Kelly Partners acquires Australian accounting practices and integrates them under a partnership model where operating partners own 49% of each business. At A$6.86 versus fair value A$5.50, the stock is overvalued by 25%. The company executes acquisitions well, but the structure dilutes parent shareholder returns—only 43% of group profits flow to equity holders after non-controlling interests take their share, while international expansion into lower-margin geographies compounds margin compression.

Best Fit: None at current levels. Quality-focused investors seeking execution excellence in professional services could consider KPG, but only below A$5.00 where the valuation compensates for structural margin compression and founder risk. The Australian operating business is genuinely well-run with stable 31% margins and exceptional cash conversion, but the 51/49 partnership structure means equity holders receive only 43% of group economics—making this a "good business, mediocre stock" situation until price adjusts.

Kelly Partners rolls up small accounting practices across Australia and the United States. The company acquires retiring practitioners' client books at 0.8-1.2x revenue, integrates them into standardised operating units, and aligns partners by selling them 49% equity stakes in each business. This creates a network of 105 partners managing 25,000+ SME client groups. Revenue comes overwhelmingly from recurring compliance and tax work (95% of total), with advisory services representing 7%.

The first half of FY26 delivered 17% revenue growth to A$76m, but statutory parent profit fell 15.5% as international expansion into lower-margin geographies (US operations at ~22% EBITDA versus 31% in Australia) compressed blended profitability. The company completed six acquisitions during the period, adding partner count from 102 to 105. Operating cash flow remained strong at 101% conversion, but gearing increased to 1.79x as debt funded deal activity.

The investment case centres on whether the partnership model can replicate Australian economics internationally. Margins have declined for eight consecutive half-periods—from 34% in FY18 to 25.6% today—as geographic mix shifts. Management's 32.5% EBITA target has never been achieved. With no dividends, no succession plan for the 60%-owning founder, and leverage constraining deal capacity, the path to value creation narrows. At A$6.86 versus fair value A$5.50, the stock is overvalued by 25%.

What happened? First-half FY26 revenue increased 17% to A$76m, driven by six acquisitions adding A$9m and organic growth contributing 4%. However, statutory parent profit declined 15.5% to A$2.8m as amortisation from prior deals, higher interest costs (up 24% year-on-year to A$3.2m), and international margin dilution offset top-line gains. The non-controlling interest absorbed A$5.6m of the A$7.3m group profit—partners' 49% stakes claimed 57% of earnings. Australian operating units maintained 31.3% EBITDA margins, but US operations at an estimated 22% pulled the blended group margin to 25.6%, down from 29.8% two years prior.

What's next? The company targets 5-8 acquisitions per year, though rising leverage (peaking at 1.85x in FY26) will constrain pace beyond FY27 as debt capacity tightens. International revenue will grow from 15% to an estimated 21% by FY28, further diluting margins unless US operations converge toward Australian profitability—an outcome management promotes but has not demonstrated over three years of expansion. The key catalysts are: (1) evidence of US margin improvement above 26% (versus current 22%), which would validate the international strategy, or (2) margin deterioration below 26% group EBITDA for two consecutive periods, confirming structural compression. Refinancing risk emerges in calendar 2026 as A$17.7m of facilities require extension. With interest cover compressed to 4.5x (down from 22x in FY18), banks may demand equity contribution or stricter covenants.

What could go wrong? The single largest risk is founder concentration combined with leverage stress—a correlated downside scenario with 35% combined probability. Brett Kelly is simultaneously Chairman, CEO, deal sourcer, integration architect, and 60%+ shareholder. No succession plan exists, no deputy CEO has been appointed, and board independence is limited. His departure or incapacity would halt the acquisition engine while simultaneously triggering partner uncertainty across 105 operating units. This event, when layered onto elevated gearing (1.79x with 4.5x interest cover), creates a refinancing cascade: deal flow stops, reducing forward EBITDA visibility; banks tighten covenants or demand equity; forced capital raise dilutes existing holders by 25-30%. The probability is not negligible—Kelly is in his 60s—and the impact is catastrophic, with fair value dropping to A$2.77 in the severe scenario. This risk cannot be hedged through portfolio construction and demands either material valuation discount (entry below A$4.50) or concrete succession actions (deputy CEO appointment with deal authority). Neither exists today.