Nothing like a rainy day for Kathmandu
When much of Australia emerged from a rainy Easter into the sobriety of work, Kathmandu's managers must have been rubbing their collective hands with glee.

This week the retailer said that it increased sales for the third quarter by almost 32 per cent against the same period a year earlier. And “favourable weather” over the Easter holiday was one of the key factors cited by the retailer of so-called adventure wear or things like fleece and Gore-Tex jackets.

And the weather plays a big factor in its profitability: “Winter is a big risk for us,” says CFO Mark Todd, from the company’s headquarters in Christchurch. About 30 per cent of the company’s product range is geared towards winter apparel.

But Kathmandu is far from a play on Bureau of Meteorology forecasts.

The bigger issue for the company, as with any retailer, is inventory management, or the lack of it. Retailers like Kathmandu live and die on how closely their inventory matches sales. If they get it right they maximise both their sales and their profits.

Last year, Kathmandu didn’t. It had too little stock. Consequently, its profits were below its prospectus forecasts. At $1.88, it is only since April this year that its share price (ASX code: KMD) has crept above its $1.70 issue price when it listed just over 18 months ago.

Todd says that the removal of the debt that burdened the company from its private equity heritage and its credit facility of $NZ125 million ($92 million) means that it has the flexibility to manage its inventory levels.

Many institutions must believe him. Adam Smith Asset Management, Sigma Funds Management, Eley Griffiths and AMP have been pouring money into the retailer. They know that if it gets this right, its gross margin (revenues less cost of sales) of 64 per cent will be easily achieved. This is at the upper reaches of any Australian retailer and is because it has a strong niche.

Many brokers have also fallen in love with the story, with price targets of $2.20 (Macquarie) and $2.45 (Goldman Sachs).

Certainly, momentum is on its side for this year’s result at least. Mark Todd and his board are hoping for a cold (and wet) winter ahead.

Contractors riding the dragon

As this column has reported, many smaller companies are taking advantage of high share prices. But nowhere is this more the case than in the contracting industry, which provides services to the booming mining sector.

“The window is definitely open,” says small caps analyst at JPMorgan Alex Mees. Small cap contractors including Southern Cross Electrical (ASX:SXE), Logicamms (ASX:LCM) and Matrix Composite (ASX:MCE) have been active in the $1.32 billion raised across the sector in the past six months.

In the past 12 months the 62 small cap mining services companies identified by JPMorgan on average returned just under 24 per cent, compared to the S&P/ASX All Ordinaries return of 1.4 per cent. This is even better than the return of just over 19 per cent of the Small Resources.

But much of this capital raising is opportunistic, Mees admits. There is no doubt that there is much work to be had in the sector, but another factor is the increasing cost of providing that work – both in terms of labour and capital.

As in any sector, there is much that differentiates the participants and some fundies are looking towards the less capital intensive participants in the industry.

“If you’re going to dig dirt out of the ground, you need these expensive D9 Caterpillar tractors, but if you’re providing consulting services and design you don’t need to,” says Adam Smith Asset Management portfolio manager Peter Mouatt.

He mentions Monadelphous (ASX:MND) and Lycopodium (ASX:LYL) as being good plays in the sector because they have relatively low capital expenditure budgets and require less working capital – or money needed for day to day operation.

Mees also mentions “capital light” contractors: Ausenco (ASX:AAX), Cardno and Emerson Stewart (ASX:ESW).

Although lately Emerson Stewart, which consults in the oil and gas mining, has not been profitable:
“These companies can lose money because of highly paid staff... if they don’t get the work, they’re not being employed...”

The last point is easy to relate to.


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