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Exploit Kape’s valuation anomaly

Although the cyber security software provider is attracting record numbers of new subscribers, and highly profitable ones, too, there is a disconnect between the stock market’s miserly valuation of the company and its operational performance

There is a glaring disconnect between the stock market’s miserly valuation of Kape Technologies (KAPE:70p), a provider of cyber security software and a constituent of my 2017 Bargain Shares portfolio when the shares were priced at 47.9p, and the operational performance of the company.

Adjust for non-cash amortisation costs of $2m, exceptional costs of $0.5m for integrating the two acquisitions made last year, and almost $1m of share-based payments, and Kape’s underlying pre-tax profit surged by a third to $4.85m on revenue up 24 per cent to $29.9m in the first half of 2019. Key metrics are all moving in a positive direction: retention rates improved by 8 percentage points to 82 per cent, one of the highest rates in the industry, highlighting a high level of customer satisfaction; 347,000 new customers were added in the period to take the subscriber base to 1.02m of the 1.2m paying users, the vast majority of which signed up for three-year subscriptions; and forecast cash flow to be generated from the existing user base has increased to $45m over the next three years.

Moreover, the integration of the October 2018 acquisition of 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 (VPNs), is working out incredibly well. That business is now operating profitably, and benefiting from Kape’s digital marketing expertise and improvements made to its product offering. These include the launch of ZenMate Pulse, a comprehensive web firewall extension that protects against pop-up ads, trackers, phishing schemes, malware and malvertising.

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