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Shares in AIM listed tech stock K3 Business Technology (LSE:KBT) are off sharply today on news that talks with potential bidders are finally – after what seems like an eternity – off. Results for the year to June 30th are also out today and are pretty damn impressive and thus, at 148.5p (valuing the company at £42.15 million) the shares are a strong buy.
The bid talks were first announced on December 1st 2011 and must have been a distraction. I am glad they have finally gone away. AIM stocks and tech stocks may be unloved (unless they are puffed up New Media rubbish) right now but that will not last forever. So now CEO Andy Makeham who I have just chatted to can get back to business. He seems rather relieved by that prospect.
In the year just ended revenues came in at £67.96 million, up from £52.8 million although acquisitions accounted for £11.82 million of the increase. Normalised profits before tax came in at £10.02 million, up from £8.68 million while normalised earnings per share came in at 30.2p up from 27.5p. That allowed the payment of a 1p final dividend up from 0.75p.
Net debt is the issue that worries some. It was £15.68 million at the year end (up from £15.49 million) but from peak levels £3.64 million was repaid. The company has banking facilities in place until December 31st 2013 and interest cover is very comfortable but that debt (55p a share) clearly worries some folks. Chatting to finance director David Bolton this lunchtime he reckons that without acquisitions ( and there is unlikely to be much on this front this year and next), K3 could use free operational cashflows of £5-6 million (and growing) to eliminate more than 80% of those borrowings by June 2014.
One commentator worried earlier today that in mentioning “a year of investment” in the statement about current trading K3 was issuing a veiled profits warning. I would not necessarily agree with this analysis. The company has good revenue visibility with more than 40% of sales now recurring revenues under contract with another 39% coming from repeat sales to existing customers (of which there are, at 3,000, a broad spread). The company will indeed be investing in developing its Microsoft AX and Managed services offerings and this will hold back profits growth a tad this year with the benefits seen next time.
I would forecast that sales will increase to £75 million this year and to £82 million in 2014 (10% increases) but that profits and earnings would increase by only 5% this time (for the reasons mentioned above) but by 12% in 2014. That gives earnings numbers of 31.7p for June 2013 and 35.5p next year.
I tipped this stock at 145p 5 years ago so I cannot say that it has exactly flown. But what is K3 worth now? For a company that seems to deliver a steady increase in earnings of 5-12% year in year out and which generates cash a current year PE of 4.7 ( and PEG of sub 1) falling to 4.2 is very harsh. I suppose the debt deters. In which case if one looks two years out and assumes no re-rating but that 44p of debt has been cleared and added to the valuation one arrives at a target price of 212p ( upside of 43% plus dividends). I think that is a tad harsh as I cannot believe that a company that is virtually debt free and growing earnings at 12% would still be on a sub 5 PE. A re-rating is likely. But for now that is enough to justify a stance of strong buy.
You haven’t learned have you. Again you tip a stock which you originally tipped at a much higher price. Presumably you expect investors to average down again ? Surely that approach is why you wwere turfed out of tips and ended up bottom of the funds rankings.
Jen, he tipped the stock at 145p, it is now at 148p.
How exactly does that count as being tipped ‘at a much higher price’?
Or are you just a carping moron who is incapable of taking responsibility for your own actions?
CHI
Remember Jen is actually a man. I have his/her email address. The issues with sexual orientation make him/her confused about a lot in life and with a tenous grasp of facts in his/her obsessive and factually innacurate and anonymous postings. He/she should have our sympathy.
Tom
CHI
So you are saying that TW has never recommended K3 above 145p?
Bob
That was the original tip price with a strict Limit Buying Price. Yes it was still a buy in tip updates at a higher level BUT ALSO REPEATEDLY MANY TIMES AT FAR LOWER LEVELS.
As ever I would not appreciate you or the cross dresser to get your facts right or show any balance at all.
Best wishes
Tom