KPG – Kelly Partners Group Holdings

I had a deep dive into KPG to see if I could find any conviction given the strong run in share price and the enthusiasm some investors I respect, had for the business. In the end I couldn’t find the conviction and here are a few of the reasons.

The debt still troubles me, a lot of it is in the partner businesses, but overall its more than I like to see and its complicated to break out and understand.

The promotional nature of the founder, as @omac mentioned, he is big on the Buffett stuff, but then strongly promotes the total return to investors – which is almost entirely due to multiple expansion. Another words Mr Market has delivered nearly all this ‘value’, not KPG. A very un-Buffett approach. The founder has gone to a lot of effort to promote the business as being very shareholder friendly, which sounds good until you really ask how, because its not at all obvious!

The complicated structure of the company, holding 51% interest in all the acquired practices means making any sense of the financial reports is torturous, the Founder attempts to smooth over this by again using a Buffettism – KPG’s version of Owners’ Earnings, trouble is this is nothing like Buffett’s process. Also he quotes variously the group OE, the parent OE and sometimes per share, sometimes not.

So when you try to breakdown the financials you have to try to work out the impact of the 51% holdings and it seems to me that nearly all the costs are 100% attributable to the company shareholders own part of, but only 51% of the profit. You can see the clear result when you see how EPS is calculated and hence why it is so low – its only roughly 51% of the total profit, the rest goes to the minority interests.

Its even more impact on the FCF, if you back out the $1.3m Covid grants this year the company ended up with a 0 cash position, partly because they chose to also pass cash back to the partners to pay down debt (here is the debt issue again). But also because once profits are distributed and dividends paid there aint much left! It also distorts the dividend payout ratio which is calculated on total cash not the proportional amount.

In saying all that, I am not even sure how much of that is strictly true, because the financials are so opaque and difficult to break down, but my guesstimate is that FCF to the shareholders of KPG is slightly more than the reported EPS and on my quick & dirty DCF implies a range of value that is less than half the current share price.

Anyway, my ddep dive didn’t deliver any more conviction!