Kiotech: focus on improved profitability

Shares in animal feed producer Kiotech (LON:KIO) had a more volatile time than usual over the summer and early autumn, trading between 78 pence and 100 pence. But while many companies quoted on the Alternative Investment Market have had a wretched time over the past three months, Kiotech is still around four times its value at the time of the Lehman Brothers collapse (a real nadir for AIM shares) three years ago.

The company’s share price, at 79 pence, is still more than a third off its high of 111.6 pence – achieved around the time it made its business-transforming acquisition of Optivite in September 2009 – but September’s interim results did help to send the shares back up towards this level as they demonstrated that management has been focusing on improving profitability.

Kiotech specialises in making high-performance natural feed additives for the global agriculture and aquaculture markets. Its products are designed to improve the health of animals, leading to improved productivity for farmers.

During the past couple of years it has been focused on the integration of Optivite and recently it said this integration was complete.

The acquisition of Optivite was driven not only by its presence in a number of markets that Kiotech was interested in, but also because its animal feed products work in a slightly different way. While Kiotech’s traditional products have been based on a pro-biotic, preventative approach, Richard Edwards, Kiotech’s executive vice chairman, says: “Optivite had a more nutritional approach, using enzymes that help get more of the proteins out of the feed.”

Optivite sells a number of products that include: vitamin mineral premixes, enzymes, specialist fats, antimicrobials, antioxidants, performance enhancers, protein concentrates, mycotoxin binders and organic feeds.

During the integration of Optivite Kiotech has taken the opportunity to make cost savings by, for example, closing down its Aldermaston facility and installing the customer service department of Kiotech’s Kiotechagil brand to Optivite’s Manton Wood site. However, both brands are here to stay, according to Edwards. “Internationally we go through different distributors, so we’ve kept both brands,” he says.

This applies even when products under the two brands compete in the same area. For example, Kiotechagil’s Salkil product for animal feed is designed to tackle enteropathogens such as E.coli and salmonella, while Optivite has a similar product called Salgard.

However, in the UK, Kiotech has exited the market for Optivite’s low-margin commodity products while focusing on higher-margin feed additive products. The firm believes that the restructuring of its business has enabled its corporate identity to be positivity reinforced within the UK agriculture market and that the brand awareness of Optivite among UK customers has significantly strengthened as a result.

Kiotech is continuing to make strides in China, where it has moved away from a direct sales approach in selling feed additives to large mills. Instead, it is forming strategic alliances within the premix segment and these alliances “are beginning to show benefits” by accelerating access into the complex buying network of large organisations. However, in its recent results the firm stressed that “success in China will not be achieved overnight” and will require persistence and patience.

In Brazil, the firm is now selling its acidifier products to some major integrators. Kiotech’s distributor in the country visited the firm’s Manton Wood during the first half in order to finalise the distribution strategy there. According to Edwards, Brazil is an important agricultural market for Kiotech. “It is the third-largest market by single country, a self-sufficient food producer, but it is now exporting into Europe so it needs to comply with EU animal health regulations,” he says.

Meanwhile, Kiotech is continuing to target the aquaculture market.

The firm’s Aquatice range of products is aimed at stimulating feeding within commercial fisheries. The benefits include increasing the feeding activity of farmed fish, so accelerating growth and lowering total feed consumption, as well as reducing environmental damage from uneaten feed.

After a trial with catfish, Kiotech found that Aquatice-treated ponds generated revenues that were 30-per cent greater than those from untreated ponds. The company estimates that there are approximately 1.5 million metric tonnes of catfish cultivated in South East Asia, of which 70 per cent are farmed in Vietnam (where Kiotech is working with Bayer HealthCare). Meanwhile, Edwards points out that other fish species such as tilapia and shrimp have also demonstrated good trial results.

Recently, Kiotech said that trials are continuing of Aquatice among farmers and larger animal health companies in South East Asia. The firm said that its technology is attracting increasing interest in the region.

The firm has also moved production of Aquatice from outsourced manufacture to its Manton Wood site, which should lower costs and increase control and flexibility of production.

The recent interim results for the half year to June 30 showed that in spite of a 16 per cent fall in revenues to £9.4 million during H1 2011 the firm’s profit before tax was up 32 per cent at £1 million (H1 2010: £786,000). It said that its fall in sales was a consequence of its strategic focus on higher-margin products and markets.

This change of strategy meant that, although sales were affected margins improved during the period. Kiotech also cut its admin costs by 11 per cent in H1 2011 thanks to “acquisition synergies and initiatives” such as the closing of the Aldermaston facility and the relocation to Manton Wood.

Finncap, Kiotech’s house broker, has a full-year pre-tax profit estimate of £2.1 million (translating to earnings per share 

of 8.4 pence). It has set a price target of 120 pence for the shares, which were trading at 77 pence each this morning.