Aim-traded Kape Technologies (KAPE:125p), a provider of cyber security software formerly known as Crossrider when I included the shares, at 47.9p, in my 2017 Bargain Shares Portfolio, has reported a robust pre-close trading update ahead of half-year results on 24 September.
I had expected as much given that the company offers tangible benefits to more than 1m customers, around 30 per cent of whom take out premium subscriptions for Kape’s products, which include: Reimage, a patented Microsoft-based product tool that enables users to clean up their computers; DriverAgent, a PC maintenance software products company offering a device driver search and update service, which scans computers for outdated drivers; and Cyberghost, a provider of secure virtual private networks (VPNs) that securely pass data traffic over public networks.
All of these activities are performing well, so much so that Kape’s cash profits increased by almost half to $4.3m (£3.3m) on revenues of $26.4m in the first half of this year, underpinning expectations of analysts at Edison Investment Research that the company can deliver cash profits of $10.2m for the full year to boost pre-tax profit from $7.5m to $8.7m. On this basis, expect adjusted EPS of 5.4¢, or 4.1p at current exchange rates.
A key take for me is Kape’s rising recurring income stream – 40 per cent of Reimage sales in the first half were sold on a subscription basis – which improves the quality of revenues as well as forward visibility, thus de-risking forecasts. The other point worth noting is that having seen last year’s €9.2m (£8.2m) earnings accretive acquisition of Cyberghost outperform internal budgets, the board are using $16m of the company’s $62.7m cash pile to acquire Seattle-based Intego, a leading Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business.
The acquisition provides Kape with a foothold in the malware protection market and boosts its product portfolio with the addition of complementary malware protection and security solutions; offers scope to leverage Intego's technology and development skills to expand into other complementary software solutions – Kape’s management intends to develop and launch an anti-malware product for Windows users based on Intego’s technology; increases Kape’s user base by 150,000 paying users, with high renewal rates of above 75 per cent; and creates cross-selling opportunities for both Kape's and Intego's products across their respective customer bases.
I would also flag up that although Intego is already highly profitable – the business posted pre-tax profits of $1.4m on revenue of $6m in 2017 based on an average annual subscription of $40 per customer – there is potential to accelerate Intego's user acquisition strategy and boost its profit margin by leveraging off Kape's digital marketing expertise.
Moreover, after factoring in a full 12-month contribution from Intego next year, then analysts predict Kape can increase its revenues by a sixth to $69.7m in 2019 to deliver cash profits of $13.2m. On this basis, expect pre-tax profits of $11.8m and EPS of 7.2¢ (5.5p). Also, after factoring in retained profits earned in the second half of this year, and adjusting for the $7m special dividend of 3.55p a share paid out in May, Kape should have $52m (£37m) net funds on its balance sheet by the year-end, a sum equating to 21 per cent of its current market capitalisation.
This means that net of cash the shares are rated on 18 times 2019 earnings estimates, hardly a full valuation given the potential for Kape’s management team under the leadership of chief executive Ido Erlichman to maintain the strong growth they have delivered since I initiated coverage two and a half years ago. There is also scope for the directors to make further complementary acquisitions to augment Kape’s product portfolio, and boost earnings further.
In the circumstances, I am lifting my target price to 180p to value Kape’s equity at £253m based on an enterprise value to cash profit multiple of 20 times for 2019. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. Full details of the content is available on YPDBooks website.
Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Simon has published an article outlining the content: 'Secrets to successful stock picking'
