Redishred Capital Quick Update - $KUT.v

Quick update after Q2 2023

You can view my original (somewhat dated) write-up of KUT here.

KUT reported Q2 2023 Thursday after the market closed and held a conference call Friday morning. Results were a bit behind my expectations and the stock sold off 5-6% on the day. I was expecting a hit to profitability with the continued trending down in paper prices, I was still expecting some EBITDA growth.

Quarter Recap

• Consolidated rev up 15% yoy.

  • Excluding contribution from recycling (paper prices) was up 28%.

• Consolidated EBITDA flat yoy.

  • Excluding contribution from recycling (paper prices) was up 28%.

• Scheduled system sales grew 12%.

• As expected they were hurt by the drop in paper prices which averaged $218/ton vs $253 last year.

  • Paper prices have continued to soften into Q3.

• Seeing inflation pressures around wages easing.

Call Notes

• Their prior stated target ebitda margin of 35% for corporate locations seems reasonable unless we see a sudden crash in paper prices.

• They completed the price increases in August to the tune of about 4% on average.

• The lower paper prices and higher interest costs tends to hurt the small independents more than their franchisees and larger multi-region independents.

• Still getting sales leads that are 60-65% for scheduled services.

Closing Thoughts

I don’t know what paper prices will do. They may move with other commodities or may not, so take that however you would like. To me they are executing what they can control. Increasing scheduled systems sales is among the top KPIs that I am tracking for my position. It was nice to see growth there. Below is a quick look at the corporate location revenue mix.

Last year Q2 to Q3 seen a large increase in corporate location costs from 8.3 to 9.2 mil with revenue essentially flat. I am not expecting the same increase in costs this year, although revenue may tick down as paper prices have continued to soften into the quarter. The growth shredding services and potentially some contribution from scanning and ewaste may also mitigate the potential decline.

The MD&A states that their target for the year is to acquire 5-6 mil USD in revenue. So far they are at 0, so I would expect them to roll in an existing franchisee or purchase one or two smaller independents. On the call the CEO didn’t seem concerned about the target. The balance sheet can handle another acquisition, but they may need capital after depending on how many turns of ebitda they are comfortable pushing.

Overall the story is still here. My purchases have been ill-timed as we have continued to see multiple compression. I think this valuation is reasonable. When I first purchased it was for an multiple close to 10 and now they are trading around 6.2x EV/EBITDA.

It’s been frustrating to see the good execution coupled with multiple contraction. I’m sure many of my fellow microcap investors feel the same way. Not sure where they chose to cry over losses, but my favorite place is still my squat rack.

If you want to own KUT right now, you will need to get used to the potential shareholders being retail and viewing this company (in the short term) as a “paper price” play. Like it or not, that’s the focus in the near term. This is all just my opinion of course.

Thanks for reading.

Dean

* long KUT.v