Tipped by Simon Thompson in the IC - part 18 Mar 2021 22:55
In the IC online today with an increased 325p price target:
"Tap into an eye-catching earnings cycle
Simon Thompson highlights a cyber security software company set for an earnings boost
March 8, 2021
By Simon Thompson
Acquisition of Webselense massively earnings accretive.
Debt funding could be repaid from free cash flow by end of 2022.
Analysts push through 60 and 85 per cent EPS upgrades for 2021 and 2022.
It certainly paid to buy shares in cyber security software provider Kape Technologies (KAPE: 245p) ahead of this month’s annual results.
Not only had the figures been well flagged – full-year cash profit of $39m was well ahead of guidance ($35m-$38m) with margins surging from 22 to 32 per cent on the back of the transformational acquisition of Colorado-based Private Internet Access – but the risk to 2021 earnings remained heavily skewed to the upside, a factor not reflected in an enterprise value to cash profit multiple of 13 times (‘Profit from the small-cap bull market’, 25 January 2021).
Even after Kape’s share price soared 27 per cent following its US$149m earnings accretive acquisition of Webselense, an independent digital platform that provides 8.5m users with unbiased insight driven content focused on cyber security and privacy trends that attracts software vendors (McAfee, NortonLifeLock, Dashlane and Kape), the valuation is not stretched by any means.
Like Kape, Webselense is fast growing and hugely profitable: cash profit trebled to US$30.7m on 91 per cent higher revenue of US$64.5m in 2020, with both financial metrics increasing more than 10-fold in the past three years. Its owners will receive 12.1m Kape shares worth US$32.5m in part consideration to give them a 5.44 per cent stake in the software group. That’s important as Kape will benefit from their extensive expertise in growing the business. Kape part funded the US$116m cash element from its own cash resources and an US$85m bridging loan provided by its majority shareholder which will be refinanced in due course.
The point is that after factoring in Webselense’s contribution, Kape’s directors are guiding investors to expect proforma 2021 cash profit of US$78m to US$81m on a margin of 38 per cent. Prior to the acquisition, Kape was expected to deliver 2021 cash profit of US$41.5m, so profit estimates have doubled. However, the share count only rises 5.8 per cent, so even after factoring in higher interest costs, earnings per share (EPS) will soar.
To put this into perspective, analysts at Progressive Equity Research raised their 2021 cash profit estimate by 80 per cent to US$74.5m on revenue of US$200m, an outcome that will see 2020 pre-tax profit of US$34.4m surge to US$64.6m in 2021. On this basis, expect EPS to rise 60 per cent to 25.4¢ (18.4p)."
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