In quality compounding we are looking for businesses that are able to reinvest their annual cash flows against high returns over a long period. Kelly Partners Group appears to be such a business.
Thank you for your kind comments and happy to hear you want to conduct more research. Always invest based on your own research, that will make you a long term investor.
I mentioned the debt is in the operating companies and could have mentioned indeed that if debt cant be repaid in the OpCo that parent is not ending up paying for it. Actually I thought I had written this down, but apparently missed it in the end. Thanks!
Good research. What are your thoughts on CEO comp? I can't get my head around having it be a percentage of sales... the incentive is not aligned with shareholders (despite him being the largest shareholder). I would have thought the board would have come up with something more aligned. It's a risk for me with too much of the thesis tied to a CEO and then to have this incentive structure.
Otherwise, it is a very compelling story with a compounding runway ahead of them.
Kelly doesnt want to impact the shares outstanding and wants an incentive which also drops if company results would drop. I should have add it in the article, 1% of revenue is his annual incentive next to a base salary. If I compare this with Cbiz, then I agree it is high. Cbiz revenue around 1,5B which would mean 15M in compensation of Kelly would reach 1,5B revenue. CEO of Cbiz roughly gets a third in salary (~5M). However margins of Cbiz are much lower. If Kelly succeeds to grow the company and keeps margins as is I think we are far better of paying Kelly a huge compensation for the top class accountancy firm he has build. But it is fair to argue why it is not e.g. 0,5% of sales.
Nice post but the margins are wrong. No attention paid to the minority interest. Cut all of your margins in half and then some for the parent reinvesmtent. parent attributable EBIT margins would be 11-12% give or take
yup, lack of discussion on the non controlling interest. it is basically an accounting gimmick by taking only 51% of the stake so that they can consolidate the book and appear growing quickly. the trick is keep acquiring. (if we look at the earning attributable to nci, it is very high, not sure why is this the case when they owned the majority stake) at current valuation, you are paying 100x on earning attributable to kelly partners. (pls educate me)
secondly, there is no mentioned on who is making decision on acquisitions. csu give the decision to a team of manager while kpg didnt make it very clear (decentralise decision is key to csu empire.)
lastly, just curious on how do you get the multiple paid for each partnership? 3-5x seems low. for context, as an ex accountant myself, it is not easy to retain staffs and most of them would want to move out from smaller to bigger firm for higher pay & reputation (that why big four has all the resources despite their poor culture) . small firm pay craps. not sure if you have any view on that.
Hi, the strength of KPG is their partner owner model where partners remain co-owner of the company. In my valuation of course I just consider the NPATA attributable to the parent, so to KPG. Because of all the acquisitions and related costs, the net income is not the right measure for Price Earnings. Also here you should look at NPATA.
KPG is at a very different stage versus CSU. KPG is early stage. KPG currently has 12 "scouts" looking for acquisitions. Currently they hand it over to Brett Kelly and Brett and Kenneth do the negotiations. In the future, as they grow, this could change.
The multiple for partnerships is announced with each partnership. By using the partner owner model the partners will stay and they often commit to stay 10 years. I am tracking from the partner level who is staying and the retention and can confirm this is very high.
As an ex-accountant you should be able to do your own die diligence and get to similar conclusions. I am an ex-accountant and ex-corporate accounting member of a stock listed company as well.
thanks. here to learn. sometimes when everyone is so bullish on a company, it is great to has a diverse opinion so that we don't fall into the trap of herd mindset. definitely more work for me to do. great write up.
Can you (or anyone else) explain this (I'm not clear on how this works)? I see that minority interests are negative and affect Net Income. Then i see it added back in cash flows. Brett Kelly mentions that the only part that is public is "his stake" as the SPVs (not roll-ups) would actually make the revenues double. I'm assuming that because the SPVs don't send money to corporate (SPVs keep 100% of the 49% they own, after they send 9% to the parent) is why minority interests shows up at the end of Net Income and then get funneled back into cash flows. Thx for the help
Great article! Looking their free cash flow it’s for the whole entity not just KPG shareholders, right? I calculated it from 2024 financial statements like following:
1. Operating Cash Flow: 25,614,000
2. CapEx: PPE: $3,421,000, Intangibles: $862,000. Total CapEx = $4.283M
3. Free Cash Flow
25.614M - 4.283M = 21.331M (the whole entity)
4. Subtract Dividends Paid to NCI (!!!) : 21.331M - 9.149M = 12.182M. Don’t see this step in their owner earnings calculations
Was really close buying before figuring this out. Listened their esrnings call and they know how to speak to investors (have read their munger&buffet 😀)! Then noticed the non controlling interest which approx doubles their valuation making them almost equally valued to the most elite serial acquirers which is a bit too rich for me
Hello, thank you for your effort with this analysis!
