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I initially recommended shares in K3 Business Technology (LSE:KBT), an AIM-listed provider of software, hosting and managed services to the supply chain industry, at 145p in August 2007 on t1ps, the website I founded in 2000 but departed from in September of this year. The shares hit 236.5p in 2011 and again traded above 200p earlier this year before falling back to the initial tip price on news on 18th September of this year that the company was to terminate a formal sale process as the board did not believe that takeover proposals received were at a level that it would be able to recommend to shareholders. With the share price at 147.5p following an AGM trading update today, the following reviews this and the current investment case here…
Today’s update notes that “the short term trading environment remains tough with customers continuing to defer spending decisions. Against this, our pipeline is strong, with a number of key deals whose successful closure will help to realise market expectations for the year”. This chimes with the company’s September results announcement for its year ended 30th June 2012 – which emphasised a “good performance in challenging market conditions” but noted that “deal slippage continues to be a feature of the trading environment”.
This latter point suggests there is currently a more elevated risk than normal in the company closing the deals to help it meet near-term financial expectations. However, the noted strong pipeline means the risk seems to be more of delay (“slippage”) than anything more sinister and robust reassurance is provided by the company’s recurring revenue stream – this totalling £33.74 million last year, accounting for almost 50% of total revenue (up from less than 46% in the prior year despite a near 29% increase in total revenue). Therefore, despite also the company having described the current period as “a year of investment” as it develops its newer product offerings, particularly Microsoft Dynamics AX and managed services, to boost future growth prospects, I continue to believe underlying earnings per share in excess of 31p possible for this year (30.2p last year) and 35.5p next year.
These forecasts are as per my detailed write up on the company in September which you can read here.
On this basis, the current rating looks derisory and is clearly being held back by worries about the trading environment and also that the company retains material levels of debt – £15.68 million at the 30th June 2012 year-end. However, the significant recurring revenue stream and strong operating cash flow reassure on this – last year despite a net £5.36 million working capital outflow, the company generated a net £5.13 million from operating activities and the year before £3.29 million (despite a net £4 million working capital outflow).
I resultantly continue to believe a share price comfortably in excess of 200p realistic here. A 200p share price would equate to an earnings multiple of around 6.5x which – for a company which looks to have the capability of fast reducing its debt and to sustainably grow its earnings by a high single figure percentage each year – I would argue is still very harsh. However, even this equates to more than 35% upside (plus dividends) from here. The shares thus look to remain a solid value buy.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
