Interim results from Kape Technologies (KAPE:190p), a provider of cyber security software, benefited from the acquisition of Colorado-based Private Internet Access (PIA), a leading provider of virtual private network (VPN) solutions that encrypt and secure internet connections.
More important than the headline grapping near doubling of Kape’s revenue to US$59m was the 12 per cent increase on a proforma basis, and the eye-catching 47 per cent organic growth in the digital privacy segment, both of which highlight the strong structural growth drivers. The Covid-19 pandemic and the shift to home working are creating a favourable tailwind, too, by bringing into sharp focus concerns relating to digital privacy and security amongst consumers.
The increased scale of the business – the group now has almost 2.4m customers – and a focus on reducing PIA’s operating costs – synergies are now towards the top end of prior guidance – are also boosting cash profit margins (up by half to 27 per cent). A high retention rate (80 per cent) and exploiting cross-selling opportunities across an enlarged customer base – Kape enjoyed a 15 per cent take-up rate of its premium VPN product amongst new Intego antivirus users in the second quarter – are further profit drivers. These factors explain why cash profits almost trebled to US$16.4m and the directors reiterated full-year guidance (US$£35-38m on revenue of US$120-123m). Attractive cash conversion rates north of 100 per cent helped slash closing net debt by a fifth to US$25.6m and Kape is well on course to be debt free within two years.
Kape’s share price is 8 per cent shy of my last buy call (‘Profit from Kape’s chart break-out, 21 May 2020), but is still up fourfold on my entry level in my 2017 Bargain Shares portfolio. A rating of 10 times 2020 cash profit to enterprise value, a third below the rating of market leader Avast (AVST) and a 2020 forward price/earnings (PE) ratio of 15 is hardly exacting. Buy.
SimplyBiz shows defensive characteristics
SimplyBiz (SBIZ:157p), a provider of compliance, business and technology services to almost 6,000 financial intermediaries, has produced solid first half results despite the Covid-19 lockdown impacting its channel distribution business.
First half cash profit dipped only seven per cent to £7.4m on slightly lower revenue of £28.9m, highlighting the defensive nature of its intermediary service business and Defaqto, a financial technology business operating a fintech platform for 5,800 advisers and providing independent ratings of 21,000 financial products and funds. The two divisions account for almost three quarters of profits, and are beneficiaries of the group’s accelerated digital strategy. SimplyBiz's cash generation is also worth highlighting; free cash flow of £4.8m reduced net debt by 14 per cent to £25.8m year on year.
The intermediary business delivered all services to IFA firms without disruption through its proprietary digital platform, boosted membership fee income by focusing on recruiting larger firms and wealth managers, and increased software license income. IFA compliance with new regulations is also providing a tailwind to the business. Last year’s earnings enhancing acquisition of Defaqto has clearly proved well timed, offsetting reduced surveying, mortgage club and marketing services income in the channel distribution division, and offering a growth driver, too.
In fact, although full-year earnings guidance of 11p a share implies a small £1m dip in underlying pre-tax profit to £14m, house broker Zeus is looking for 11 per cent earnings recovery in 2021, the growth being driven by Defaqto. The shares have edged up since my last buy call ('Targeting value plays', 16 March 2020) and on a modest forward PE ratio of 13 continue to rate a 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.
