Kathmandu Holdings Limited

Company Overview:

Kathmandu Holdings Limited (NZX: KMD) is a specialist outdoor retailer. The Company is engaged in designing, marketing and retailing of clothing and equipment for travel and adventure. The Company's segments include New Zealand, Australia and the United Kingdom. It offers a range of apparels, including waterproof jackets, down jackets, thermals, fleece jackets, shirts and pants, merino apparel and thermals, and footwear and socks. It also offers equipment, including packs, bags, sleeping bags, tents, travel accessories and camping accessories.

Kathmandu Holdings Limited

KMD Details

Kathmandu Holdings Limited (NZX: KMD) is a marketer, designer, wholesaler, and retailer of footwear, clothing, and equipment for travel and adventure. The company operates in New Zealand, the United Kingdom, the United States of America, and Australia.

Looking at the past performance, KMD’s topline and bottomline for FY17-21 grew with a compounded annual growth rate (CAGR) of 19.98% and 13.52%, respectively. Its total revenue for FY21 stood at $922.8 million, as compared to $445.3 million in FY17. Its net income for FY21 stood at $63.1 million, as compared to $38.0 million in FY17.

Exhibit 1: Historical Financial Performance

Source: Analysis by Kalkine Group

Results Performance (FY21 ended 31 July 2021)

• The company’s sales for FY21 stood at $922.8 million, an increase of 15.1% on previous year. This included a full 12-month contribution from Rip Curl. Underlying EBITDA for the period stood at $113.3 million (excluding the impact of IFRS 16 and one-off abnormal costs), an increase of 35.9% on previous year. This was driven by strong sales performance and focused management of operating expenses.
• Underlying NPAT for the period stood at $66.3 million (excluding the impact of IFRS 16 and one-off abnormal costs), an increase of 110% on previous year. The Board of Directors declared final dividend of 3.0 cents per share (fully franked for Australian shareholders), taking the total FY21 dividend to 5.0 cents per share.

Exhibit 2: Financial Statistics

Source: Analysis by Kalkine Group

Key Ratios

The company’s gross margin, EBITDA margin and net margin for FY21 stood at 58.7%, 22.9% and 6.9%, better than the industry median of 24.5%, 10.8% and 5.7%, respectively, implying the company’s decent fundamentals. However, its ROE for FY21 stood at 7.9%, lower than the industry median of 21.1%.

Exhibit 3: Key Ratios

Source: Analysis by Kalkine Group

Top 10 Shareholders

The top 10 shareholders have been highlighted in the below charts, which together forms ~39.80% of the total shareholding. Yarra Funds Management Limited and Briscoe Group Limited are holding 8.36% and 6.77%, respectively.

Exhibit 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Recent Updates

• On 6 December 2021, the company completed a formal request for proposal process for external audit services. It has accepted the resignation of PwC and appointed KPMG as its external auditor for the financial year ending 31 July 2022.
• On 9 November 2021, the company provided update on Q1 earnings, wherein Same store sales (including online) for the 13 full weeks to 31 October 2021 were significantly impacted by Australasian COVID lockdowns. Pleasingly, online sales have grown strongly at +33.8%, with Rip Curl +11.2% and Kathmandu +58.4%.

Outlook:

Rip Curl and Kathmandu are well prepared for the key Black Friday and Christmas trading period, and inventory remains sufficient to meet expected demand. Due to the uncertain COVID trading environment, the Group will not provide forward guidance, however as markets reopen, trading is expected to improve with growth opportunity in the second half of FY22.

The Group is actively managing ongoing supply chain disruption globally, particularly impacting the timely flow of products into its North American markets. Oboz product deliveries will be impacted for Q2 as Vietnam footwear factories slowly ramp up production following COVID closures during Q1. Demand for Rip Curl wetsuits continues to exceed available supply. Freight, logistics and raw material costs remain elevated as the outlook for supply chain remains challenging. This will be managed where possible through pricing and raw material substitution.

Key Risks:

The company experienced store disruptions due to the COVID-19 associated travel restrictions and government authorised closures and shutdowns. In Q1, COVID-19 was a major disruption, with Australasian retail stores impacted by the lockdowns. Also, the supply chain disruption impacted the ability to fulfil the robust wholesale demand.

Valuation Methodology: EV to EBITDA Multiple Based Relative Valuation (illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

Despite the challenging trading conditions, the company has been focusing towards capitalizing on the growth opportunities. Notably, the company has been deploying towards the long-term expansion of the global house of outdoor brands.

The stock has been valued using EV/EBITDA multiple-based illustrative relative valuation and the target price so arrived reflects the potential rise of low double-digit (in % terms). A slight discount has been applied to EV/EBITDA Multiple (NTM) (Peer Average) considering the risks related to the COVID-19 pandemic as well as the associated lockdowns. However, the company has posted higher sales in FY 2021 on the YoY basis.

Considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of $1.47 per share, down by 2.65% on 20^th December 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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