r21442
05 Jul 2016
Re: IC again - long article - 425p target Further IC update...K3 earnings enhancing acquisition Retail software company K3 Business Technology (KBT:337p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web-hosting services, has made its second acquisition in the past 10 weeks. The company is acquiring Merac, the author of an electronic point-of-sale and management system for the visitor attractions and leisure sector. Merac's customers comprise many of the UK's leading historic houses, zoos, and theme parks, including Stonehenge, Longleat Safari Park, Castle Howard, Adventure Island, and Wookey Hole Caves.It’s a well structured deal as K3 is paying an initial cash consideration of £1.27m, and an earn-out up to £175,000 is payable next year depending on performance. In the last financial year, Merac made an adjusted pre-tax profit of £0.33m on revenue of £1.27m, so the bolt-on deal will be earnings accretive. It also adds further substance to analyst forecasts that K3 can lift EPS by 10 per cent to almost 27p in the 12 months to end June 2017. On 12.5 times forward earnings, and offering 25 per cent upside to my 425p target price, I rate K3's shares a decent buy at 337p. Please note that I first advised buying the shares at 220p ('Tapping into retail growth', 16 Sep 2014), and recently published a detailed analysis of the company for online subscribers (‘Plug in and play with K3’, 20 June 2016).
r21442
20 Jun 2016
IC again - long article - 425p target When markets are jittery it pays to screen for shares that are showing relative strength. That's because the lack of selling pressure in a company's share price is a sign that shareholders are sufficiently comfortable with trading prospects and the valuation of their holdings to ride out the general market sell-off. It also indicates an absence of speculative holders who are all too ready to press the sell button. This resilience appeals because when investor sentiment improves, and the risk premium embedded in equity valuations returns to a more normal level when market volatility subsides, then shares that failed to join the sell-off in the down phase are more likely than not to make headway. Of course, shares in companies that have been sold off heavily are likely to bounce back strongly if the concerns expressed by investors that led to the share price decline prove unfounded. But as is always the case, any investment decision is all about balancing risk and reward. Personally, I would rather recommend buying shares in a quality small-cap company with a solid and loyal shareholder base and where the share price is unlikely to take a hit if investor risk-aversion rises any further. High margin, and high growth software play Bearing this in mind, I have noticed that Aim-traded shares in retail software company K3 Business Technology (KBT:358p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web-hosting services, have held up remarkably well since the share price hit a 19-year high of 377p last November. The sideways consolidation move, and lack of selling since then, is usually a good sign that the next move will be to the upside. It's a company I know well, having spotted the investment potential when the shares were priced at 220p ('Tapping into retail growth', 16 Sep 2014). I last recommended running profits back in April at the current price ('Hitting target prices', 21 Apr 2016).Shortly after I published that article the company raised £13.5m in a placing of 4.09m shares at 330p each, which expanded its share capital by 12.8 per cent. The main purpose of the capital raise was to acquire DdD, a Danish provider of proprietary 'point of sale' software/hardware for retailers primarily for the fashion sector. DdD's core 'retail in a box' product is a fully integrated combined hardware/software proposition that provides and integrates a retailer's point-of-sale, back-office system, and head-office system. The suite is designed as an easy-to-install 'plug and play' solution which is delivered via the cloud and licensed to clients on a monthly 'consumption' basis. Its main attraction to retailers lies in its rich customer interface as well as ease of use and rapid installation.The benefit for K3 is that DdD enhances the company's overall offering to the retail sector and, in particular, increases the number of its own IP-based solutions. Revenues earned from DdD's consumption-based licensing model and a diverse and well established 750-strong customer base across Denmark, Germany, Sweden and Norway also enhances K3's recurring income. There are cross-selling opportunities, too, while access to DdD's cloud technologies boosts K3's product development activities.It looks a sensibly priced deal as DdD is a growing, profitable and cash-generative cloud consumption-based business with significant proprietary IP and one that generated cash profit of €1.08m (£850,000) and operating profit of €868,000 on revenue of €6.2m in 2015, so the initial cash consideration of £7m equates to seven times cash profit. There is also an earn-out of £900,000 dependent on performance targets being hit, so management is well incentivised.Strategically, the acquisition makes sense because it would have taken K3 around 18 months to develop and deliver an equivalent pilot product and at a cost of £2.5m. So the company has not only avoided the executi
Muzzletoff
28 Apr 2016
RNS Impossible to say whether this is a good acquisition or not. Time will tell.I note they have stuck on the back of the placing a lump of money will be dedicated to working capital. Probably a sensible move because this company is not generating large amounts of cash as it once was, and so this provided some fall back. But it has meant a 12% dilution, so not insignificant.
