Although still small, Kiotech International already sells its animal and fish-feed supplements in 60 countries worldwide, and increasing its sales in developing countries provides the company with a significant opportunity.
- Strong global demand for agricultural feeds
- Focus on higher-margin products paying off
- Regulatory-driven growth in developed countries
- Firepower for acquisitions
- Rising input costs
- Difficult to deal in shares
Worksop-based Kiotech started out developing additives to encourage fish to eat, but its acquisitions of Agil in 2006 and Optivite in 2009 have given it a solid base for growth in supplying animal food supplements that, for example, help to keep pigs' digestive systems healthy. Investment in its processing plant means the company only operates at half its production capacity, so further growth in sales should significantly boost profits as economies of scale kick in. Monthly production volumes have already tripled since the acquisition of Optivite.
Merging Agil and Optivite has allowed the company to make more from its existing distribution network and management has axed some less-profitable products. This meant that in the first half of 2011 revenues fell 16 per cent, but gross profits were unchanged. This was achieved despite pressure from rising input prices, with some raw material costs rising by 20 per cent. However, discounts from buying in bulk and pushing through price increases offset much of the pressure. Profit margins should improve further as production volumes grow.
Kiotech has well-diversified revenue streams, with only 36 per cent of sales derived from the UK and Ireland; a further 36 per cent come from mainland Europe, with the balance from the rest of the world. The growth potential in the developing world, where demand for more protein-rich food means farmers need to use more animal feeds and additives, is well known. But the UK and European markets are also driven by animal welfare and food safety regulations, an area that Kiotech's products specifically address.
KIOTECH INTERNATIONAL (KIO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 83p | MARKET VALUE: | £15.0m | |
| TOUCH: | 76-83p | 12-MONTH HIGH/LOW: | 100p | 72p |
| DIVIDEND YIELD: | 3.0% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 84p | NET CASH: | £3.4m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 5.4 | 0.5 | 3.0 | 0.05 |
| 2009 | 11.0 | 1.4 | 9.5 | 1.15 |
| 2010 | 21.6 | 1.5 | 7.0 | 2.00 |
| 2011* | 21.0 | 2.0 | 8.7 | 2.30 |
| 2012* | 23.0 | 2.3 | 9.7 | 2.50 |
| % change | +10 | +15 | +11 | +9 |
Normal market size: 1,000 Market makers: 4 Beta: 0.3 *FinnCap estimates | ||||
In emerging markets, Kiotech's key initiatives include early-stage work with a pig and poultry supplies distributor in Brazil and a wholly-owned subsidiary in China that sells direct to farmers and to feed mills. This subsidiary is now breaking even.
Kiotech has no exposure to the US, although management could make an acquisition there. It will have the resources - with its main capital spending done, the group may well have £5m of cash by the end of the year, reckons broker FinnCap.
The global size of the animal feeds business, which is worth about £10bn a year, means that some of Kiotech's competitors are huge - the likes of BASF, Bayer and Nutreco - as are its customers. That means Kiotech could be a takeover target. Yet the market also remains sufficiently fragmented for it to grow by acquisition.
