Bargain shares: Technology stocks on the upgrade

Over 40 per cent of ExpressVPN’s users are based in North America, which scales up Kape’s global offering, and almost half its 290 employees are R&D engineers, thus adding valuable expertise. There are also material opportunities to cross-sell and generate cost savings by combining the two groups which will service 6m paying customers. ExpressVPN is fast-growing, reporting revenue of $279m and cash profit of $74.8m in 2020, both metrics up by more than a third year on year.

Kape is now forecast to deliver cash profit of around $172m in 2022, up from $74m expected in 2021 and $38m in 2020. When I included the shares, at 47.9p, in my 2017 Bargain Shares portfolio, Kape was making cash profit of $8m. Given the structure of the deal, analysts expect earnings per share (EPS) of 41c (30p) in 2022, implying 61 per cent year-on-year growth. On a forward price/earnings (PE) ratio of 13.8, the rerating has further to run.

Kape’s earnings-accretive game-changing acquisition

• Earnings-accretive $936m acquisition of ExpressVPN
• Cost savings of $19m targeted in 2022 and $30m annualised from 2023
• Guidance cash profit of $166m to $172m in 2022 on revenue of $610m to $624m
• Forecast earnings per share (EPS) of 41¢ in 2022

The $936m Kape Technologies (KAPE: 415p) is paying for ExpressVPN looks a fair price as it represents 10.8 times 2022 cash profits (7.8 times after targeted cost savings and synergies), a deep discount to rival Avast’s recent take-out price of 16 times cash profit.

The funding structure is sensible, too, as the consideration is being settled by the issue of $237m new ordinary Kape shares to the vendors, $354m cash on completion (financed by a placing and retail offer at 337.5p), with a further $172m cash payable on both the first and second anniversaries of the deal. Importantly, deferred consideration can be fully funded from Kape’s operational cash flow and by using undrawn lines from its existing credit lines. Net debt is expected to decline from three times cash profit on completion to 1.5 times by the end of 2022.

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). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Simon then advised taking up the one-for-six open offer at 5.5p ('Exploiting margins of safety', 1 June 2021). Total return reflects these transactions.

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). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and  rates the shares a buy.

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 at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019).

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 transferred its UK listing to the Johanesburg Stock Exchange. The shares were then delisted on 23 November 2020 when shareholders received an exit cash payment of R415 per share on cancellation of their shares.

7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). 

Source: London Stock Exchange.

Factoring in $19m of targeted cost savings in 2022, the £1.2bn market capitalisation group is being valued on an enterprise valuation to cash profit multiple of 11 times. That’s a low rating for a group run by a shrewd management team who are proving adept at increasing its customer base, cross-selling products, successfully integrating acquisitions and entering new lucrative revenue generating agreements.

Kape’s share price has risen by 35 per cent since I last suggested buying the shares, at 303p (‘Bargain shares: Building momentum’, 26 July 2021), and the holding has produced a 763 per cent total return on my 2017 entry point. I raise my fair valuation by a third to 500p to reflect a target enterprise valuation of 13.4 times 2022 cash profit estimates. Buy.

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