Driver shortages and supply chain logjams are dominating the news headlines and could put a dampener on Christmas this year.

Yet one growth company doing its bit to deliver the goods in these unpredictable times is Kitwave (KITW:AIM), a small cap food and drink wholesaler with its own in-house established fleet of delivery vehicles and drivers and which isn’t reliant on third party logistics providers as a result.

Shares believes this independent delivered wholesale business is undervalued considering its cash generation, capacity to capitalise on the current situation to strengthen its competitive position, a proven buy-and-build strategy and its attractions as a play on the full recovery of the leisure and hospitality sectors.

DELIVERING THE GOODS

For the uninitiated, Kitwave floated on AIM at an issue price of 150p in May 2021.

Founded in 1987, the North Shields-based concern sells and delivers everything from confectionery, soft drinks and snacks to tobacco, beers, wines, groceries and frozen and chilled food, delivering to a diverse 38,000-strong UK customer base spanning convenience stores, pubs, vending machine operators and foodservice providers.

Among Kitwave’s competitive advantages is an extensive depot network giving the group nationwide coverage. It offers next-day delivery for deliveries within 25 miles of a depot and three-day delivery slots nationwide. And the company typically carries 23 days of stock to ensure it can fulfil orders even in the event of inbound supply chain delays.

Growth to date has been achieved organically and by gobbling up smaller, family-owned businesses, yet canny CEO Paul Young insists the UK grocery and foodservice wholesale market remains ‘highly fragmented’ and presents Kitwave with ‘numerous additional growth opportunities’.

Admittedly, this is a high volume yet low margin business and there is always the risk that Kitwave buys a company that proves to be sub-par. However, Young and his team know target market companies well, which limits the potential for overpaying for acquisitions.

Canaccord Genuity recently reiterated its ‘buy’ rating and 210p target price for Kitwave, implying 40% upside at current share price levels, with analyst Mark Photiades impressed by a visit to the company’s new purpose-built Butterfield facility in Luton.

Offering over 70,000 square feet of temperature controlled bespoke frozen, chilled and ambient warehouse space to service its network of independent customers in the south, the site also provides future capacity for Kitwave’s longer-run growth ambitions.

IN THE DRIVING SEAT

Significantly, the visit also showcased Kitwave’s in-house delivery fleet which the analyst says is allowing the company to ‘benefit whilst others have struggled with third party providers and driver shortages’.

This is backed up by the company’s highly-efficient route planning system which helps to drive route density and efficiency gains whist also maintaining high levels of customer service.

As Canaccord Genuity explains: ‘Whilst some brand owners have been short of product, given Kitwave’s wide product base it is able to offer customers substitute products, thus maintaining strong customer relationships and service levels.’

With a few weeks of the financial year to October 2021 left to run, Canaccord Genuity feels confident Kitwave is on track to meet its forecasts and is ‘well-placed to be able to absorb inflationary pressure’ in full year 2022, stressing that historically, the company has successfully maintained gross margins during periods of supply chain inflation, without denting volumes.

Results (27 July) for the half to April were impacted by Covid-19 lockdown restrictions, especially leisure and hospitality sector closures, yet Kitwave still managed to generate £9.8 million of cash from operations and declared an interim dividend of 2.25p.

TRADING STRENGTHENS

Management flagged that trading had strengthened across June and July as lockdown restrictions eased, with volumes having moved back towards pre-pandemic levels, setting Kitwave up nicely for the seasonally more important second half.

For the pandemic-impacted year to October 2021, Canaccord Genuity forecasts sales of £360 million and adjusted pre-tax profits of £1.4 million. However, sales are forecast to recover to £420 million and £428.4 million over the next two years, fuelling pre-tax profit recovery to £11.7 million and £12.6 million respectively.

Based on next year’s 13.6p earnings per share estimate and a forecast dividend of 6.8p, Kitwave looks too cheap on a prospective price-to-earnings ratio of just below 11 times with an attractive, cash-backed 4.5% dividend yield.

We share Canaccord Genuity’s view that Kitwave is ‘well-placed to accelerate organic revenue and profit growth through its buy-and-build strategy’ and that there is ‘scope for the valuation to positively re-rate in time’.

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