I have one question regarding their valuation. Their net profit (parent) in 2024 was about 3.5 mil AUD and their underlying NPATA 8 mil AUD. They are now trading at close to 13 AUD (market cap: 580 mil AUD) which equates to a ratio of 165 (P/E) and 72 (NPATA/E). Do I miss something or is this company hughely overvalued?
Hi Martin, thanks for your nice words. For Kelly Partners its important to look at their future growth. Their current runway on underlying NPATA is already around 12-13 AUD. This is the measure where you should value KPG against. As the company is still small and their runway is long, I think they will do very well. Main question is how long do you think they can grow / how long can they double each 4 years? If you think 10 years and then just 3% then the stock is quite expensive. If you think 20 years then you still will have a great return. Brett is aiming for an even longer period. Lets see 😊
Because it is not the parent but the full Group. I have already explained this in the comments above and on a discussion on Twitter (where I think you have seen this as well).
Great article & introduction to KPG, thank you! This leads to me wanting to research more about the business.
Thank you for your kind comments and happy to hear you want to conduct more research. Always invest based on your own research, that will make you a long term investor.
Yes 100% Agree, a thorough and investigative analysis is one of the most important things.
Iirc, the debt is at the operating business non-re course to parent kpg. Should alleviate the risk a little bit. Worth mentioning in the article.
I mentioned the debt is in the operating companies and could have mentioned indeed that if debt cant be repaid in the OpCo that parent is not ending up paying for it. Actually I thought I had written this down, but apparently missed it in the end. Thanks!
Good research. What are your thoughts on CEO comp? I can't get my head around having it be a percentage of sales... the incentive is not aligned with shareholders (despite him being the largest shareholder). I would have thought the board would have come up with something more aligned. It's a risk for me with too much of the thesis tied to a CEO and then to have this incentive structure.
Otherwise, it is a very compelling story with a compounding runway ahead of them.
Kelly doesnt want to impact the shares outstanding and wants an incentive which also drops if company results would drop. I should have add it in the article, 1% of revenue is his annual incentive next to a base salary. If I compare this with Cbiz, then I agree it is high. Cbiz revenue around 1,5B which would mean 15M in compensation of Kelly would reach 1,5B revenue. CEO of Cbiz roughly gets a third in salary (~5M). However margins of Cbiz are much lower. If Kelly succeeds to grow the company and keeps margins as is I think we are far better of paying Kelly a huge compensation for the top class accountancy firm he has build. But it is fair to argue why it is not e.g. 0,5% of sales.
Great article, thanks (long KPG for quite some time now).
Do note that you have 2 places where you got the currency wrong:
"this means the buy-below price of KPG is 10.00 CAD." --> should be AUD
"Currently we are paying close to 3 times sales for 2024, assuming 110M CAD in sales" --> should be AUD
Thanks Eran! You are right, I have updated the article, thanks for letting me know.
Nice post but the margins are wrong. No attention paid to the minority interest. Cut all of your margins in half and then some for the parent reinvesmtent. parent attributable EBIT margins would be 11-12% give or take
yup, lack of discussion on the non controlling interest. it is basically an accounting gimmick by taking only 51% of the stake so that they can consolidate the book and appear growing quickly. the trick is keep acquiring. (if we look at the earning attributable to nci, it is very high, not sure why is this the case when they owned the majority stake) at current valuation, you are paying 100x on earning attributable to kelly partners. (pls educate me)
secondly, there is no mentioned on who is making decision on acquisitions. csu give the decision to a team of manager while kpg didnt make it very clear (decentralise decision is key to csu empire.)
lastly, just curious on how do you get the multiple paid for each partnership? 3-5x seems low. for context, as an ex accountant myself, it is not easy to retain staffs and most of them would want to move out from smaller to bigger firm for higher pay & reputation (that why big four has all the resources despite their poor culture) . small firm pay craps. not sure if you have any view on that.
