Investors Chronicle TODAY - Simon Thompson RE-TIP19 Nov 2020 15:16
Kape poised for re-rating
¦ Oversubscribed placing and retail offer raises US$115m.
¦ Trading update at upper end of earnings guidance.
Kape Technologies (KAPE:170p), a provider of cyber security software, has successfully raised US$115m (£88m) in an oversubscribed placing and retail offer at 150p. The company has used US$72.5m of the proceeds to buy out the two major vendors of Colorado-based Private Internet Access (PIA), the transformational acquisition Kape completed at the end of 2019. On completion of the deal, Kape paid US$85m of the US$162m consideration in cash and issued 10.5m shares to the vendors. The company was then scheduled to settle 21m of the 28m deferred share element next month.
So, to avoid a stock overhang, Kape has bought back the 10.5m shares issued and has made a cash payment to settle the deferred share element rather than issuing further shares to PIA’s vendors. There is an also additional tax-related cash benefit of US$50m over 15 years available to Kape following the change to the PIA deal structure. The remaining US$43.5m proceeds wipes out Kape’s net debt of US$25.6m and means the company is well funded to continue making selective earnings accretive acquisitions.
Kape also revealed in a brief trading update that user growth in its Privacy division hit a run rate of 14 per cent annual growth during the third quarter, and customer retention rates remain strong. The board is maintaining guidance of annual revenue of between US$120m-$123m and cash profit of US$35m-$38m. On this basis, analysts at Progressive Equity Research are pencilling in full-year adjusted pre-tax profit of US$30.9m and EPS of 14.2¢, rising to US$36.4m and 15.8¢, respectively, in 2021. Closing net cash improves to US$22m and US$31m, respectively, implying the shares are rated on a cash-adjusted PE ratio of 13 for the 2021 financial year, a low rating for a company operating in a high growth industry.
Kape’s shares are showing a healthy 256 per cent paper profit on the entry level in my 2017 Bargain Shares portfolio, albeit the price is well shy of the summer highs around 230p. However, with the potential stock overhang cleared, and the shares rated on an unwarranted three point discount to larger rival Avast (AVST), I can see scope for a much higher rating. From a technical perspective, look for a chart break-out above 180p. Buy.
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