BUY: Kitwave (KITW)
Acquisitions and organic growth were behind the robust performance, writes Christopher Akers.
It’s an end of an era for Aim-listed food and drink wholesaler Kitwave, as chief executive and co-founder Paul Young is set to retire next month, to be replaced by current chief operating officer Ben Maxted. Young’s final results at the helm have demonstrated further progress for the business, with a combination of its buy-and-build acquisition strategy and organic growth delivering a surge in annual revenue and profits as well as a chunky increase in the dividend.
The £28mn WestCountry purchase (which completed in December 2022) has been successfully integrated, and this drove the 44 per cent rise in foodservice revenue. This enlarged high-margin division was a key factor behind the 150-basis point increase in overall gross margin to 21.9 per cent.
A bigger footprint in south-west England will be supported by the construction of a new 80,000 square foot distribution centre, which is set to complete this autumn.
Meanwhile, after the year-end, Kitwave completed the small bolt-on purchase of composite drinks wholesaler Wilds of Oldham which will bring in around £10m of annual revenue. Thirteen businesses have been acquired and integrated since 2011, and the company clearly isn’t resting on its laurels.
Organic growth was also healthy, with overall like-for-like sales up 13 per cent as Kitwave benefited from an increase in case volumes as well as higher prices. Combined revenue at the ambient and frozen and chilled divisions rose 12 per cent.
Leverage sat at 1.4 times at the year end, a manageable position and well under the company’s 2.5 times limit. Cash generation was up 14 per cent to over £30mn in the year, while the company has around £40mn of headroom on its banking facilities which limits any balance sheet concerns.
The shares trade at 10 times forward earnings, an undemanding rating given the performance and outlook. We remain bullish.
SELL: Aston Martin Lagonda (AML)
The luxury carmaker is spending cash faster than it has raised investment, writes Michael Fahy.
It would be churlish not to acknowledge that some progress has been made at Aston Martin Lagonda. A 6 per cent increase in average selling prices was conducive both to its top line and its gross margin, which the company said hit a “record” level of 45.2 per cent in the fourth quarter. Yet this merely elevated the company’s full-year results to bad rather than awful, with its pre-tax loss halving to £240mn.
More important to a company carrying as much debt as Aston Martin is its cash position. Higher interest and working capital payments as well as a £100mn increase in capex as it developed new models meant its free cash outflow increased by around £60mn to £360mn. The luxury carmaker now expects to launch its first battery electric vehicle in 2026, delaying its previous target by a year.
So even after tapping investors for £310mn of fresh funding through share sales last year and benefiting from a £61mn tailwind as the pound strengthened against its largely US dollar-denominated debt, the company finished the year in a bigger hole than it started — net debt increased by almost £50mn to £814mn.
What’s more, it appears to be going through chief executives very quickly, with Bloomberg recently reporting that executive chairman Lawrence Stroll has begun the search for what would be his fourth chief executive in four years.
Aston Martin’s shares more than doubled in price in the first eight months of last year, as the Formula One team it sponsors performed well. But it has drifted back down since, with fundraisings increasing its share count. As we’ve said before, until it can start generating enough cash to make meaningful inroads into its debt, we don’t see any value in its shares.
HOLD: Taylor Wimpey (TW.)
There are hopeful industry signs in the early part of 2024, a Competition and Markets Authority probe notwithstanding, writes Mark Robinson.
A dispassionate assessment of Taylor Wimpey’s full-year figures would probably point to some early signs of improvement in the UK housing market set against a still challenging macroeconomic backdrop. Unfortunately, the statutory release came just days after the CMA said it has launched a probe into the UK housebuilding sector after a year-long investigation.
The probe will centre on possible price collusion, specifically whether the main players in the UK market have been engaged in “information sharing”, in a bid to influence “the build-out of sites and the prices of new homes”. Admittedly, the CMA investigation primarily laid the blame for the UK’s chronic shortfall in new housing on the current planning system. But for now, Taylor Wimpey is one of several housebuilders under the microscope, so any operational progress it makes in the near term will be set against the pall hanging over the industry.
Housebuilders saw market conditions improve through the early part of the year as lenders reduced mortgage rates thereby aiding affordability. Unfortunately, surging private sector wage growth is forcing a rethink on that front for lenders. Expectations of a cut in the UK base rate have also moved further into the distance.
Nonetheless, the outlook has certainly become more positive and demand indicators point to a nascent recovery. Taylor Wimpey’s trading in the early part of 2024 supports this notion, although its reported figures show that it has been moving through a trough in the market.
The group’s operating profit, at £470mn, was at the upper end of guidance, but it still represents a 49 per cent fall from the prior year, as the underlying margin contracted by 7.5 percentage points. The fall-away in profitability is perhaps even more disconcerting given that first-half margins are likely to be held in check by lower pricing in the order book and persistent build cost inflation.
Improved prospects are reflected in a net private sales rate of 0.67 per outlet in the early part of the year, against 0.62 over the equivalent period in 2023, while the cancellation rate has dropped 5 percentage points to 12 per cent.
Despite these hopeful portents, the group indicated that it would build fewer homes this year, indicating lingering market uncertainty. Access to a sizeable land bank, some 80,000 plots, provides optionality in its determination to pursue “opportunities that balance risk, reward and returns to create shareholder value” – government diktat will have to take a back seat. A forward rating of 13 times consensus earnings (ex-cash) appears compelling given an implied dividend yield of 6.8 per cent, but it would be unwise to second-guess the outcome of the CMA probe.
