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Three buying opportunities

A cyber security firm, a provider of a state-of-the-art mobile payment platform and a litigation funding firm are all set for growth
March 18, 2020

Kape Technologies (KAPE:100p), a provider of cyber security software and a constituent of my 2017 Bargain Shares portfolio, rallied 64 per cent after my last article (‘Kape’s transformational acquisition’, 25 November 2020) to hit my 200p target price last month. The subsequent sharp retracement presents a new buying opportunity for several reasons.

Importantly, Kape is unaffected by the outbreak of Covid-19. In fact, Kape has been benefiting from increased adoption of its cyber security software (which protects data security and privacy against piracy and phishing attacks) given that hundreds of millions of people are now working from home for the foreseeable future, and spending far more time online as a consequence.

Secondly, digital privacy is a fast-growing market that is worth $24bn globally and is expected to grow by 50 per cent by 2022, according to industry experts. Kape has the products to exploit the consumer demand, as highlighted by the 42 per cent organic growth in its user base on industry leading retention rates of 81 per cent last year. CyberGhost, a leading cyber security software-as-a-service provider of virtual private network (VPN) solutions that encrypt and secure internet connections to protect individuals' privacy and digital data, has increased its user base five-fold since Kape’s acquisition three years ago.

Thirdly, the $127m acquisition of Colorado-based Private Internet Access (PIA), a leading provider of VPN solutions, has scaled up the operation and is enabling Kape to market new products and cross sell existing ones across a significantly larger base of 2.35m customers. Almost half of Kape’s revenue is derived from North America and more than a quarter from France, Japan, UK and Germany.

Fourthly, taking into account targeted cost savings from PIA’s infrastructure and back office functions, and factoring in a conservative high single digit growth in revenues earned from Kape’s legacy business and PIA, management guidance is to expect 2020 revenue in excess of $120m and adjusted cash profit of at least $35m, up from $14.6m in 2019. On this basis, expect underlying pre-tax profit to treble to $31.4m, earnings per share (EPS) to double to 13.4 ¢ (11.2p) and operating cash flow to slash net debt from $32m to $20m by year-end. Kape is close to completing a highly competitive debt refinancing that will cut its interest bill in half, too.

On a bargain basement 2020 price/earnings (PE) ratio of 9, and with solid prospects of also delivering double-digit organic EPS growth in 2021, the shares should re-rate sharply once the market malaise passes. Buy.

 

Bango’s cash profit set to surge

Aim-traded Bango (BGO:69p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, is benefiting from the global lockdown following the outbreak of Covid-19.

With millions of people stuck at home and schools closures across the world, appstore and in gaming spend could ramp up sharply as has previously been the case during holidays and festivals. Bango is leveraged to an uptick in business across multiple territories including Japan where physical goods and delivery services can be paid for via its platform, too. The Covid-19 lockdown could be in force for months, thus forcing marketers to spend more on their campaigns, which in turn is good news for Bango’s data monetisation business. Chief executive Paul Larbey notes that consumer spending on online services and entertainment has been increasing in countries where there are “stay at home” policies.

Bango’s end user spend (EUS) doubled for the fifth consecutive year to £1.1bn, and the company moved into cash profit last year. Alongside the annual results, Bango announced the launch of carrier billing payment services with Hatch, the US monthly subscription-based 5G games streaming platform, adding further to its recurring revenue stream having agreed a similar deal for the monthly subscription-based YouTube TV package.

So, with the benefit of stable operating costs and a platform that has been tested to process payments of £25bn, Bango’s operational gearing should really kick in this year. Also, some large licences “worth seven figures” that were due to be signed at the end of 2019, will now be higher value when they are signed off in the first half, adding weight to FinnCap’s 2020 forecast of a 58 per cent revenue hike to £14.7m. On this basis, expect cash profit to surge from £400,000 to £3.4m and produce pre-tax profit of £0.9m. Bango can fund its business internally as it has a cash rich balance sheet and 2020 operating cash flow is forecast to treble to £2.5m.

