The directors of Kape Technologies (KAPE:100p) a provider of cyber security software, were in very confident mood during our results call and justifiably so.
The annual results for 2018 speak for themselves: recurring revenues more than trebled to $27.6m (£21m) to account for more than half of the total, thus vindicating the decision to improve the quality of earnings by adopting a subscription based model; underlying cash profit of $10.4m was up 28 per cent year-on-year, and beat market estimates; and cash profit margins rose by four percentage points to 20 per cent, driven by higher average revenue per user and lowering customer churn. Indeed, retention rate improved from 69 to 74 per cent, a reflection of the high levels of customer satisfaction.
Furthermore, Kape continues to pull in new subscribers, driven by the March 2017 acquisition of CyberGhost, a leading cyber security SaaS (software as a service) provider of secure virtual private networks (VPNs), which enable users to securely pass data traffic over public networks. That business has almost trebled its customer base to more than 400,000 subscribers since acquisition as digital privacy awareness has become mainstream due to the escalation of cyber crime targeting consumers’ data.
Indeed, chief executive Ido Erlichman revealed during our call that Cyberghost is attracting 20,000 new customers every month, representing a six-fold increase in the past couple of years. It’s highly profitable too as customer acquisition costs are recouped within 15 months and by the third year the company has earned double that sum. An annual subscription for the service is $71 (£53) and most customers signs up for between three to four years. Although not disclosed, the net profit earned by Cyberghost in 2018 was more than double the $1.5m (£1.1m) made in 2017, thus vindicating the decision to pay total consideration of €9.2m (£7.9m) for the business only 24 months ago.
| 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 03.02.17 (p) | Latest bid price on 19.03.19 (p) | Dividends | Total return (%) |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 51.4 | 0 | 163.0 |
| Kape Technologies (formerly Crossrider) | KAPE | 47.9 | 97 | 3.55 | 109.9 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 2.3 | 0 | 41.2 |
| Cenkos Securities (see note two) | CNKS | 88.425 | 106 | 9.5 | 30.6 |
| Manchester & London Investment Trust (see note three) | MNL | 291.65 | 377 | 3.0 | 28.4 |
| H&T | HAT | 289.75 | 301 | 15.8 | 9.3 |
| Bowleven (see note four) | BLVN | 28.9 | 12.54 | 15 | 6.0 |
| Avingtrans | AVG | 200 | 205 | 5.8 | 5.4 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 16.7 | 0.54 | -68.7 |
| Average | 32.2 | ||||
| FTSE All-Share Total Return | 6485 | 7250 | 11.8 | ||
| FTSE AIM All-Share Total Return | 977 | 1038 | 6.2 | ||
| Notes: | |||||
| 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale. Simon subsequently advised using some of the proceeds from the share sale to participate in the one-for-8 open offer at 13p a share in March 2018 which is taken into account in the total return ('On the earnings beat', 5 Mar 2018). | |||||
| 2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). | |||||
| 3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price. | |||||
| 4. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale. | |||||
| 5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price. | |||||
| 6. Tiso Blackstar has transferred its UK listing to the Johanesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. | |||||
| 6. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p, and running the balance for free ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) | |||||
| Source: London Stock Exchange share prices. | |||||
Growth in Cyberghost was the key driver in last year’s surge in Kape’s subscriber numbers from 260,000 to 830,000, but there was solid growth too from more recent acquisitions including last summer’s $16m acquisition of Intego, a Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business. Mr Erlichman says that Intego’s user base of 150,000 customers has increased significantly since acquisition, and Kape has made cost synergies too, not to mention cross-selling the product to its enlarged paying base of 1.1m customers.
The same is true of last autumn’s $5.6m acquisition of Berlin-based ZenMate, a digital privacy company focused on encrypting and securing internet connections and protecting individuals' privacy and digital data through VPNs. It was losing €100,000 a month at the time of acquisition, and has since turned cash profitable following a short period of restructuring.
Reflecting the contribution from Zenmate and Intego, and ongoing growth from Cyberghost and Kape’s suite of other products - Reimage, a patented Microsoft-based product tool that clean ups computers, and DriverAgent, a device driver search and update service - analysts at house broker Shore Capital expect Kape to lift revenues by almost half to $77m in 2019 and deliver a 43 per cent increase in pre-tax profits to $12.6m. On this basis, expect earnings per share (EPS) of 6.8¢ (5p). Analysts have also introduced their 2020 forecasts which point to Kape’s revenues rising to $88m to produce pre-tax profits of $16.3m and EPS of 9.2¢ (7p).
This means that the shares are rated on cash-adjusted price/earnings (PE) ratio of 11 for the 2020 financial year after accounting for a net cash pile of $40.4m worth 22p a share. That’s hardly a high rating for a company which is successfully targeting a global cybersecurity market worth $153bn and one that is growing annually at 12 to 15 per cent. The global VPN market is now worth $21bn and is growing even faster at around 15 per cent per annum.
I included Kape’s shares, at 47.9p, in my 2017 Bargain Shares Portfolio when the company was previously known as Crossrider and they have more than doubled in the past year. The board have also paid out a special dividend of 3.55p a share. I last suggested buying the shares at 102p (‘Kape on course for bumper 2019’, 4 February 2019) and continue to feel that another leg up in the share price is warranted especially as I understand that the directors are looking to make a potentially large earnings-enhancing acquisition, thus providing scope for further earnings upgrades. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
