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Kape on course for bumper 2019

The provider of cyber security software has delivered 25 per cent earnings growth in 2018, and is on course to grow even faster this year
February 4, 2019

Shares in Kape Technologies (KAPE:102p) a provider of cyber security software, have more than doubled in value since I included them in my at 47.9p in my 2017 Bargain Shares Portfolio, but I feel the re-rating is far from over.

A full-year pre-close trading update confirmed that 2018 cash profits will be slightly above market estimates, up by 25 per cent to $10.4m (£8m), to deliver a similar percentage rise in pre-tax profits to $8.4m. The trading update also revealed that last summer’s acquisition of Intego, a Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business, is progressing ahead of management’s expectations. Intego’s purchase price of $16m equated to 11 times its 2017 pre-tax profit of $1.4m, so was sensibly priced and that’s before Kape’s management got to work on ramping up Intego’s user acquisition strategy as it has done so well with the 2017 acquisition of CyberGhost, a provider of secure virtual private networks (VPNs) that securely pass data traffic over public networks.

Furthermore, having trebled its customer base to 830,000 over the course of last year, Kape can target market cross-promotion campaigns to try to entice its customers in 160 countries to take more than one of its products. Bearing this in mind, the directors say that the integration of last autumn’s 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, is ahead of expectations, too.

2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 3.02.17 (p)Latest bid price on 1.02.19 (p)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.2546.80151.1
Kape TechnologiesCROS47.91000108.8
Chariot Oil & Gas (see note one)CHAR8.292.7043.0
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
Bowleven (see note four)BLVN28.9171513.8
H&T HAT289.7529715.88.0
Avingtrans AVG2002004.72.4
Management Consulting Group (see note five)MMC6.18360-3.0
Tiso Blackstar Group (see note six)TBG5520.40.54-61.9
Average    32.1
FTSE All-Share Total Return  64856900 6.4
FTSE AIM All-Share Total Return 9771035 5.9
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. 
7. 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

So, with customer retention rates up from 69 to 74 per cent in the past 12 months, margins improving and Kape set to reap the full benefits of last year’s acquisitions, then expect another step change in profitability in 2019. House broker Shore Capital forecasts 2019 cash profits of $14.3m and pre-tax profits of $12.2m on revenues of $77m. On that basis, expect EPS to rise from 3.7¢ in 2017, to 4.6¢ in 2018 and 6.7¢ in 2019. I would flag up that Kape ended the year with net funds of $40.3m, a sum worth 22p a share, giving it ample firepower to fund future earnings-enhancing bolt-on acquisitions in this high-growth sector.

This means that net of cash on the balance sheet, Kape’s shares are priced on a forward PE ratio of 15 for 2019, hardly a punchy rating for a company that is generating organic growth and making sensibly priced acquisitions to scale up its operations and create cross-selling opportunities, too. So, although the shares are slightly below the 105p level at which I last suggested buying (‘Bargain Shares: Exploiting pricing anomalies and top-slicing’, 3 Dec 2018), I feel that another leg up in the share price is warranted and next month’s annual results could be just the catalyst. 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.