Among the London stock market’s successful small cap IPO’s (initial public offering) of recent years, Kitwave’s (KITW:AIM) stock has more than doubled since Shares highlighted the independent wholesaler’s attractions in October 2021, but the company has the capacity to deliver plenty of growth and income for investors in the years ahead.
We believe the £233.5 million cap can sustain its positive trading momentum and serve up further earnings upgrades given its competitive advantages, and a robust pipeline of acquisitions, in what remains a highly fragmented UK grocery and foodservice wholesale market. Cash generative and robust of balance sheet, Kitwave speaks for just 5% of an addressable market worth £11 billion, so an exciting market consolidation opportunity lies ahead.
DRIVING GROWTH
Kitwave is an independent UK wholesale business selling everything from confectionery, soft drinks and snacks to beers, wines, groceries, frozen and chilled food and tobacco. It distributes products to reassuringly diversified base of around 42,000 customers including convenience stores, pubs, vending machine operators and foodservice providers.
Floated on AIM at 150p in May 2021, Kitwave is growing organically whilst executing on its successful buy-and-build strategy, having integrated two earnings enhancing acquisitions and a small bolt-on deal since IPO.
The North Shields-based outfit’s competitive advantages include long-standing supplier and customer relationships, its exceptionally high service standards and a 30-strong depot network giving the company nationwide coverage. In addition Kitwave has the firepower for further acquisitions.
The company is also well placed to drive lower risk organic growth over the short-to-medium term by gaining new customers, expanding its product range and capturing a greater share of customers’ wallets. Continued progress is being made to increase online ordering, which is boosting average order values and the company has opportunities to expand its geographic footprint to under-penetrated areas whilst lifting brand awareness.
Results (27 February) for the year to October 2023 met the market’s significantly upgraded expectations, showing a 20% surge in revenues to £602.2 million including organic growth of 13% and a 45% rise in adjusted pre-tax profits to £27.5 million. Shareholders were treated to a 20%-plus hike in the total dividend to 11.2p and while year-end net bank debt was £25.7 million, up from £14.8 million in October 2022, this mainly reflected the late 2022 acquisition of WestCountry, a successful deal which expanded Kitwave’s offering into fresh produce throughout the South West of England and complements the acquisition of M.J. Baker in the region.
Kitwave also delivered a 97-basis point increase in adjusted EBITDA margin to 6.8%, demonstrating its ability to manage wage and distribution cost inflation. Encouragingly, the construction of a new South West distribution centre, which will fully integrate the company’s operations in the region and drive margin benefits, is progressing to plan and budget.
CRACKING VALUE
Bear points to consider include Kitwave’s single-digit operating margins, a significant second half weighting to profits and the presence of some meaty competitors in the marketplace. The presence of institutions like Liontrust, BlackRock and Harwood Capital on the shareholder register provides some reassurance.
For the year to October 2024, Canaccord Genuity forecasts pre-tax profits of £28.5 million rising to £29.8 million and £30.5 million in the 2025 and 2026 financial years respectively. Based on current year earnings per share and dividend per share estimates of 29.3p and 12.7p respectively, Kitwave trades on an undemanding prospective PE (price to earnings ratio) of 11.2 and investors are being paid an attractive 3.9% dividend yield while they wait for a re-rating.
The broker sees net debt reducing from £25.7 million to £17.7 million this year as copious cash generation continues, although that estimate is before any further acquisitions.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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