Tipped by Simon Thompson of the IC3 Dec 2018 14:05
Today's tip has already been published elsewhere, so here it is:
"The technology sector rout has led to an unwarranted pull-back in the Aim-traded shares of Kape Technologies (KAPE:105p), a provider of cyber security software. It’s in no way a reflection of the operational progress being made by the company.
Indeed, a trading update has revealed that last summer’s acquisition of Intego, a Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business, is progressing ahead of management’s expectations. Intego’s purchase price of $16m equated to a sensible looking 11 times its 2017 pre-tax profit of $1.4m. However, if Kape’s management works its magic as it has so far with its March 2017 acquisition of CyberGhost, a provider of secure virtual private networks (VPNs) that securely pass data traffic over public networks, then there could be significant potential to grow Intego’s profits by leveraging off Kape’s larger customer base.
Bearing this in mind, the directors have revealed that the “implementation of Kape's user acquisition technology with Intego has been extremely encouraging and will have a positive impact from the first quarter of 2019. In addition, Kape has recently launched cross-promotion campaigns between CyberGhost's VPN and Intego's malware protection software, and there are early signs of strong traction across these products”.
This autumn’s acquisition of Berlin-based ZenMate, a digital privacy company focused on encrypting and securing internet connections and protecting individuals' privacy and digital data through VPNs, is performing ahead of expectations too. The previously lossmaking business should turn cash profitable from the first quarter of next year, which is supportive of analysts’ predictions that ZenMate could report cash profits of $500,000 on revenues of $2.5m in 2019, thus warranting the €4.8m (£4.2m) cash consideration Kape paid. It’s also supportive of forecasts that Kape can boost pre-tax profits from $8.7m in 2018 to $12.3m on revenues of $72m in 2019.
On this basis, Kape’s shares are rated on a cash-adjusted PE ratio of 14.5 for 2019, hardly a punchy rating for a company that is successfully recycling its cash pile – I estimate net funds of around $41m, or 22p a share, post the ZenMate and Intego acquisitions – into high-growth cyber security markets and successfully creating cross-selling opportunities across its entire product range for its 1m customers in 160 countries. Retention rates are high at 74 per cent, and rising, suggesting Kape’s income stream is becoming more valuable too.
So, having first advised buying Kape’s shares, at 47.9p in my 2017 Bargain Shares portfolio, and last reiterated that advice at 120p when the ZenMate acquisition was announced (‘Kape’s growth underpriced’, 18 October 2018), I note that the oversold shares have drifted back to support around the 100p level and look primed for a rally. Buy."
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