Kitwave boosts margins and expands through acquisition

Kitwave (KITW) shares have more than doubled since they floated on the Alternative Investment Market (Aim) in May 2021, with the Tyne and Wear-based food and drink wholesaler impressing investors with strong revenue growth, gross margins which have headed northwards, and the building up of its position in the UK market through acquisitions.

The company, which also supplies tobacco and chewing gum, sells to independent customers across the UK from 29 depots and has a client base of around 42,000. Revenue growth in the half was driven by higher prices and acquisitions. Retail and wholesale revenues were up 15 per cent to £194mn, while foodservice sales climbed by 49 per cent to £81mn. 

Gross margin rose by 180 basis points against last year to 21.6 per cent, no mean feat in this inflationary environment. While there are headwinds from labour and delivery-based costs, management's focus on margin development is paying off and cost control is evident. 

The £28mn acquisition of Westcountry Food in December supplemented the purchase of M.J. Baker last February, and expands the company’s presence in the South West. A new 80,000 square foot distribution centre is being constructed, which will help “supercharge the organic growth opportunity” in the area, chief operating officer Ben Maxted told the Investors’ Chronicle.

Debt has risen because of the Westcountry acquisition, with leverage up to 1.9 times and finance costs also climbing. But fears are soothed by strong cash generation here, albeit the £11.7mn posting in the half was down from the £17.1mn last year.

House broker Canaccord Genuity upgraded its forecasts for the seventh time since IPO in the wake of these results, and now has an increased target price of 435p. With an attractive forward earnings valuation, robust recent trading, and a guidance uplift from management, we initiate on the bullish end of things. Buy.

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