At the risk of sounding like a broken record, I have to do the same again this week as a host of other companies have all issued positive trading updates and seen their share prices hit highs, or exceed my target prices. Over the course of this week I will revisit these companies in separate articles in order to ascertain whether there is mileage left in the upward momentum, or if it's time to bank profits on these holdings.
Another major contract win for K3
Aim-traded retail software company K3 Business Technology (KBT: 361p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, has won a major contract for its "ax|is fashion" solution with one of Germany's major online retailers, K-mail Order GmbH & Co.
The order has been secured through K3's channel partner in Germany and is its second order through a global systems integrator, and the second win in Germany, the largest market for fashion in Europe, in under two months. In mid-September, the company announced that it had won a similar contract with Munich-based TriStyle Mode GmbH, a leading European mail-order fashion retailer. I commented on the significance of that deal at the time ('Small-cap value plays', 22 September 2015). Clearly, investors have taken note as K3's share price has risen by a further 22 per cent to 352p and has now risen by 64 per cent since I initiated coverage on the company ('Tapping into retail growth', 16 Sep 2014).
The expansion of K3's third-party sales network has been a key focus for the company over the past 12-18 months and is a significant part of its growth strategy. Head of equity research Andrew Darley at broking house FinnCap notes that "as well as demonstrating execution of the potential for territorial expansion into Europe, the US and the Far East, the contract was also secured through a new channel partner, contributing to an expanded channel partner network which offers additional promotion and sales routes to market". Mr Darley also makes the valid point that although the scale of the contract is not disclosed for commercial reasons, the award underpins unchanged financial forecasts, with ongoing revenue from software licence and support renewals.
FinnCap predicts that K3 should be able to increase revenues by 8 per cent to £90m in the 12 months to end-June 2016 to boost pre-tax profit by more than a third to £9.7m and deliver EPS of 25.4p, up from 19.1p in fiscal 2015. On this basis, expect the payout to be raised by a fifth to 1.8p. The respective forecasts of analyst Katherine Thompson at Edison Investment Research are for pre-tax profits of £9.3m, EPS of 23.7p and a dividend of 1.65p.
Putting the rating into some perspective
This means that K3's shares are currently trading on 14 times fiscal 2016 earnings estimates using FinnCap's top-of-the-range estimates, a single-point rating discount to the average earnings multiple for the small-cap UK software and IT services sector. Mr Darley has a 380p target price and believes that the current rating "seems to be appropriate to a Microsoft reseller, not a provider of its own ax|is IP, so there is still plenty of upside". K3's core business offering is a Microsoft Dynamics-based range of retail software that provides a single platform for the entire business. Last year, K3's sales of Microsoft Dynamics-based software products rose by more than half to £7.4m, representing 9 per cent of its revenues.
Edison believes that the shares should trade up to at least 15 times earnings estimates to give a minimum target of 355p. So although that target has almost been hit I feel that the potential for further contract awards will not only underpin the sharp rise in profits forecast this year, but are likely to drive the price higher towards Mr Darley's 380p target. Run profits.
Please note that I have written two other columns today, both of which are included in the list below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past two weeks:
■ MS International: Buy at 180p, initial target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)
■ UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)
■ Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015)
■ Globo: shares suspended at 28p ('The truth about Globo', 29 October 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
