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Kresta Of A Wave

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Following a series of recent property sales, Kresta has no debt, and net cash on the balance sheet of more than $4 million. The company is now poised to capitalise on its strong brands.

Window furnishings maker and retailer Kresta Holdings Limited (KRS) is one of those micro-cap companies (it is valued at $26.9 million) that has a very widely known brand, but almost zero accompanying knowledge that it is a listed, investable stock.

Traders know about it; but they tend to keep Kresta in a band between 10 and 20 cents. The stock needs long-term investors to stand a chance of breaking out of that band: and long-term investors need to see good performance.

To be fair, Kresta has not given investors much incentive over the last three or four years to be involved: for a fair chunk of that time, Kresta has been bedevilled by a combination of board ructions (including a failed takeover attempt by a former director), market concerns over suppliers as directors, the loss of a chairman and two chief executives, the restatement of the 2009/10 accounts after the discovery of accounting errors in the audit process, profit downgrades, investor revolt over executive pay, the closure of factories and a profit downturn, which culminated in a net loss of $781,000 in FY11.

But a management and structural review undertaken since then has turned the company around. Even though Kresta made an underlying EBIT (earnings before interest tax) loss of $1.73 million in FY12, sales of surplus property enabled by the closures helped to bring the company back to net profit. In all, about $11 million of surplus property was sold in FY12 and FY13.

The FY13 final result was net profit of $1.53 million, up from $791.000 in FY12, although revenue fell 9%, from $110.9 million to $100.7 million. Earnings per share (EPS) came in at 1.06 cents a share, up from 0.55 cents a share in FY12 and a loss of 0.54 cents a share in FY11. A dividend of 0.25 cents a share, fully franked, was paid for FY13, the first since 2011.

The balance sheet improved in FY13, with net assets increasing from $19.73 million to $21.31 million. After the property sales, Kresta has no debt, and net cash on the balance sheet of more than $4 million. The company is now poised to capitalise on its strong brands.

Kresta has been making blinds for more than 40 years, and is the largest maker and seller of window coverings – that is, blinds, curtains, awnings and shutters – in Australia and New Zealand. Its brands include Kresta Blinds, Curtain Wonderland, Vista Window Coverings, Decor2Go and Ace of Shades.

The company runs 80 stores of its own and also wholesales components to the Australasian window furnishings industry, manufactured or imported by Kresta under the brand names Sharatan and Mardo. About 60% of revenue comes from ‘made-to-measure’ products, where Kresta staff measure the customer’s window and cut the product to fit; the remainder comes from ‘ready-made’ window furnishings and home décor products sold in the stores.

Where the company once operated four manufacturing plants, it now runs just the one, at its headquarters site in Malaga in Western Australia, with some manufacturing outsourced to China, Taiwan and Indonesia. The site is more correctly described as an ‘assembly” operation: Kresta brings in the raw materials from Asia and assembles products at Malaga.

While that business model increases costs compared to competitors who simply import and sell, having local assembly means Kresta is not as exposed to a weakening Australian dollar – the lower it goes, the more competitive Kresta is.

The company’s business exposure is mixed between the outfitting of new homes and the refurbishment of existing homes: Kresta says low interest rates are good for it, but like many retailers exposed to consumers’ willingness to spend disposable income, it still sees a “mixed” business environment. While historically the first-half is stronger for revenue – because the onset of summer drives the purchasing of window coverings – the company says it is trying to spread the revenue more across the year, to help to reduce the fixed costs of its retail store chain. Curtain Wonderland’s strongest month is January.

On the stockmarket, Kresta’s recent troubles have marred its three-year return, which sits at –11.6% a year. But on a five-year basis, Kresta has returned 15.5% a year: while for the most recent 12 months, the return is 7.5%.

There is also the problem for potential investors that liquidity is poor, and there are no institutional investors “disclosable” in the stock: that is, no institution owns more than 5% of Kresta. ‘Ethical’ fund manager Hunter Hall was on the register for 16 years but sold out in December 2013: most of its 22% stake was bought by a Chinese individual investor Xiaoyang Lu, who the company says is a high-net-worth Chinese investor interested in manufacturing, and who wants to invest in Australian businesses on the back of a weaker dollar. Mr. Lu has 19.9%, but does not have board representation.

Brisbane-based window furnishings wholesaler and retailer Fiesta Designs – a supplier to Kresta – is the next largest shareholder, with 19%: it picked up its stake in Kresta in 2011 when entrepreneur Ian Trahar – a former Kresta director – abandoned his takeover bid for the company. Fiesta has one nominee on the board.

Another Chinese company, Ningbo Xianfeng New Materials, whose APLUS branded fabrics are sold internationally, bought into Kresta in December and now owns 16.8. The Chinese company – which is a supplier to Kresta –picked up most of the stake from Si Chuan Cheou, owner of Taiwanese window coverings manufacturer Santa Monica, and a long-time Kresta shareholder and supplier.

Intriguingly, Xiaoyang Lu is also based in the city of Ningbo: at the time of Ningbo Xianfeng New Materials buying in, Kresta chief executive Jules Di Bartolomeo said that while Mr Lu and the owners of Ningbo Xianfeng knew each other, they had “no formal business relationship” that Kresta was aware of. Di Bartolomeo said Ningbo Xianfeng wanted to increase the volumes of raw material it supplied to Kresta.

As the West Australian newspaper reported at the time, the Kresta board “would be hopeful of the Ningbo investors' acting as a bulwark against 19 per cent shareholder Fiesta Design, a Queensland-based retailer which has withheld support for executive pay arrangements.”

Di Bartolomeo, appointed in 2012, is a former QBE executive brought in with a brief to turn around Kresta’s fortunes in terms of management and financial performance. Shareholders would have to be pleased with the results so far, and there is plenty more room for improvement in a highly fragmented $3 billion industry awash with cheaply imported products.

Kresta Holdings has given no guidance for FY14, but at 18 cents, the stock is trading on an historical price/earnings (P/E) ratio of 17 times earnings and a dividend yield of 1.4%, fully franked. Kresta is an illiquid micro-cap and it would take quite some time to amass a reasonable stake in the company. But if Di Bartolomeo and his management team get it right, and Kresta can leverage its brands’ strong recognition and market position, and most importantly, start to attract institutional investors with good financial performance, Kresta could make investors – as opposed to traders – some solid money.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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