV is no beautiful swan; it's a very ugly duckling.

But the investment thesis for the stock at this point in time is simple:

Things are very tough today.
Things will not be very tough forever.


Anyway, you seem committed to the cause, I wish you well!

Yes, I do have a degree of investing conviction, so am indeed committed (which is why I actively seek out contrary arguments).

But my conviction is based not on the business being something that it is not (I know what it is, and what it is not); my conviction is based on a sense of the under-valuation of the business in the context of historical precedent.