KBAL - Kimball International Inc.

[Value_Added]

Bear with me, this is my first post pertaining to an analysis of a company.  I've been trying to learn proper value investing and valuation methods for the past 8 months or so and have loved it so far!  I did a search and haven't seen this company mentioned, so here goes...

 

I've been following this stock since Michael Burry's purchase in Q2 2020.  It's an extremely boring furniture company with offerings in the office/hospitality/health sectors.  They have a strong balance sheet and a price that seems to be on sale even at the price today and very much overlooked.  They recently completed an acquisition of Poppin Inc, a furniture company based out of NYC that focuses on small businesses and work from home clientele.  We've yet to see how the acquisition pays off but it could be a catalyst for KBAL for faster growth (or not), regardless, KBAL still seems worth a look.

 

Post spin-off ROE, ROIC are attractive and they have near zero debt (they did take on a bit from my understanding with the recent acquisition but I wasn't able to find the exact number while digging through the 100+ page 8k regarding the acquisition).  KBAL recently (2015) spun-off their electronics division and their sole focus is on furniture manufacturing and sales.  They are almost completely vertically integrated and their competitors are companies such as Herman Miller, Knoll, et...(all with comparable gross margins).

 

KBAL has a cash amount of about $3/share.  In addition, they own just over 3,000,000 square feet of real estate on 331 acres of land (13 properties in IN, and 2 properties in KY).  The stated value of buildings and improvements are $116.7 million per the 10K.  Depending on how long they've owned these properties (Kimball is a very old company but it's hard to adjust to which properties were kept during the spin-off so I wasn't able to find an exact purchase date), they could be significantly more valuable.  Assuming they are worth their stated value, there's approximately another $3/share in real estate assets.  KBAL also keeps about $20 - $30 million in raw material at any given time (about $1/share).  I assume that their raw material in inventory can be sold at near-stated price in the event of a liquidation of assets (which is doubtful given their zero debt).

 

Factor this into the current share price and you are buying the furniture business for $5.5 and $6.5 per share which offers a very comfortable margin of safety given their history, consistent revenue, good ROE and ROIC, and again...no debt to speak of.  They do pay a dividend and they also participate in share buybacks (though, I wish to see more given their seemingly undervalued share price).  Most importantly, the downside risk seems very minimal.

 

I would love to hear your thoughts on this? 

 

 

[thepupil]

Unless the real estate and materials are excess of what’s needed to operate the business, you may be double counting.

 

If you make $1 driving for Uber and need a $5 car to do it, your Uber driving business is not $1 x multiple + the $5 car. You’d either have to burden earnings with the rental of a car, or not include the car in the valuation of the business.

[Gregmal]

I think this is somewhat interesting. They've taken measured steps towards becoming more shareholder friendly over the years, have my kind of balance sheet, and seem positioned to benefit from a recovery. Pay a respectable dividend as well. Thanks for bringing this up.

[Value_Added]

Thanks for the insight.  Again, I am still learning so forgive me in asking what may appear to be a silly question.  I valued it that way based on the event of a liquidation.  You're saying that an asset based valuation shouldn't be mixed with the current business valuation unless the assets being valued are in excess of what is needed to run the business?  Does this include cash as well?

 

Thanks

[thepupil]

In general, in a sum of the parts/ liquidation with a mix of operating business and assets, you have to separate what the business needs to operate from “excess assets” or charge rent to the operating business and value the two separately.

 

For example, Steinway piano used to trade publically. Steinway was a glorious asset play. They owned a prime piece of property on 57th street in NYC (a showroom for pianos), they owned like $100mm of finished pianos that were worth $100K each of sol le in an orderly fashion, and they owned 20 acres in queens where their factory sat.

 

The prime site on 57th street was not needed to operate the core business and Steinway (as a private company since Paulson bought it) sold this to become condos on billionaires row. They didn’t have to have that showroom there.

 

The inventory was sold down over time as the economy recovered.