r21442
21 Apr 2016
IC still running profits Shares in Aim-traded retail software company K3 Business Technology (KBT: 341p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, have drifted off slightly off their autumn highs (‘In the money’, 9 November 2015), but I still feel it’s worth running profits if you followed my earlier advice to buy at 220p ('Tapping into retail growth', 16 Sep 2014).I have taken a close look at the recent interim results and feel that the company is well on course to deliver the sharp uplift in underlying full-year pre-tax profits from £7.2m to £9.2m as predicted by analyst Katherine Thompson at Edison Investment Research. In the six months to end December 2016, pre-tax profits increased by a third to £4.78m, so more than half that 12 month estimate has been booked already. Moreover, with the benefit of a strong order book, improved margins on the back of a higher proportion of sales of the company’s own-IP products, and the company winning major contracts for its "ax|is fashion" solution with major German online retailers, then there are sound reasons to remain positive.Cash generation is strong, so much so that net debt is expected to fall from £12.1m to £10m in the 12 months to end June 2016, implying balance sheet gearing of only 17 per cent. Part of this cashflow is expected to fund a 10 per cent hike in the dividend per share to 1.65p, following a 20 per cent increase in the previous financial year. It’s well covered too by EPS of 23.3p, up from 19.1p a year earlier, and is likely to remain so if K3 grows EPS to somewhere between 25.6p and 26.8p in the financial year to June 2017 as analysts at Edison and finnCap respectively forecast. Given the momentum in the business, I feel comfortable with those estimates. I also believe that a forward earnings multiple of 12.5 times is an unwarranted 20 per cent discount to the average rating for small cap IT and software companies in K3’s space. A valuation closer to 400p is justified to bring the rating into line with peers – Edison has fair value of at least 384p and finnCap has a target price of 435p.So, ahead of a pre-close trading update in early July I would continue to run your 55 per cent gains. Run profits.
Muzzletoff
31 Mar 2016
Re: Interesting look at intrinsic value of K... Something to be wary of is adjusted earnings. Not entirely sure if development costs of K3 (which are increasing currently) are fully expensed, and written off against the p&l, or are being capitalised and spread (amortised) over their estimated useful lifetime.If being capitalised, it somewhat flatters the p&l figures. As development costs grow it inevitably flatters even more, earnings.Something to watch out forKeep you eye on cash generation. At the moment K3 is sensibly paying down debt incurred for past acquisitions. However, cash generation is not super strong, as it should be for a company of this size in the IT sector they are in. However, moving steadily in the right direction
mcescher
30 Mar 2016
Interesting look at intrinsic value of K3 Business Technology Group Apparently 21% EPS growth next year on here: [link]
Muzzletoff
21 Mar 2016
Exceptional costs I see on reflection these largely came from the reduction of the Dutch retail staff. I believe Dutch employment law is quite protective, so quite an expensive exercise, probably
Muzzletoff
21 Mar 2016
Interim results I have only lightly perused the Interims.Two main questions arise in my mind. The scope for reducing debt appears quite slim with IP development increasing. Cash generation is not exceptional for the Group, but is at least occurring.I note that the exceptional costs element increased significantly for the half year (Approx. £800K) , but on my quick analysis I couldn't see from the commentary where this increase had come from. Of course my bête noire is that when exceptional costs occur every year, they are not really exceptional any more are perhaps more truly recorded as a cost of business. However, there has been a substantial increase for this period from a lower usual base.In my experience this is usually due to reducing staff, and the redundancy etc costs that flow from that. But it may be something else. But as far as I can see, there is no note on that, which is intriguing for such a large increase.I also note that the acquired Sage business is not going great guns. I wonder if it gets the focus it requires in such a diverse range of activities for the Group?
