KAP International Holdings (KAP)

Previous Stock Tip These companies are all previous recommendations from the Red Hot Portfolio that we subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations we’re making now, just start your 1 month risk free trial! Initial Recommendation: RHPS Issue 66 / November 2006 Wealth creation is the aim here – and it’s outperforming all forecasts, including the markets This is the second time we’ve had this quality share in our portfolio, having done very well the first time round in 2004. Back in those days it was called Kolosus and was emerging from a terrible time. It’s just returned to profitability, generating an important market lesson: Forget the past and look ahead! I presented the share then as a recovery stock, which all transpired just as expected. In fact, the amazing story of wealth destruction began with the share at R150 back in the mid-90’s, which plunged all the way down to 50c in 2003. Now the recovery motivation has evolved into a growth motivation. Have a look at the graph and note the dot on the left hand side. That was the first entry point and look just how well the share has done since. Today Kap International Holdings Limited is reformed after going through quite radical restructuring, and as you can see from the graph, we now have a new upward trend forming. What’s of significance here is the share is trading on a price to earnings ratio of only 8, while it’s sector is on a PE of 14, identifying this as a share that is undervalued by a long way. Don’t wait too long for this value to be recognised and realised by the market! This is a holding company for a portfolio of diverse manufacturing businesses operating in the fields of processed meats, automotive and leather products, other automotive components, footwear, speciality fibres, bottle resin and towelling products. The group’s headquarters are in Paarl with operations all over SA, and a staff compliment exceeding 5,270 people. The group has assets of over R1.6 billion with generated revenue of R1.9 billion, much larger than just a few years ago. Living up and exceeding all its goals I’m always impressed to see a company beat its own (and the market’s) forecasts, by bringing out positive trading updates and then delivering the goods! Just what we have here. In July, Kap informed the market it would beat earnings estimates and two months later it did just that! As we go back to the previous period we see just the same thing again with a trading update coming out followed by better-than-expected results. I wouldn’t be surprised to see this pattern repeat itself for the next set of earnings as well! And on that subject, dividend payments for the last two years rose from 5c to 12c per share, with net asset value also rising nicely. Kap traditionally generates the greater portion of its earnings in the July to December period. I expect to see this pattern repeat with positive share price implications. A few months ago Kap went on a spending spree expanding its automotive interests with the purchase of Caravelle, a company which supplies mats and carpets to the motor manufacturing sector. This is a natural well-fitting acquisition with great synergies and expands Kap’s automotive trim and acoustic insulation interests. Kap will use its existing structures to expand Caravelle’s activities into the export markets. Niche product development locks in value Forecast growth in the automotive vehicle market is positive and bodes well for this section of the company. New moves into global markets are just beginning to bear fruit with a lot more to come as niche products continue to be developed. Kap says it expects the remainder of 2006 and the business climate for 2007 to be strong with growth coming through in all of the businesses. Now here is an interesting bit of news. One of the world’s largest investors in SA is Claas Daun, who has just completed the placement of 24 million Kap shares with various institutions (at 400c per share). He’s also the largest single shareholder in Kap, with a holding of 37%. This was done to primarily increase the liquidity of the share and increase exposure to institutions.

RHPS Verdict This share is undervalued, and there are no fundamental or structural reasons for it to be so. The company’s in great shape after reaping the rewards of the restructuring phase, and is now growing nicely. I fully expect this selection to do very well again, second time around! I would suggest a buy from current levels of 405c to a target of 900c in a year. UPDATE 1: RHPS Issue 67 / December 2006 RHPS Recommendation: HOLD KAP (KAP): You ain’t seen nothing yet We’re nicely above selection price, but the real upward move which I expect is still ahead of us. Don’t underestimate this share! UPDATE 2: RHPS Issue 69 / February 2007 RHPS Recommendation: HOLD KAP (KAP): Heading for the stars The share’s now rocketing to highs last seen six years ago. UPDATE 3: RHPS Issue 71 / April 2007 RHPS Recommendation: HOLD KAP (KAP): Undervalued by far The company recently released results with revenue up by 15%, operating cash flow up by 67% and operating profit up by 12%. Although these results are good they disappointed the market, which has seen the share price fall back. The share is now just trying to turn back up again and while on a PE of only 7 is undervalued. UPDATE 4: RHPS Issue 75 / September 2007 RHPS Recommendation: HOLD KAP (KAP): Not doing well The share continues to fall and doesn’t look good at all. UPDATE 5: RHPS Issue 77 / November 2007 RHPS Recommendation: SELL KAP (KAP): Goodbye for now The recovery has been quite spectacular, but is now hesitating around current levels. This new upward trend should continue, but a bit more slowly. It’s been with us for a year, so it’s time to sell.

The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.