 

The factory in queens has not to my knowledge been sold, because Steinway needs it to run the business. They can’t relocate because generations of artisans who hand build Steinways don’t want to move. Unless they found their way around that, I wouldn’t consider the factory as a monetizable asset separate from the business.

 

This seems like a company to value on plain old earnings at first glance. thanks for the idea!

[Value_Added]

Makes perfect sense and thanks for clarifying.  KBAL does have a few showrooms, but I do believe these are leased.  I will investigate further but I believe cash is the only thing to be considered of what I mentioned above.

 

 

[thepupil]

It looks like to me they don’t have $3 of cash per share

 

t last Q they had $100mm or so and they just closed on the acquisition for $110mm.

 

 

company. The purchase price is $110 million in initial cash consideration plus additional contingent payments based on revenue and profitability milestones achieved through June 30, 2024, with potential total cash consideration equal to $180 million if all milestones are achieved.

 

The company said they have a little bit of net debt after the transaction

 

https://www.globenewswire.com/news-release/2020/12/09/2142257/0/en/Kimball-International-Announces-Closing-of-Poppin-Acquisition.html

 

Following the completion of the transaction, Kimball International’s pro forma Net Debt to adjusted EBITDA ratio was approximately 0.5x. The Company’s strong balance sheet and modest leverage enables Kimball International to maintain its capital allocation priorities, which include organic investments, acquisitions, return of capital to shareholders in the form of dividends and opportunistic share buybacks.

[irakraus]

They released Poppin results + Pro Forma

https://www.sec.gov/Archives/edgar/data/55772/000005577221000018/0000055772-21-000018-index.htm

 

Will take a look during the weekend

[irakraus]

What am I missing (all figures are pre-covid)

 

KBAL was growing before COVID & Before Poppin (see attached) - about 5% a year (revenue) from 16 to 19. 

Positive CS, net profit, a pile of cash. Revenues are ~750mm

 

Poppin was growing 30% pre covid - yet had a negative net & cash-burning ops. Revenues were ~80mm.

 

Some out of the head and not complex calculations, given that KBAL could make Poppin as profitable and cash-burning as KBAL is:

KBAL, 2019:

If we take KBAL's 2019 net income ratio (5.12%) and we say that Poppin (which is currently losing money) could reach it, and we multiply it with Poppin 2019 results (80.1mm) we get about 4.1m. Then, if we apply KBAL's P/E for 2019, we get ~47mm value for Poppin - which is at minimum 2.5x what KBAL paid for it.

 

Don't you think it's too much, even though Poppin had a 6x higher growth rate than KBALs?

[ContrarianValue44]

On 2/20/2021 at 8:14 AM, irakraus said:

What am I missing (all figures are pre-covid)

 

KBAL was growing before COVID & Before Poppin (see attached) - about 5% a year (revenue) from 16 to 19. 

Positive CS, net profit, a pile of cash. Revenues are ~750mm

 

Poppin was growing 30% pre covid - yet had a negative net & cash-burning ops. Revenues were ~80mm.

 

Some out of the head and not complex calculations, given that KBAL could make Poppin as profitable and cash-burning as KBAL is:

KBAL, 2019:

If we take KBAL's 2019 net income ratio (5.12%) and we say that Poppin (which is currently losing money) could reach it, and we multiply it with Poppin 2019 results (80.1mm) we get about 4.1m. Then, if we apply KBAL's P/E for 2019, we get ~47mm value for Poppin - which is at minimum 2.5x what KBAL paid for it.

 

Don't you think it's too much, even though Poppin had a 6x higher growth rate than KBALs?

 

I wouldn't use Kimball's PE for this calculation as I believe that it is currently very depressed and could double. A better approach in my opinion would be a perpetual growth DCF with growth set to the risk free rate or 0. With that I get Poppin's value at about $300M. Just my valuation though, everyone thinks differently, which is the beauty of investing