r21442
09 Nov 2015
IC continue running profits Another major contract win for K3 Aim-traded retail software company K3 Business Technology (KBT: 361p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, has won a major contract for its "ax|is fashion" solution with one of Germany's major online retailers, K-mail Order GmbH & Co.The order has been secured through K3's channel partner in Germany and is its second order through a global systems integrator, and the second win in Germany, the largest market for fashion in Europe, in under two months. In mid-September, the company announced that it had won a similar contract with Munich-based TriStyle Mode GmbH, a leading European mail-order fashion retailer. I commented on the significance of that deal at the time ('Small-cap value plays', 22 September 2015). Clearly, investors have taken note as K3's share price has risen by a further 22 per cent to 352p and has now risen by 64 per cent since I initiated coverage on the company ('Tapping into retail growth', 16 Sep 2014).The expansion of K3's third-party sales network has been a key focus for the company over the past 12-18 months and is a significant part of its growth strategy. Head of equity research Andrew Darley at broking house FinnCap notes that "as well as demonstrating execution of the potential for territorial expansion into Europe, the US and the Far East, the contract was also secured through a new channel partner, contributing to an expanded channel partner network which offers additional promotion and sales routes to market". Mr Darley also makes the valid point that although the scale of the contract is not disclosed for commercial reasons, the award underpins unchanged financial forecasts, with ongoing revenue from software licence and support renewals.FinnCap predicts that K3 should be able to increase revenues by 8 per cent to £90m in the 12 months to end-June 2016 to boost pre-tax profit by more than a third to £9.7m and deliver EPS of 25.4p, up from 19.1p in fiscal 2015. On this basis, expect the payout to be raised by a fifth to 1.8p. The respective forecasts of analyst Katherine Thompson at Edison Investment Research are for pre-tax profits of £9.3m, EPS of 23.7p and a dividend of 1.65p. Putting the rating into some perspective This means that K3's shares are currently trading on 14 times fiscal 2016 earnings estimates using FinnCap's top-of-the-range estimates, a single-point rating discount to the average earnings multiple for the small-cap UK software and IT services sector. Mr Darley has a 380p target price and believes that the current rating "seems to be appropriate to a Microsoft reseller, not a provider of its own ax|is IP, so there is still plenty of upside". K3's core business offering is a Microsoft Dynamics-based range of retail software that provides a single platform for the entire business. Last year, K3's sales of Microsoft Dynamics-based software products rose by more than half to £7.4m, representing 9 per cent of its revenues.Edison believes that the shares should trade up to at least 15 times earnings estimates to give a minimum target of 355p. So although that target has almost been hit I feel that the potential for further contract awards will not only underpin the sharp rise in profits forecast this year, but are likely to drive the price higher towards Mr Darley's 380p target. Run profits
r21442
23 Sep 2015
IC running profits K3 on a roll Aim-traded retail software company K3 Business Technology (KBT: 298p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, has smashed my 275p target price. I initiated coverage exactly a year ago when the price was 220p ('Tapping into retail growth', 16 Sep 2014), and last advised running profits at 275p (‘Hitting the right numbers’, 30 July 2015).It's easy to understand why investors are warming to a company that is not only generating decent profit growth - adjusted pre-tax profit rose by 9 per cent to £7.2m on revenues up 16 per cent to £83m in the 12 months to end June 2015 - but prospects are increasingly positive. Revenue from K3's own IP software is growing strongly, the company has been recognised by Microsoft as a leading partner for the fashion retail sector, and K3 has recently become a member of Microsoft's inner circle of Dynamics partners. This should provide a step change in licence sales and size as Oxfordshire-based K3's core business offering is a Microsoft Dynamics-based range of retail software that provides a single platform for the entire business. Last year, K3's sales of Microsoft Dynamics-based software products rose by more than half to £7.4m, representing 9 per cent of its revenues.Furthermore, the company has just announced a major contract win for its "ax l is fashion" solution with Munich-based TriStyle Mode GmbH, a leading European mail-order fashion retailer. The order has been secured through K3's channel partner in Germany and is its first order though a global systems integrator, the largest order secured to date through K3's channel partner network, and is the first win in Germany, the largest market for fashion in Europe. The expansion of K3's third-party sales network has been a key focus for the company over the past 12-18 months and is a significant part of the growth strategy. It's worth flagging up that sales and profit growth is also being underpinned by licence fee renewals, support contracts and hosting income; an increasing focus on K3's own IP, which is boosting higher-margin recurring revenues; and a focus on growing the SYSPRO and Sage businesses and selling hosting services to a larger proportion of its customers. This strategy is clearly working as the