KOV 2.20% $8.46 korvest ltd

"My understanding is is that the higher aud provided more...

  1. 16,379 Posts.
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    "My understanding is is that the higher aud provided more incentives for cheaper competition from overseas but does the parallel higher raw material costs balance this out? "

    Not at all.

    If what you are asking is whether or not a weak A$ is good, bad, or neutral for KOV, the answer is that - all other things held equal - it is good.

    The reason for this lies in KOV's cost structure, 40% of which relates to Cost of Doing Business Sales/Marketing, Distribution and Administration) and 60% is Cost of Goods Sold.

    And of that 6o% CoGS figure, a significant proportion of it - at least half, I'd guess - would be denominated in A$ terms (power, factory labour, maintenance, locally-sourced spares and materials).

    So, I'd say that a maximum of 25% or 30% of total operating costs would currently be for raw materials. And in terms of their price movements, calendar YTD the zinc price is some 10% or 15% lower than JH2018's average and steel prices are roughly 5% to 10% lower. So I think the net cost impost from raw material prices - in A$ terms - in the current half versus pcp is probably a bit of a mere wash though.


    Not just that, but there is the more medium-term impact on the industry structure to consider when it comes to major movements in the A$:

    By far the more important determinant of KOV's financial performance is volume; it is an acutely volume-intensive business.

    And where the business got badly hurt in the years subsequent to the mining boom (besides the normal cyclical downturn) was the emergence of competing distributors sourcing product offshore, who became viable when the A$ was stubbornly close to, and above, parity with the US dollar.

    And, as you know, once a competitor has set up shop, even if the tailwind (in this case, the invoicing appeal of a strong A$) that brought that competitor into being ends up drying up, natural corporate stasis means that it takes a few years for that competitor to finally pull up stumps.

    We are now 5 years into the reversal of that strong A$, so I suspect many of those distributors have will have started disengaging from the Australian market, and if they hadn't already done so a year ago, the movements in the exchange rate in recent months will only add to their margin pressure.

    So, even if KOV picks up 3% or 4% more volume from competitors (assuming rational pricing, of course), the operating leverage in KOV's P&L makes those additional sales translate into a meaningful change in operating profits.

    .
 
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