Hi, the strength of KPG is their partner owner model where partners remain co-owner of the company. In my valuation of course I just consider the NPATA attributable to the parent, so to KPG. Because of all the acquisitions and related costs, the net income is not the right measure for Price Earnings. Also here you should look at NPATA.
KPG is at a very different stage versus CSU. KPG is early stage. KPG currently has 12 "scouts" looking for acquisitions. Currently they hand it over to Brett Kelly and Brett and Kenneth do the negotiations. In the future, as they grow, this could change.
The multiple for partnerships is announced with each partnership. By using the partner owner model the partners will stay and they often commit to stay 10 years. I am tracking from the partner level who is staying and the retention and can confirm this is very high.
As an ex-accountant you should be able to do your own die diligence and get to similar conclusions. I am an ex-accountant and ex-corporate accounting member of a stock listed company as well.
thanks. here to learn. sometimes when everyone is so bullish on a company, it is great to has a diverse opinion so that we don't fall into the trap of herd mindset. definitely more work for me to do. great write up.
This is not true
Can you (or anyone else) explain this (I'm not clear on how this works)? I see that minority interests are negative and affect Net Income. Then i see it added back in cash flows. Brett Kelly mentions that the only part that is public is "his stake" as the SPVs (not roll-ups) would actually make the revenues double. I'm assuming that because the SPVs don't send money to corporate (SPVs keep 100% of the 49% they own, after they send 9% to the parent) is why minority interests shows up at the end of Net Income and then get funneled back into cash flows. Thx for the help
Great article! Looking their free cash flow it’s for the whole entity not just KPG shareholders, right? I calculated it from 2024 financial statements like following:
1. Operating Cash Flow: 25,614,000
2. CapEx: PPE: $3,421,000, Intangibles: $862,000. Total CapEx = $4.283M
3. Free Cash Flow
25.614M - 4.283M = 21.331M (the whole entity)
4. Subtract Dividends Paid to NCI (!!!) : 21.331M - 9.149M = 12.182M. Don’t see this step in their owner earnings calculations
P/FCF= 538m/12,182= 44
Any comments or thoughts ? Do you think this is totally wrong, or doesnt apply ? Doesnt change the valuation to you? Thanks !
Need to check this more in detail to verify the numbers. Your logic seems ok to me.
Was really close buying before figuring this out. Listened their esrnings call and they know how to speak to investors (have read their munger&buffet 😀)! Then noticed the non controlling interest which approx doubles their valuation making them almost equally valued to the most elite serial acquirers which is a bit too rich for me
Hello, thank you for your effort with this analysis!
I have one question regarding their valuation. Their net profit (parent) in 2024 was about 3.5 mil AUD and their underlying NPATA 8 mil AUD. They are now trading at close to 13 AUD (market cap: 580 mil AUD) which equates to a ratio of 165 (P/E) and 72 (NPATA/E). Do I miss something or is this company hughely overvalued?
Thanks in advance.
Hi Martin, thanks for your nice words. For Kelly Partners its important to look at their future growth. Their current runway on underlying NPATA is already around 12-13 AUD. This is the measure where you should value KPG against. As the company is still small and their runway is long, I think they will do very well. Main question is how long do you think they can grow / how long can they double each 4 years? If you think 10 years and then just 3% then the stock is quite expensive. If you think 20 years then you still will have a great return. Brett is aiming for an even longer period. Lets see 😊
Hi, thank you very much for your response.
I see, it´s kind of like the same type of high growth company like Amazon or Constellation Software, which seemed pretty expensive all of the time.
When you write about the current runway of underlying NPATA. How do get to the number of 13 AUD? Where do find this one?
Thanks in advance.
It is in the financial report for first half year. The range was 10-13M, but asking in the earnings call looks like its in the 12-13M range.
How do you get to the 25% EBIT Margins? For the parent is more like 10-12%.
Because it is not the parent but the full Group. I have already explained this in the comments above and on a discussion on Twitter (where I think you have seen this as well).