Well, looks like the wait is going to be a few months longer. In...

Well, looks like the wait is going to be a few months longer.

In the meantime, I hope that yesterday's announcement means that I will be able to add to my holdings at meaningfully lower prices.  Although I somehow doubt it.

On point on the subject of dividends (which, at the current rate of 20c pa imply fully franked yield in excess of 8%), the announcement refers to "sufficient profit reserves" to pay a final franked dividend.

That is a bit of a bizarre statement because, under changes to the Corporations Law made in 2012, companies no longer needed to have a positive retained earnings balance in order to declare a dividend.

All they need to do is pass the solvency test, to wit:

The new section 254T of the Corporations Law allows companies to pay dividends if certain solvency criteria are met. It provides that a company must not pay a dividend unless:

-  the company's assets exceed its liabilities immediately before the dividend declaration and the excess is sufficient for the dividend payment;
- the dividend is fair and reasonable to members as a whole; and
- creditors are not materially prejudiced.

As case in point, KOV's Retained Earnings balance @ 30 December 2016 was negative $1.033m, an yet the company still declared a $1.1m dividend after the balance date.

In terms of its solvency per the above criteria for purposes of declaring a dividend at the full-year mark, KOV's Current Assets are $22.9m, compared to Current Liabilities of $5.6m, and Total Liabilities of $5.6m, so with a Current Ratio of 4.1x And Current Assets to Total Liabilities of 3.6x), it is eminently solvent.

The one area where the board might trip itself up in terms of declaring a final dividend is in terms of the cash flows that are currently being generated. While KOV is probably EBITDA break-even for the current half and is sure to be generating positive EBITDA in DH2017, there will need to an investment in working capital for the company to supply the projects that have commenced recently, and others that the company expects to be awarded in FY2018.

So, I expect the company will have recorded negative operating cash flow for the current half, of a similar order of magnitude as DH2016, namely around $200k to $300k.  
Capex for the half-year will be around $500k, and the 10c interim dividend will consume a further  $1.1m.

This means that KOV will have incurred a near $1.9m capital deficit for the half.

Net cash balance @ 30 December 2016 was $3.2m, so Net Cash @ 31 June 2017 will be around $1.3m.

That is sufficient to fund a final dividend of a further 10cps (equivalent $1.1m), before any free cash flows are generated in DH2017, and I think a modest $300k or $400k would come in the door over the next 6 months.

Which would leave the company with around $0.5m in the bank @ 30 December 2017 at a time when, presumably, the cash flows from the work currently being awarded, will be back at levels in the millions of dollar per year.

So, the business is able to wear a 10cps final dividend without needing to go into temporary overdraft to fund it.


After all, while this company has always run with a healthy cash balance (it averaged around $4.5m in the years up to the peak of the commodity boom, reaching $6.3m in DH2012, at the high point in the cycle), there have been short periods during which the board has been happy to take on a very modest amount of temporary debt to protect the dividend (in 2010 and 2015).

KOV's Net Cash (Debt) ($m)
JH2004:   7.9
DH2004:  7.7
JH2005:   8.3
DH2005:  6.5
JH2006:   4.6
DH2006:  3.2
JH2007:   4.5
DH2007:  4.2
JH2008:  2.0
DH2008: 2.2
JH2009:  4.0
DH2009: 4.9
JH2010:  2.6
DH2010: (0.4)
JH2011:   1.6
DH2011: 3.3
JH2012: 5.2
DH2012: 6.3
JH2013:  2.3
DH2013: 3.7
JH2014: 0.5
DH2014: 2.5
JH2015: (0.5)
DH2015: (0.2)
JH2016:   5.1
DH2016: 3.2
JH2017: 1.3  (Adam's Forecast... for what it's worth)
DH2017: 0.6  (assuming 10cps final dividend for FY2017).

(It warrants mentioning, I think, that the company has maintained that healthy balance sheet despite having paid out in excess of $35m in ordinary dividends over that period, without any recourse whatsoever to its shareholders.)

Oh, and the company has more than $8.0m ($70c per share) in franking credits, so that should not be any