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A couple of days ago I suggested to you that K3 Business Technology (LSE:KBT) was something of a nil brainer buy at 148.5p. I am pleased to receive a note from broker FinnCap this morning which suggests that my forecasts are pretty sensible. It rates the shares as a buy at 149p with a 220p target price – my own target price is 212p. Sorry to be so prudent.
As a reminder of my maths, I concluded:
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.
FinnCap’s forecasts are below
| Year to June 30th | 2012A | 2013F | 2014F |
| Sales £ million | 68 | 73.5 | 79.1 |
| Pre-Tax Profit (adj) £million | 10.1 | 10.6 | 12.3 |
| Earnings Per share (adj) pence | 30.1 | 31 | 35.6 |
| Dividend per share (p) | 1.0 | 1.1 | 1.2 |
The broker concludes:
We release forecasts highlighting material upside even at unchallenging multiples: investment in the managed service in 2012 and ongoing investment in the Microsoft UK division should both generate growth into 2013 and 2014, supported by continuing strength in the Sage & SYSPRO and International businesses. We introduce forecasts indicating the stock trades on a June 2013 P/E of only 4.8x, falling to 4.2x in FY14. Our 220p target price represents an unchallenging 7.5x FY13 P/E, as the roadshow reintroduces the company to potential investors: while the stock pricerecovers from the termination of the offer period, this is a strong opportunity for investment with significant potential valuation upside.
I am set to meet CEO Andy Makeham on 1st October for a detailed catch up. We may record a video then but I shall certainly be reporting back.
You can read my original detailed piece HERE
Tom, FinnCap are K3’s NOMAD, ignore anything a NOMAD has to say
Still, K3 is cheap as chips now, I will be in @100p