Kitwave Group – on less than a 10pe this group is well below value

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Kitwave Group – on less than a 10pe this group is well below value

The announcement last Friday morning of the £24.5m acquisition of a foodservice supplier by this recently floated wholesale group spiked my interest.

The North Shields-based Kitwave Group (LON:KITW) looks to me to be quite an expansive group, whose investment merits may well have not yet become apparent to the majority of ‘small-cap’ investors, let alone the rest of the market.

I know that we have not done well with the McColls Retail Group, which was a Profile selection in late April last year. It has been bitterly disappointing to date. Its shares did at least rise 23.5% and almost hit my price objective before falling back due to major Covid-19 hassles. But I maintain hope of its resurrection in share price terms.

But Kitwave Group does not seem to be a parallel operation to MCLS. It is not a retailer but is, importantly, a wholesale supplier.

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 26 depots across the country.

Along the way it has made ten acquisitions of other wholesale distributors, before last Friday’s purchase of MJ Baker Foodservice.

Its customers

Supplying some 38,000 customers Kitwave specialises in selling 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.

It has 1,070 employees, operates over 370 delivery vehicles, as well as a scalable IT platform.

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.

The Acquisition

Paying £24.5m cash, from its banking facilities, Kitwave has purchased the Newton Abbott located MJ Baker.

Carrying 3,500 products in various ambient, chilled and frozen foods Baker is the West Country’s leading independent foodservice supplier and it must make a wonderful fit into the Kitwave portfolio.

On £16.9m of sales in 2020 it made pre-tax profits of £1.5m. The company has £7.9m of net assets, including £6m of cash and freehold property of around £1m in value.

This immediately earnings enhancing deal is based on about six times EBITDA.

Paul Young, the Kitwave CEO stated that it was an excellent addition to the group, which helps to build its nationwide foodservice offering as part of the group’s growth strategy.

The Equity

The group only went public in May last year, when it did a Placing of shares @ 150p each on behalf of vending shareholders and the company itself.

There are currently 70m shares in issue.

The larger holders include Paul Young, CEO (15.7%), Liontrust Investment Partners (14.2%), Premier Miton Group (10.7%), Canaccord Genuity Wealth (6.82%), Harwood Capital Management (6.10%), Ninety One UK (5.33%), Northern Trust and Jarvis Investment Management (5.01%), BlackRock Investment Management UK (5.00%), Columbia Threadneedle Investments (3.86%) and BMO Global Asset Management (3.09%).

The Directors, including Paul Young, hold about 18% of the group’s equity.

Brokers View

Subsequent to last Friday’s Baker deal analyst Mark Photiades, an analyst at the company’s brokers Canaccord Genuity Capital Markets, upped his estimates for the current year and next.

The year to end October 2022 is expected to see sales of £451.5m, an adjusted pre-tax profit of £12.7m, earnings of 14.7p and a 7.4p dividend per share.

For 2023 he goes for £475.2m of sales, £14.7m of profits, 16.4p earnings and a dividend of 8.2p per share.

His price objective is 240p.

My View

The group will announce its results for the 12 months ended 31 October 2021 on Monday, 28 February. At that time I would expect to see a bullish current year statement.

The shares touched 179.75p early last July before drifting back to 130p just before the Baker acquisition was announced.

On Friday night they closed at 145.5p, after peaking that day at 149.69p.

At that closing price I rate the shares of Kitwave Group as an excellent addition for any capital growth portfolio, whether short or long-term.

My Target Price is 180p.

Comments (1)

  • Surinder DB says:

    Hi Mark,

    I think McColls woes, as reflected in the SP chart from 2017 onwards, suggests management was already struggling to keep the ship afloat. The storm caused by shifts in the convenience store sector was all too much for them, this was long before Covid-19 appeared on the scene.

    Poor form to see management helping themselves to free company shares whilst the share price continued to fall into the abyss. Yes, we all understood that the share award schemes were neatly gift wrapped with pretty little “legal bows”.
    However, it’s easy to imagine what Warren Buffet would say on the ethics of such corporate shenanigans.

    With new disruptive forces such as Amazon Fresh etc..the business model for McColls may be nearing it’s “best by date”.

    Growing inflationary pressures suggest higher interest rates down the line, at least for the medium term, and I hope that McColls can do enough to keep the banks’ onboard.

    Face lifts are OK (rebranding to Morrison’s) but what really matters is metabolic health for whole body functionality. It is vital that profitability is achieved by a major reduction of the overhead fat stores.

    Yes, like you very bitterly disappointed in MCLS.

    Kind regards,

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