Investing is a funny business! We are constantly reminded how little we do know, and indeed can know. After all my research and analysis and taking a position yesterday, today the company announces it is issuing 15m shares for Loan Funded Shares under the Employee Incentive Option Plan. So this completely offsets the 15m shares bought back by the company, so no net benefit for shareholders from the buyback!
My initial inclination is to respond to this red flag by selling my position straight away, but the CEO is going to call me about some other questions I had so I shall wait to hear from him.
Michael Ivanchenko, CEO rang me back today, 19/1, his explanation about the benefits of the Loan Funded Shares for employees offset my concerns about it negating the effect of the buyback. The optics are a bit off given the same amount of shares bought back as can be issued in the scheme. The benefit is they dont vest for 3 years and most need to meet the KPIs including a share price of 16c. I certainly prefer this process to complicated option schemes many companies run. He also explained why the 10m from the cap raise was unspent, it was raised to finance the integration and development of an aquisition, which then cost much less than they first expected, leaving them with the cash on hand. Then it was decided to use some of that to buyback shares as algo trading had driven it down to 7-8c.
He also indicated capex thru product dev costs would drop by 25% pa over the next couple of years which should drive some healthy FCF growth if they can execute.
Here is the content of my letter,
Hi,
I have just become a shareholder in Kinatico through my SMSF, hopefully you dont mind engaging with a small, retail investor like myself.
KYP is probably an earlier stage, less mature business than I would normally invest in but after finding the business and doing my research and analysis I came to the belief that if KYP management can continue to execute as they have done in the last 2 years then it is probably significantly undervalued. I also liked the straightforward language in your updates and reports, almost no mention of bullshit earnings (EBITDA) - a pet hate of mine! Also very little of the waffle and acronym bingo usually associated with businesses claiming to be SaaS.
My only nit pick would be calling your trading updates, “Flash Updates”!
One question I have is about the share buyback, in principle I am in favour of businesses I am part owner of engaging in share buybacks when the shares are undervalued by the market. What I find a bit unusual is a business like KYP at its stage of development doing it. It seems to me in reading back through the previous reports, that there was a $10m CR in 2021 and essentially it is these funds that are financing the share buybacks. I say this as there is not really any FCF while the cost of product development is as high as it currently is.
So the first question is what was the CR earmarked for originally? (seems a little odd to raise so long ago and still have most of the cash.)
Secondly, what is the rational for using it for a share buyback rather than retaining it for future growth or other opportunities?
Third question sort of grows out of the comment about FCF & product development costs, given that OCF and product development costs are running at about the same quantum currently, and the growth in the SaaS business should see OCF grow pretty quickly, do you also expect to see a drop off in those product development costs going forward? Or is it really a recurring capex cost that will impact FCF going forward?
