Accounting roll-up Kelly Partners Group (ASX:KPG) provided a disappointing trading update today, lowering its full year revenue guidance by approximately 1.6%. That’s not a huge drop, but for a service business with relatively fixed staff costs, and the integration costs associated with previous acquisitions, that’s expected to translate into a ~24% decline in group operating profit.
However, at the time of writing, shares have held firm. So what’s going on?
A tale of two halves
Shares in Kelly Partners were already quite weak following a disappointing first half. For the six months through to 31 December 2018, operating group profit fell 2.1% due to the under-performance of its Sydney CBD office. Granted, that’s not a big decline, but it marked a significant drop from the 17% growth achieved in the prior full year. As a result, shares that were previously priced for growth dropped a whopping 25% at the time, and have languished at all time lows ever since.
After the results, management had guided for a solid recovery in the second half, calling for Net Profit (excluding amortisation, NPATA) to come in flat for the full year at $4.3 million. But that’s now expected to be between $3 and $3.5 million.
Nevertheless, although the recovery in the second half hasn’t been quite as strong as hoped, the business is clearly trending in the right direction. From today’s trading update, Kelly Partners has said:
- Group revenue is expected, at the mid-point of guidance, to have improved 4.6% from the preceding half.
- Group operating profit (EBITDA) is expected to improve by between 13% to 34% from the first half.
- Dividends for the full year will be increased by 10%, to 4.4 cents per share.
- The troubled Sydney CBD office looks to be on the mend, with margins climbing to KPG’s benchmark levels in the second half.
- Existing businesses (excluding Sydney CBD and recent acquisitions) have shown a 7% improvement in revenues year to date
- Recent acquisitions are expected to boost company revenues by 10% in their first full year of operation.
Given the slowdown in the first half, it was always going to be a herculean task to deliver strong growth in the current financial year. It seems like the market had already discounted the likelihood that KPG would achieve its previous guidance, and has been unwilling to further punish shares in the light of some encouraging signs.
After all, the business is demonstrating a noteworthy improvement from the first half and is well placed to return to stronger growth in the years ahead — especially given the expected boost from recent acquisitions. Further, things look to be on the mend for the Sydney CBD office, while other established practices continue to post solid organic growth.
Longer term, it continues to have a long runway for further acquisitions and the establishment of new offices, and has built a solid foundation from which to support this planned expansion.
A profitable business with reliable revenues and a well supported dividend, KPG is presently on a Price to earnings multiple of just 10.5, and is offering a fully franked yield of 5.9% — or 8.4% grossed up.
As an accounting business Kelly Partners certainly doesn’t have the sexiness of the very much in-vogue technology sector, but at these levels it’s well placed to deliver attractive long-term returns — especially for those that have an income focus. As such, I’m adding it to my Strawman scorecard.
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