DES Contracts and FY19 Outlook

A few issues that must be raised:

The DES contracts are worth ~$500-600k per contract. This is a relatively conservative figure. The Taylor Collison broker report's assumptions are incorrect in their assumption of average DES contract value. Apart from anything else, the economics of $150k per contract (best case scenario in the TC report) aren't enough to warrant setting up a new site, as the revenue will quickly be eaten up by employment expenses and property costs.

If the math is completed conservatively, and the rest of the KKT business held constant, this implies at least a ~15% increase in revenue. Given the fact that KKT already has a large footprint in NSW, a majority of the sites that will generate the DES contract revenue already exist, the extra costs of generating the revenue will be a lot less and growth capital expenditure will be minimal.

If this is combined with the ~$2.5-3m property cost cuts due to footprint integration as mentioned by management (an assumption which I back the credibility of) this actually generates underlying EBITDA margins of 13%+ which is higher than the business has ever had before.

Another key point worth mentioning is that KKT's key competitors are all owned by private equity and the strategy which these businesses adopted was also to take an injury management business and combine it with an employment/disability services business. This is largely due to the working capital benefits to the employment business provided by the injury management business. Another key benefit is that KKT, who currently provide injury management services for large low-skill employment companies like Coles/Woolworths, will now be able to take direct appropriate job-seekers from Mission Providence into vacancies at these businesses. Australia-wide, these supermarkets have thousands of vacancies on a weekly basis. This is a great low-cost way to improve conversion in the MP business through the injury management business.

The strategy KKT is going through currently has been done before and has been successful. These businesses typically have been purchased on significantly higher revenue multiples than KKT is on currently. APM was purchased on a revenue multiple of ~3x. KKT is a lower quality business, with less exposure to disability services, however a revenue multiple or 0.5x isn't realistic in my opinion.

Another note for future growth is an enormous opportunity to pursue service contracts for the NDIS. KKT will be well placed, having fully completed the MP acquisition, to take advantage of this. This is at least a year or two away though, but provides a significant growth opportunity under a scheme with enormous funding.



I have completed significant research into this including reaching out to people in the industry to seek information. Please feel free to conduct your own research and build your own hopefully accurate opinion.