retail business had a pipeline worth £32m at the end of June and the manufacturing and distribution software business had just shy of £30m-worth of new deals in the pipeline. It's also the reason why analysts at broking house FinnCap expect revenues to rise by around 8 per cent to £90m in the 12 months to end-June 2016 to drive up both pre-tax profits and EPS by a third to £9.7m and 25.3p, respectively. This means that K3's shares are trading on 12 times fiscal 2016 earnings estimates, a three-point rating discount to the average earnings multiple for the small-cap UK software and IT service sector. Importantly, the company is well funded to achieve the step change in sales as year-end net debt of £12.1m, better than analysts had expected, represents less than a quarter of shareholders' funds. In turn, the combination of rising profits and falling debt offers scope for another double-digit increase in the dividend following the 20 per cent hike to 1.5p a share in the full-year results.In the circumstances, I would run your healthy profits as there is a decent chance the shares could run up to analysts' upgraded target prices. Edison Investment Research has fair value of 355p (up from 289p previously), and FinnCap raised its target price from 330p to 380p. Run profits.
Muzzletoff
15 Sep 2015
Getting better Cashflow seems to be improving, debt is reducing and expected to be reduced further. Dividend up. Adjusted profit up (beware of adjustments).Generally a better picture for K3. I suspect they could have been in a whole better position if they had never acquired AX, but we are where we are. I am not attaching too much to that major new contract, as it is made through their new channel, so margins will be reduced. I think it will be heavy weather to get a return on their AX investment, but they seem to be mitigating some of the downside.Generally better news for shareholders.
r21442
23 Apr 2015
Re: Latest IC comment Another update from IC.........Aim-traded retail software company K3 Business Technology (KBT: 226p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, has announced the bolt-on acquisition of Willow Starcom, a wholly owned subsidiary of software minnow Access Intelligence (ACC: 2.76p).The cash consideration of £1.75m is being funded from K3’s existing banking facilities and the acquisition will be earnings enhancing in the first full year of ownership. Established in 1990, Willow Starcom provides remotely managed, on-premise and cloud-hosted IT support solutions together with related hardware, software support and consultancy. It has particular expertise in Microsoft products and is a Microsoft Hosting Partner. Other key areas of expertise are data storage, remote access and virtualisation. Willow Starcom operates in two data centres in the Manchester area and has around 240 customers across a variety of sectors. It looks a good fit too. K3’s chief executive David Bolton points out that Willow Starcom generates a high proportion of recurring revenues, is highly complementary to K3's existing hosting and managed services activities, and the business can be very readily integrated. The acquisition not only “broadens our existing offering within hosting and managed services and brings additional expertise and skills to our team, but there is significant potential to expand our hosting and managed services activities and this acquisition is part of our strategy to realise that growth opportunity.” Willow Starcom posted cash profits of £370,000 on revenues of £2.66m in its last financial year, so after factoring in its contribution, head of research Andrew Darley at brokerage finnCap has upgraded his June 2016 fiscal year-end profit and EPS estimates by 3 per cent to £10m and 25.3p, respectively, based on revenues of £90m. For the current financial year to end June 2015, Mr Darley expects K3 to grow pre-tax profits by 13 per cent to £7.5m based on an 11 per cent rise in revenues to £80m to produce EPS of 19.5p, so the company is expected to report a major step change in profitability again next financial year. Growth profile well underpinned This forecast sales and profit growth is being underpinned by licence fee renewals, support contracts and hosting income; an increasing focus on K3's own IP, which is driving margins higher and boosting recurring revenues from a base of over 3,100 customers; and a focus on growing the SYSPRO and Sage businesses and selling hosting services to a larger proportion of customers. Oxfordshire-based K3′s core business offering is a Microsoft Dynamics-based range of retail software that provides a single platform for the entire business. The company is Microsoft's largest Dynamics Retail reseller in the UK.Clearly, there is execution risk in achieving the ramp up in sales and profits next year, but with K3’s shares only trading on 11 times earnings estimates, falling to nine times fiscal 2016 forecasts – a 38 per cent discount to the small-cap software sector average – then I feel this risk is more than factored into the current rating. There are no financial concerns either as pro-forma net debt of £13.8m equates to a modest 25 per cent of shareholders' funds. Offering 21 per cent upside to my target price of 275p - below finnCap's target of 330p and also below the 289p target of Katherine Thompson of Edison Investment Research - I continue to rate K3's shares a value buy on a bid-offer spread of 225p to 226p. Please note that I initiated coverage when the shares were 220p ('Tapping into retail growth', 16 Sep 2014), and last updated the investment case around the current price post the interim results (‘Blow out results’, 18 March 2015).
