KD - Kyndryl Holdings Inc.: Initiative-Driven New Company

2023-04-27 07:36:06 ET

Summary

• Kyndryl Holdings offers IT infrastructure services both in the United States and globally.
• The company became independent in late 2021 after its spinoff from IBM.
• To drive its growth and financial benefits, the company developed a long-term strategy involving three initiatives: Alliances, Advanced Delivery, and Accounts.
• The stock has a certain level of risk, and this is in relation to its high debt level.

Investment Thesis

Kyndryl Holdings ( KD ) operates in the IT sector and provides IT infrastructure services worldwide. These services include Cloud, Digital Workspace, Network, Edge, Data, Application, Core enterprise, and cloud services. The company serves the retail, telecommunications, and financial industries.

The company's stock has appreciated 16.4% this past year. Following KD's spinoff from International Business Machines Corporation [IBM] in 2021, it is pushing hard to establish itself as an independent company. As a result, it has put into action a long-term strategy or, as the company calls it, 'the three A's initiatives' to propel its growth and bring significant financial benefits. These three initiatives are Alliances, which involve creating new partnerships and expanding existing ones; Advanced Delivery, which consists in delivering technologies that improve service quality; and Accounts, which position the company to be successful and profitable by reviewing their customer account management. The firm faces currency exchange costs and price surges, but with the progress in the 3A's, it has navigated them.

Kyndryl has registered positive returns against its CAPEX based on the 3A's initiatives. However, the stock is not without risk, which is related to its high debt. The company has not yet been profitable since its' independence.' I rate the stock a buy to patient investors in the absence of profits but a hold to profit-oriented investors.

The Three A's Initiatives

Kyndryl has tried to carve out its position as an independent unit after IBM's spinoff. KD has been free to explore more ground in the IT sector to drive its growth. Therefore, it developed a long-term strategy with three initiatives; Alliance, Advanced Deliver, and Accounts management.

Alliance

KD has tried to forge alliances and partnerships with cloud technology providers such as AWS, Cisco, Dell Technologies, Google Cloud, Lenovo, Nokia, Microsoft, and Teradata, among other players. At first, in the cloud domain, the company only provided IBM cloud services, accounting for a very small market share. With the new partnerships formed, it has been able to increase its market share in the IT sector.

Some of these alliances have led to new offerings from Kyndryl. For example, Kyndryl and Nokia have partnered to provide cutting-edge wireless connectivity and edge computing to customers globally. They share a common vision to enhance their customers' digital transformations in their businesses and operations.

Additionally, the Mainframe data pipes have facilitated connections between the mainframe and Microsoft cloud, providing customers with a pathway to move their mainframe data to the cloud. The Kyndryl and Teradata alliance has also helped clients gain insights using Artificial Intelligence and data modernization to achieve better business outcomes. These developments would have been nearly impossible if the company was still tied to IBM.

Advanced Delivery

The concept of advanced delivery is providing automation alongside other technologies which improve their service quality, specifically regarding system resilience and stability. This involves identifying issues early on, anticipating them, and taking proactive measures. In turn, this creates customer value and lowers company costs.

KD has therefore developed services and solutions aligned with modern and evolving business demands. They include; Kyndryl Bridge , an open platform that combines and links complex process and management tools that businesses rely upon in the world economy. Second is the Kyndryl Vital , through which the company's team and experts work with their customers to evaluate problems and develop effective and efficient solutions. Lastly is the Kyndryl Consult that unites Kyndryl Bridge and Kyndryl Vital to establishing a dependable loop of tech-based agility, resilience, and business advancement that enable companies to retain a competitive edge.

Accounts

After the spinoff, the company noted that approximately 40% of its clients generated what they regarded as inadequate profit margins. One of the company's main focuses is tackling those that provide narrow margins or unattractive returns by incorporating content with better profit margins into existing accounts. This initiative works to improve aspects of its operations that have substandard margins.

Attracting new customers as a new company is a top priority, and Kyndryl is no exception and has been notably successful on this front. It has signed contracts with BMW, Singapore Airlines, Honda, Yamaha, and Michelin.

Bottom line, I have confidence in the company's strategy to propel its growth and profitability both now and in the future. This is based on the initiatives' progress thus far, which I shall discuss below. The company is headed towards a promising future with attractive returns to its investors.

Are the Investments in Relation to the 3A's Worthwhile?

KD's investments have indeed generated positive returns against its investments. First is the Alliances initiative, in which Kyndryl inked contracts in relation to cloud hyper scalers partnerships in the nine months that ended on December 31, 2022. They were valued at around $750m on average, almost hitting their target signings at $1b for the year. The company also increased its proficiency in cloud computing with 31,900 certifications among its staff, which is a 98% increase y-o-y.

In the Advanced Delivery initiative, the company reassigned over 4500 delivery experts to support emerging revenue sources and fill gaps resulting from attrition. This action will generate total annual savings amounting to $225m, setting the company up to supersede its $200m objective at the end of the fiscal year 2023. Moreover, according to the Q3 2023, signings from the Kyndryl Consult increased 32% compared to the previous year, contributing to about 12% of their revenues.

According to the MRQ, efforts from the Accounts initiative resulted in total annual benefits of $130m, which is moving towards the end of 2023's fiscal year goal of $200m.

Analyzing the Balance Sheet

The company's total debt is $4.53b, about 1.3x its market cap of $3.26b. As of December 31, 2022, the company had short-term assets at $4.96b, which exceeded its short-term liabilities at $ 4.6b, showing its ability to cover its liabilities in the short run. However, its long-term liabilities were $6.4b higher than its receivables at $1.56b and cash at $2b, and in comparison to its market cap, this is a huge debt.

With its cash balance amounting to $2b, the net debt is $2.53b. Regarding the debt's interest coverage, the company is not in a position to cover its interest payments as it has only registered pretax losses as a result of currency exchange costs and inflationary pressures. This is a cause of concern; however, its debt repayments are due between late 2024 and 2041. Although risky and without guarantee, investors can consider that the company still has time to generate pretax profits and generate enough cash flows to service its debt. Investors should monitor this debt, as external factors could increase debt levels.

Valuation

Looking at the valuation ratios, I will consider its PS and PB ratios. Comparing the stock price with its revenues/sales TTM, KD had a PS ratio of 0.19 which is well under the sector's median at 2.59. Its PB ratio was 1.20 while the sector's was 2.75. The ratios signal that investors are willing to pay less for the company's sales and book value. This makes sense considering its low profit margins. It would be insignificant to consider its PE ratio since the company has recorded negative earnings. However I think investors should take advantage of the low entry as it is a good buying opportunity since the company is still establishing itself in the industry and is continuing to pursue its growth.

Conclusion

Following its independence from IBM, Kyndryl has been pushing hard to establish itself as an independent firm. As a result, it has implemented its long-term strategy involving three initiatives to propel its growth and enable it to gain financially. The company has recorded positive returns from its investments in relation to the three initiatives. The company is not without risk, and this is regarding its high debt levels.

With the progress of the three A's initiatives, the future looks promising in terms of profitability and value to its investors. I rate the stock a buy to patient investors in the absence of profits but a hold to profit-oriented investors.

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