Kiotech – feeding the growth in world population

New management have set about transforming the fortunes of Kiotech. In the past, the AIM counter focused its efforts on developing a pheromone-based bait additive, known as Ultrabite, which helped anglers catch specific fish. It generated a lot of noise but progress was slower than hoped, so the brand was sold to Rapala for €900,000 in 2009.

Having recently made the visit to its main manufacturing facility at Manton Wood Enterprise Park in Worksop, I can confirm that the business is now a very different beast. Following two successful acquisitions, Kiotech manufactures a wide range of natural animal feed additives that are sold into more than 60 countries. By using its products, farmers can help improve the health and output of animals and keep livestock healthy. With the global population on the rise, and therefore demand for meat set to increase, Kiotech is poised for growth.

The first deal was the £5.25 million acquisition in 2006 of ‘cash cow’ Agil, a natural additive producer for pigs and poultry, from Lawrence. Kiotech welcomed new shareholders after raising cash, but crucially Agil brought a global distribution base. Having streamlined the operation and developed new products, Kiotech went on to acquire animal feed nutrition business Optivite for £3.4 million – a move that has proved highly complementary and trebled its size.

Strategy
Kiotech is essentially split into three product categories, producing: enzymes that ensure animals gain increased nourishment from their food; acidifiers that treat bacteria such as E. coli and salmonella; and binders that are used in food pellets to remove toxins.

Optivite develops non-hazardous, drug-free animal products, and has a strong position in poultry nutrition, which has been expanded into pigs and ruminants. Combining the business with Agil has added new sales territories, new products and above all significant scope for cross-selling. Optivite also has a much stronger position in nutritional products, and higher-margin products such as omega-3.

At the time of the deal, Kiotech estimated that it would yield cost savings of £400,000, but this figure has since been well surpassed. Kiotech closed the Optivite vegetable-to-salmon oils site in Lincolnshire, retaining the value-add omega oil business, outsourcing the lower-margin cow fats business to improve margins and shedding unprofitable resale products. In addition, it consolidated the manufacture of feed additive products at its Manton Wood site in Worksop – this acts as head office and was recently acquired for £1.5 million to give security of tenure.

The omega-3 supplements have been moved to the 24-hour Manton Wood site, as has the international sales team. Thanks to investment in plant and equipment, the factory has trebled its production throughput but is still running at 60 per cent capacity. Better group buying has also helped increase its profit margins.

Kiotech retains the Boroughbridge-based Vitrition arm, which is a feedmill manufacturer and is at the forefront of organic animal nutrition. Accounting for 17 per cent of total sales, it sells a full range of products for all species and custom mixes. There has been strong grain price inflation, and Kiotech expects more stringent EU legislation to force  organic feed producers to use 100 per cent organic ingredients. As one of only two suppliers with a dedicated organic plant in the UK, it should be well placed, but this remains a low-margin business.

Overseas sales are key to growth, with the focus on introducing new products to its worldwide distributors. New initiatives include a range of enzymes and omega-3 supplements that enhance fertility. Last year it enjoyed strong growth in Argentina, Mexico, Turkey and Japan. It has opened an office in China to help boost sales in what is a massively growing market.

Kiotech retains a small exposure to the Aquaculture market with a Thailand-based operation that is working with a number of farmers and hatcheries on shrimp, tilapia and Asian sea bass. Work continues with a large multi-national on its Aquatice technology used as a fish attractant. The hope is this could lead to a global licensing deal.


Management
Born in 1957, non-executive chairman Richard Rose joined the board in March 2005. He is no stranger to turnaround situations, following a successful stint at Whittard of Chelsea before its sale to Baugur in 2005. Prior to this, he was CEO of electrical products firm WF Electrical.

When not at Kiotech he holds the position of chairman at leading food and drink wholesaler and FTSE 250 stalwart Booker, he is also involved with struggling butcher chain Crawshaw. Rose won the Entrepreneur of the Year gong at the PLC Awards in 2003.

During his time at WF Electrical, executive vice-chairman Richard Edwards was introduced to Rose. He joined Kiotech in 2006 as CEO following the acquisition of Agil, and was appointed to his current role in April this year. With general management and corporate strategy experience, he is spearheading both the acquisition campaign at Kiotech and the aquaculture business.

When not wrestling with the responsibilities of twins, energetic CEO David Bullen is a very hands-on operator at Kiotech. Having moved to the AIM firm in 2007 he was originally taken on as general manager of Kiotechagil. He has successfully integrated Optivite and helped establish the wholly owned subsidiary in China. Prior to Kiotech, he worked in the animal health division of Novartis, as head of sales and marketing in the Benelux region.

Non-executive director Peter Lawrence is the founder of AIM rival ECO Animal Health (formerly Lawrence), he sold the Agil business to Kiotech. Other directorships include Baronsmead AIM VCT and Noble AIM VCT.

Optivite founder Richard Scragg is also a non-executive. He has a degree in agriculture from Nottingham University and is highly experienced in the animal feed additive market.

Prospects
By using its range of products, farmers can enjoy a good payback, by charging premium prices for meat and eggs that contain omega-3, for example. Higher-margin additives account for 70 per cent of sales, and it is here that Kiotech plans to expand. With cash in the bank and scope to issue shares as well as debt, it is on the lookout for acquisitions that could chip in sales of up to £10 million.

The market for enzymes is growing at 6 per cent a year and is estimated to reach $7 billion by 2013. Demand for acidifiers is also on the increase, with the market expected to be worth $1.3 billion next year.

Europe leads the world in natural animal feed additives, but the market remains hugely fragmented. Brazil and China account for 40 per cent of pig and poultry production so Kiotech is targeting these markets heavily. In addition, the growth in world population, particularly in emerging markets will provide plenty of scope for new business.

As is detailed in the management section, Kiotech has a board that is capable of running a much larger company, so expect further corporate activity.

Valuation
One problem for Kiotech is that there is no obvious quoted peer, so it’s hard to make a comparison on valuation grounds. However, the group has net cash of £3.4 million, so if this is stripped from the current market value, Kiotech is valued at little more than £11 million.

This seems churlish considering that current trading is good, it has a strong product range and, of most significance, it has a worldwide distribution network, thus providing a huge barrier to entry.

House broker finnCap expects sales to dip slightly in the current year due to the elimination of low-margin business but pre-tax profits should still increase 38 per cent to £2.1 million, with a 15 per cent lift in adjusted EPS to 8.4p. New forecasts have been introduced for 2012, which predict a further increase in pre-tax profits to £2.4 million and EPS of 9.7p. The broker also places a 120p share price target on Kiotech – 50 per cent above the current price.

Trading on just eight times 2012 earnings and with a current-year yield of 2.9 per cent in prospect, the shares are too low for what is a growth business in geographically diverse markets. And with annual Plc costs of £700,000, a potential bidder could strip these out and afford to pay a useful premium.

Last year Kiotech consolidated its illiquid shares on a 23-for-1 basis in a bid to narrow its spread and increase the price. Though the bid/offer spread may still put some people off, the shares are well worth buying and locking away.