Q3/24 FIRST LOOK: ANOTHER QUALITY BEAT, STILL FLYING UNDER THE RADAR
THE TD COWEN INSIGHT
Record quarter. A few SMID cap stocks under coverage continue to outperform and beat expectations. KBL is at the top of that list, but the shares have remained range-bound. We believe KBL is a high-quality company, with solid defensive attributes, and expect valuation to better reflect that once macro environment improves.
Impact: POSITIVE
KBL reported Q3/24 revenue of $104.5mm / adjusted EBITDA of $23.0mm, a strong 5%/11% beat to consensus estimates of $99.7mm/$20.7mm, and above our street-high estimates.
Revenue (5% > cons) increased 20% y/y. Relative to our estimates, the beat was largely driven by organic growth and entirely from UK Hospitality. We believe the outperformance in hospitality reflects both pricing and strong client activity (i.e., STR reported flat-to- modest increase in both Canadian and U.K. hotel occupancy, while IATA reported 3.7% y/y increase in North American revenue passenger-kilometers, both pointing to healthy travel demand including business travels). Canadian Healthcare was 4% below our estimates, although management noted that volume was stable and Q3 growth was in the LSD% range. Acquisitions collectively contributed $12.4mm to total revenue, just a touch above our $11.9mm estimate.
EBITDA (11% > cons) increased 30% y/y. Margin was in line with our estimate, and +160bps y/y driven by Shortridge contribution (we estimate ~25% > KBL's historical ~15% in UK).
Stabilized business, solid outlook on both segments. Management expects activity levels to remain stable at current levels for both healthcare (i.e., steady demand given elevated surgery backlog) and hospitality businesses (i.e., business/leisure travel reflecting historical seasonal trends). Also, it believes that energy prices, labour market shortages and cost inflation have stabilized, and sees stable EBITDA margin following historical seasonal trends going forward (we think higher on an absolute level given Shortridge's higher margin profile).
M&A remains in focus, supported by a strong balance sheet. K-Bro exited Q3 with ~$34mm available liquidity (plus $75mm for growth). Management intends to continue focusing on M&A, while maintaining conservative leverage and financial flexibility. Given high interest rates that favour scaled players like K-Bro, we think additional M&A opportunities could arise.
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