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Kape’s growth materially undervalued

The provider of cyber security software is set for a step change in profitability this year and next, and that is simply not being priced into the company’s current valuation
June 20, 2019

Kape Technologies (KAPE:83p), 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 company’s name was Crossrider, has issued a bullish update this morning on its October 2018 complementary acquisition of Berlin-based ZenMate – a digital privacy company that is focused on encrypting and securing internet connections and protecting individuals' privacy and digital data through virtual private networks (VPNs).

This segment of the cyber security market is a core driver of Kape’s growth. Having made the acquisition in March 2017 of CyberGhost, a leading cyber security software-as-a-service (SaaS) provider of VPNs, Kape has trebled that business’s user base to more than 400,000 customers in the past two years. The global cyber security market is worth $153bn (£120bn) and is growing at 12 to 15 per cent per year, so is a really hot area to be operating in. The global VPN market is growing even faster. It was valued at $15.3bn in 2016 and is projected to post compound annual growth of 18 per cent until 2022 when it could be worth $35.7bn, according to Statista, a leading provider of market and consumer research data.

2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Latest bid price on 20.06.19 (p)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.2545.20146.9
Kape Technologies (formerly Crossrider)KAPE47.9803.5574.4
Chariot Oil & Gas (see note one)CHAR8.294.5051.2
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
H&T HAT289.7532022.418.2
Avingtrans AVG2002187.212.6
Bowleven (see note four)BLVN28.912.4155.8
Management Consulting Group (see note five)MMC6.18360-3.0
Tiso Blackstar Group (see note six)TBG5518.20.54-65.9
Average    29.9
FTSE All-Share Total Return  64857393 14.0
FTSE AIM All-Share Total Return 9771053 7.8
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). Simon turned buyer of the shares again on 17 April 2019 ('Chariot's North African adventure', 17 April 2019).
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. 
6. 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.

It’s not difficult to understand why the cyber market is growing so quickly, either, as almost one billion adults in 20 countries globally experienced cybercrime in 2017 alone, based on research from Symantec, the US cyber security group. This favourable backdrop offers an opportunity for Kape to grow its businesses organically, and to make earnings-accretive acquisitions too.

Kape’s management team are clearly working their magic on ZenMate, realising $1.7m of annualised cost savings since acquisition to attain cash profitability in the first quarter this year. They have launched the ZenMate ultimate app across multiple online platforms and ZenMate Pulse, a comprehensive web firewall extension, which protects against pop-up ads, trackers, phishing schemes, malware and malvertising, as well as providing users with an explanation of the types of threats that they face on each website.  

The contribution from ZenMate along with that from last summer’s $16m acquisition of Intego, a Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business, should contribute to a step change in Kape’s profits this year and next. Analysts at broking house Arden Partners predict that Kape’s current-year pre-tax profits will increase by 58 per cent to $9.8m on 40 per cent higher revenue of $76m to produce earnings per share (EPS) of 5.5¢ (4.3p). The respective forecasts for 2020 are revenues of $89.8m, pre-tax profit of $16m and EPS of 9.1¢ (7.2p). Kape also retains a strong balance sheet to fund future earnings-accretive bolt-on acquisitions. Arden predicts year-end closing net funds of $35.4m (19.5p a share), rising to $40.2m (22.25p) at the end of 2020.

On this basis, Kape’s shares are rated on a modest cash-adjusted 2019 price/earnings (PE) ratio of just below 15, falling to a PE ratio of 8.5 in 2020. From my lens at least, the market is materially undervaluing the company’s projected earnings growth, which could see EPS increase by 160 per cent this year and next. Moreover, the potential for earnings upgrades on the back of merger and acquisition activity is effectively in the price for free. Strong buy.

■ Stock clearance offer. 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. 

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