Simon Thompson 8 hrs ago - Profit from Kape’s chart break-out21 May 2020 20:49
Aim-traded shares in Kape Technologies (KAPE:208.5p), a provider of cyber security software, have smashed through my 200p target price after doubling in value since I last suggested buying, at 100p, two months ago (‘Three buying opportunities’, 18 March 2020). I first recommended buying, at 47.9p, in my 2017 Bargain Shares portfolio, so long-term holders have more than quadrupled their money. The re-rating is fully justified as this morning's trading update highlights.
Firstly, home working and remote working restrictions imposed on billions of people across the globe due to the Covid-19 pandemic has led to increased adoption of Kape’s cyber security software (which protects data security and privacy against piracy and phishing attacks). . Moreover, management report that demand for virtual private network (VPN) solutions that encrypt and secure internet connections has been rising notably in both North America and Europe, regions which account for almost three quarters of Kape’s annual revenue. Indeed, new monthly sign ups increased by 19 per cent last month within the digital privacy segment
Secondly, even before the lockdown restrictions, industry experts were predicting that the digital privacy market would grow by 50 per cent by 2022, thus providing a strong tailwind to Kape’s business. It’s a safe bet to assume that growth rates will be even higher now as hundreds of millions of internet users try to protect themselves from the marked increase in cyber and phishing attacks. The data security breach of 9m online customer accounts at budget airline EasyJet (EZJ) this week highlights the need for both companies and consumers to be extra vigilant.
Thirdly, there is scope for earnings upgrades driven by ongoing organic growth and by successfully marketing new products and cross selling existing ones to a significantly enlarged customer base following the acquisition of Colorado-based Private Internet Access, a leading provider of VPN solutions.
Fourthly, management reiterated guidance which points to underlying pre-tax profit trebling to $31.4m, and earnings per share (EPS) almost doubling to 13.4¢ (11p). Bumper operating cash flow should cut net borrowings by 38 per cent to $20m by year-end which means a higher level of economic interest in the company for shareholders. Kape has also completed a recent debt refinancing that has reduced interest charges in half.
Fifthly, the shares registered an important triple top chart break-out when they smashed through the 200p resistance level into blue sky territory. On a 2020 price/earnings (PE) ratio of 18.8, and with potential to deliver double-digit EPS growth in 2021 and beyond, I lift my target price to 275p. Buy.
Sign In
Follow the stocks