True, the market crash has wiped out the 40 per cent paper profit since my November article (‘Bango gaining momentum, 25 November 2019). However, the business could be making £10m of annualised cash profit on revenue of £20m next year, a level of profitability that a market capitalisation of £48m fails to reflect. In a more benign stock market, the share price could double. Buy.

 

Litigation Capital’s growth undervalued

Sydney-headquartered Litigation Capital Management (LIT:49p), a provider of litigation financing to enable third parties to pursue and recover funds from legal claims, has delivered eye-catching interim results.

Revenue more than doubled to A$24.1m (£12m) buoyed by four single-case investments in the Asia-Pacific region. The decision to enter the corporate portfolio market in 2019 is paying off handsomely, too. The resolution of two disputes accounted for a third of gross profit of A$12.2m, and Litigation Capital has already got back all of the A$4.3m it invested in a portfolio of seven cases.  Moreover, with operating costs of A$5.4m kept under control, pre-tax profit soared by 155 per cent to A$6.9m to deliver almost half the annual profit estimate of Arden Partners. Total cash receipts of A$18.9m have buoyed net cash to A$44.5m.

An impressive internal rate of return (IRR) of 79 per cent on completed cases over the past 8.5 years highlights the potential for further thumping gains on the A$37m (at cost) that Litigation Capital has invested in 24 separate direct balance sheet investments (estimated capital commitment of A$96m). The company has just raised US$150m from smart investors for a new third-party fund, too, thus enabling Litigation Capital to increase investments in new opportunities, and earn performance fees.

The company will invest 25 per cent of the fund’s capital on which it will take its share of profit, receive 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and earn an outperformance return fee of 35 per cent over an IRR of 20 per cent during the fund’s six-year term. The fund will be seeded with A$51m of investments including international arbitration, class actions and commercial litigation cases.

True, the shares have pulled back since I updated my 2019 Bargain Shares Portfolio last month. However, priced on 1.1 times June 2020 book value estimates and on a forward PE ratio of 10, the earning power of Litigation Capital’s legal eagles is being materially undervalued. Also, in periods of economic uncertainty, the volume of legal disputes generally rises, driven by higher levels of corporate bankruptcies and liquidations. Buy.

 

Strix’s high yield worth locking in

Shares in Isle of Man-based Strix (KETL:128p), a global leader in the manufacture and design of kettle safety controls and one with strong relationships with global original equipment manufacturers (OEMs), hit my 200p target price at the tail end of last year (‘Strix’s global market expansion’, 24 September 2019), but have pulled back in the market rout. The de-rating is unwarranted.

Firstly, the company only suffered one week’s lost production at its China manufacturing facility and is now fully operational. Furthermore, having analysed trading trends during the Sars crisis in 2002-03 and the past two global recessions, chief executive Mark Bartlett says that although there is an initial small dip in business, this is then followed by a bounce back, highlighting the uncorrelated demand. This is already happening in China where Strix has a 49 per cent share of the kettle controls market. The Guangzhou facility is operating at 96 per cent resource levels.

Secondly, all of the company’s 20 largest OEMs have resumed production and are increasing capacity. Strix is sensibly holding 10 to 12 weeks of strategic stock to mitigate any supply impact during the epidemic. Risk of bad debt is incredibly low as 60 per cent of payments for products are received in advance, and working capital management is tight.

Thirdly, Strix is planning 14 product launches this year across all categories including a Duality appliance aimed at reducing water waste, a range of steriliser products with a leading Asian baby care brand, and six new lines (sterilisation and filtration) for its Aqua Optima, Astrea and Halopure brands.

Guidance is for a flat six months and then low single-digit growth in the more seasonally important second half, a realistic assumption and one that should deliver EPS of 15.5p and support a dividend per share of 7.9p as analysts at Zeus predict. On this basis, the shares are trading on a PE ratio of 8 and offer a 6.2 per cent yield. Buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.