Ann: Chairman's Address to Shareholders, page-2

I feel that every time I say anything at all about KOV, I need to preface it with a cautionary disclaimer something along the lines of,

"This is not a very good quality business; it operates in an acutely cyclical industry that is both mature and competitive. It's basically a smokestack stock."

But generally, KOV is a company that is profitable across its business cycle; with profits ranging from not-very-much at the bottom of the cycle, to generating significant free cash flow at all other points in the cycle.   And shed loads of free cash flow (as much as $1.00/share) at the top of the cycle.

Having come off the commodity boom in spectacularly poor fashion (which included a denuded balance sheet as a result of having made a classic, top-of-the-cycle acquisition during the halcyon days), it has been a tough few years for the company.  Tough years compounded, in no small part by some half-baked management practices, it has to be said.

But today's AGM announcement is - to my way of thinking - a bit of a watershed in terms of emerging out of the cycle.

For starters, this is the first time that the company has articulated some sort accountability for the company's woes, implying that it rests with the recently-departed CEO.

And, after reporting accounting losses during the past 2 half-years, the company is now back in profit.

By half-years, KOV's cyclical EBITDA and NPAT trajectory looks as follows:

JH14: EBITDA = $6.0m /  NPAT = $$3.9m
DH14: $3.4m / $1.8m
JH15:  $2.7m / $1.3m
DH15:  $1.4m / $0.6m
JH16:  $2.6m / $1.3m
DH16: ($0.6m) / ($1.0m)  [Loss]
JH17:  $0.1m / ($0.5m)  [Loss]
DH17:  $1.6m / $0.6m  [based on today's AGM guidance]


With implied EBITDA for the current half at around $1.6m, I expect JH2018 will be a further $1.0m up on that, so JH2018 EBITDA = ~$2.5m, with an year-end exit run-rate of somewhere between $2.7m and $3.0m.   

So, even without any further cyclical uplift from there, that would imply FY2019 EBITDA of around $5.5m.

At the current EV of some $23m, that has the stock trading on an EV/EBITDA multiple of a little over 4.0x.


Like the disclaimer says, this business is no thing of beauty by any measure, but it does offer a low-cost option on playing the infrastructure cycle upswing  that is currently taking hold.