Earlier last week the North Shields-based Kitwave Group (LON:KITW) announced its interim results for the six months to end May this year.
They showed a real recovery bounce in its business, returning to its pre-pandemic levels, with particularly strong demand in the latter part of the first half.
They also brought about significant broker upgrades in profit expectations.
The business
Established way back in 1987, this group subsequently expanded from the acquisition of a single-site confectionery wholesale business, into what is today a totally independent wholesale company carrying over 34,000 different lines, from its 27 depots across the country.
The company, which floated on AIM in May last year, has the following operating segments:
Ambient (which last year made up 42.7% of the group’s sales): providing delivered wholesale of ambient food, drink and tobacco products;
Frozen & Chilled (41.7%): delivering wholesale of frozen and chilled food products; and
Foodservice (15.6%): providing delivered wholesale of alcohol, frozen and chilled food to trade customers.
Its customers
Supplying some 39,000 customers, Kitwave specialises in selling and delivering impulse products like snacks, soft drinks and confectionery. It also handles frozen and chilled foods such as ice cream, groceries as well as alcohol.
The group’s customers take in convenience stores, the on-trade like bars restaurants and pubs, vending machine companies, large retail and discount chains, re-wholesalers and companies in the foodservice sector like takeaways, schools, leisure centres etc.
What makes Kitwave different from other such operators is that it caters for customers that are considered too small for the bigger brethren. Reliably it offers high service levels and profitably too, despite its average order size being around £400.
Its suppliers
Kitwave has longstanding relationships with over 300 different suppliers, including major brand names.
For instance, Unilever provides about 8% of the group’s turnover, while Walkers Snack Foods and Molson Coors make up the top three suppliers accounting for a total of 16% of its sales.
Acquisition Strategy
Apart from looking to drive its organic growth, the group’s highly successful strategy is still focused upon the acquisition of smaller regional players across the fragmented UK grocery and foodservice wholesale market.
Since 2011 the group has acquired and integrated 11 wholesale distributor businesses.
The Equity
There are currently 70m shares in issue.
The larger holders include Paul Young, CEO (15.7%), Liontrust Investment Partners (16.6%), Premier Fund Managers (9.00%), Harwood Capital (5.98%), Canaccord Genuity Wealth (5.06%), Chelverton Asset Management (5.01%), BlackRock Investment Management UK (5.00%), Ninety One UK (5.00%), Threadneedle Asset Management (3.86%) and BMO Asset Managers (3.09%).
The Directors and associates, including Paul Young, hold about 19.7% of the group’s equity.
The Latest Results
The first six months saw revenue up 51.8% to £223.3m (£147.1m), with the group’s adjusted pre-tax profits up to £6.2m (loss £1.6m).
It showed strong cash generation in the opening period, some £17.1m (£9.8m).
The group’s CEO Paul Young stated that
"The outlook for the UK economy is dominated by cost-of-living issues which provide an element of uncertainty in relation to end consumer demand for the group's products.
While the Board is cognisant that these issues could impact trading in future periods, given the better-than-expected performance in H1 and the strong start to H2, we expect to be significantly ahead of expectations for the current year."
Brokers View
Analyst Mark Photiades, at the group’s NOMAD and broker Canaccord Genuity, upgraded his price objective and his profit estimates on the back of this week’s figures.
For the current year to end October he forecasts sales rising from £380.7m to £489.8m, upon which he sees the group more than quadrupling the adjusted pre-tax profits to £18.7m (£4.5m), with earnings of 21.6p (8.2p) and a dividend of 9.2p (6.8p) per share.
Without the benefit of any further acquisitions, he goes for the coming year to record £515.8m sales, £20.6m profits. 22.9p earnings and a 9.8p per share dividend.
The broker states that it sees scope for the group’s shares to re-rate further following the positive Update news.
Its price objective has been raised from 255p to a very healthy 345p a share.
My View
This really stands out as an excellent purchase at the current 164p, at which level the shares trade on a current year price-to-earnings ratio of 7.6 times, yielding a useful 5.6%.
That valuation is far too low in my opinion.
This time last year the shares were trading at 177p and have since then been down to 129p.
Now with last week’s positive Interim results, I see them rising well above my Target Price of 180p that was set on Valentine’s Day earlier this year.
(Profile 14.02.22 @ 145.5p set a Target Price of 180p)