Aim-traded Kape Technologies (KAPE:120p), a provider of cyber security software, is acquiring Berlin-based ZenMate, a digital privacy company focused on encrypting and securing internet connections and protecting individuals' privacy and digital data through virtual private networks (VPN).
The acquisition is highly complementary to Kape's existing VPN business, CyberGhost, and deepens its presence in Europe and Germany, in particular. ZenMate currently has 50,000 premium customers which analysts at Edison Investment Research estimate pay annual subscriptions of between $40 to $50. Zenmate has grown organically to date but has not reached critical scale yet to turn a profit – it posted a pre-tax loss of €1.1m in 2017. However, its ‘Software-as-a-Service’(SaaS) model is consistent with that of Cyberghost and Kape’s management team plan to use their technology infrastructure and digital marketing expertise to accelerate Zenmate’s user acquisition and enhance its profit margins. They have form here as Cyberghost has outperformed expectations substantially since being acquired by Kape in March 2017.
There should also be scope to exploit cross-selling and up-selling opportunities from Zenmate’s customer base across the rest of Kape’s product portfolio which includes: Reimage, a patented Microsoft-based product tool that enables users to clean up their computers; DriverAgent, a PC maintenance software product offering a device driver search and update service; and Intego, a Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business.
Analysts at Edison estimate that after restructuring (at a cost of $300,000), Zenmate should be able to turn profitable in the next quarter and generate cash profits of $500,000 on revenues of $2.5m in 2019, warranting the €4.8m (£4.2m) cash consideration Kape is paying. Moreover, including the contribution from last summer’s acquisition of Intego, details of which I outlined in my last article (‘Kape crusading cyber security’, 24 September 2018), Edison expects Kape to lift pre-tax profits from $8.7m this year to $12.3m on revenues of $72m in 2019.
On this basis, the shares are rated on a 2019 cash adjusted PE ratio of 18 after taking into account a pro-forma cash pile of 22p a share. For a business servicing a high growth segment of the cyber security market, and with cash in the bank to fund further complementary bolt-on deals (which will enhance the product suite further and create even more cross-selling opportunities), that rating is not expensive.
So, having first advised buying Kape’s shares, at 47.9p, in my 2017 Bargain Shares portfolio, I continue to see upside potential to my 180p target price. Buy.
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