r21442
18 Mar 2015
Latest IC comment Shares in Aim-traded retail software company K3 Business Technology (KBT: 227p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web hosting services, have yet to hit my 275p target price, but there is no doubting the company is moving in the right direction.There were several key takes for me in yesterday's half-year results including the 11 per cent growth in K3's recurring revenues (to account for almost half of turnover) underpinned by licence fee renewals, support contracts and hosting income; an increasing focus on K3's own IP, which is driving margins higher and boosting recurring revenues from a base of over 3,100 customers; and a raft of major contract wins. In fact, no fewer than 81 new customers were added in the six-month trading period.Headquartered in Didcot, Oxfordshire, K3′s core business offers customers a Microsoft Dynamics-based range of retail software to provide a single platform for the entire business. The benefits for retailers is three-fold: the technology removes the need to purchase different software solutions for a customer's head office, store and EPOS till systems; avoids the requirement of integrating multiple databases; and leads to faster delivery of meaningful data, and fewer integration challenges. Retail driving earnings K3 is now not only Microsoft's largest Dynamics Retail reseller in the UK, but the software giant's preferred partner for the fashion retail sector: customers here include Agent Provocateur, Charles Tyrwhitt, and The White Company. K3's retail segment increased half-year revenues by a third to £19.6m, driven by sales of its flagship new Microsoft Dynamics AX solution, "ax | is". In turn, the division more than doubled its profit contribution to £1.06m, easily outpacing K3's manufacturing and distribution business.The core offering here is a Microsoft-based business solution aimed at small- and medium-sized manufacturers, and developed by SYSPRO, one of the longest standing independent, international vendors of ERP business software solutions and services. K3 primarily sells SYSPRO solutions to manufacturing customers and is the exclusive distributor in the UK. The manufacturing business posted half year operating profit of £3.4m on revenues up 11 per cent to £22m, but investment in personnel to support future growth meant profits were down slightly, albeit recurring revenue remains high at 59 per cent of the total and chairman Lars-Olof Norell describes prospects as "encouraging". He has a point as new products have been introduced including a cloud-based SYSPRO product, new channel partners have been signed up in three countries in Europe for SYSPRO, and the company should get a lift from an upgrade to its Microsoft Dynamics NAV distribution product, K3 Advantage. In fact, the pipeline of business for K3's manufacturing and distribution activities has increased by over 20 per cent to £29m year on year, reflecting these three initiatives. Attractive valuation As a result, head of equity research Andrew Darley at broker finnCap predicts that K3's revenues will increase from £72m to £80m in the financial year to the end of June 2015 to drive adjusted pre-tax profits up 13 per cent to £7.5m, in line with the profit growth rate reported in the first half. True, this is slightly down on the £8m profit estimate when I initiated coverage six months ago when the shares were 220p ('Tapping into retail growth', 16 Sep 2014), but it mainly reflects a higher non-cash amortisation charge. In any case, pre-tax profits are still growing at a double-digit rate which makes a forward PE ratio of 11 - based on adjusted EPS estimates of 19.5p in the 12 months to June 2015 - too low in my book. Moreover, as the benefits of investment in broadening sales channels and territories comes through as 2015 progresses, expect a ramp up in profits driven by higher-margin licens
Muzzletoff
17 Mar 2015
Half Year results A case of good headline figures, but check out the cashflow. When there is a disparity between the two, be on your guard.
