FY16 trading in line

K3 Business Technology 14 July 2016 Update

K3 Business Technology

FY16 trading in line

Trading update

Software & comp services

14 July 2016

Price

316.00p

Market cap

£114m

€1.19:£1

Net debt (£m) at end FY16

8.9

Shares in issue

36.0m

Free float

78%

Code

KBT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.6)

(7.5)

27.7

Rel (local)

(18.5)

(10.6)

30.0

52-week high/low

373.50p

250.50p

Business description

K3 Business Technology provides Microsoft- and Sage-based ERP solutions and managed services to SMEs in the retail, distribution and manufacturing sectors.

Next events

FY16 results

13 September 2016

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

K3 Business Technology is a research client of Edison Investment Research Limited

K3 expects to report FY16 results broadly in line with market expectations. Trading was encouraging during H216, with a good level of contract wins in the final months of the year. Net debt has reduced over the year, although is higher than we forecast, partly due to a major retail customer going into administration close to year-end. We make no changes to estimates, pending FY16 results on 13 September.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

72.0

6.6

18.5

1.25

17.1

0.4

06/15

83.4

7.2

19.1

1.50

16.5

0.5

06/16e

87.5

9.4

23.3

1.65

13.6

0.5

06/17e

95.6

11.9

26.2

1.82

12.1

0.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY16 broadly in line with market expectations

K3 has reported that FY16 trading was encouraging, particularly in its core sectors. Results for the year should therefore be broadly in line with market expectations. This is despite providing in full for a retail customer that went into administration in June. The crucial final months of the year saw a good level of contract wins across both the Retail and Manufacturing divisions, and this combined with renewals supported significant new business for K3 hosting. Recurring revenues should show growth y-o-y, reflecting the increasing proportion of cloud-based business. Integration of DdD continues on track, and should be earnings enhancing in FY17.

Net debt reducing, although higher than expected

Net debt at year-end is expected to be £8.9m, down from the £12.1m at the end of FY15. This is higher than our £5.8m forecast – several factors have caused this, including the customer that has gone into administration and euro-denominated debt being translated at a lower exchange rate (from roughly €1.3/£1 through H216 to €1.2/£1 on 30 June). We expect to get a clearer picture on working capital when the company reports FY16 results on 13 September, at which point we will also incorporate the recent Merac acquisition.

Valuation: Own-IP strategy to drive upside

The stock is trading on a P/E multiple of 13.6x FY16e EPS and 12.1x FY17e EPS compared to small-cap UK software and IT services stocks trading on an average 17x current year and 15x next year EPS. K3 continues to invest in developing and supporting its own-IP solutions and building out its partner channel. Combined with a focus on selling hosting services to a larger proportion of customers, the company has the potential to grow the business on a multi-year basis. We believe that the stock could trade up to 15x FY17e EPS (393p per share).

Exhibit 1: Financial summary

£'000s

2012

2013

2014

2015

2016e

2017e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

67,961

63,513

71,950

83,427

87,506

95,609

Cost of Sales

(28,491)

(30,375)

(32,990)

(40,446)

(40,131)

(43,878)

Gross Profit

39,470

33,138

38,960

42,981

47,375

51,731

EBITDA

 

 

12,942

7,261

9,861

10,975

13,540

15,676

Operating Profit (before am of acq. Intang. and except.)

11,405

5,164

7,328

8,169

10,215

12,151

Amortisation of acquired intangibles

(3,586)

(3,182)

(2,989)

(2,800)

(2,900)

(2,900)

Share-based payments

(72)

(70)

(27)

(18)

(30)

(30)

Other

(395)

(727)

(1,722)

(546)

(900)

0

Operating Profit

7,352

1,185

2,590

4,805

6,385

9,221

Net Interest

(1,309)

(723)

(705)

(926)

(780)

(300)

Profit Before Tax (norm)

 

 

10,096

4,441

6,623

7,243

9,435

11,851

Profit Before Tax (FRS 3)

 

 

6,043

462

1,885

3,879

5,605

8,921

Tax

(319)

780

675

(436)

(1,057)

(1,659)

Profit After Tax (norm)

8,591

4,165

5,874

6,162

7,738

9,592

Profit After Tax (FRS 3)

5,724

1,242

2,560

3,443

4,548

7,262

Average Number of Shares Outstanding (m)

28.2

29.2

31.4

31.6

32.6

36.0

EPS - normalised (p)

 

 

30.4

14.3

18.7

19.5

23.7

26.6

EPS - normalised fully diluted (p)

 

 

29.7

14.1

18.5

19.1

23.3

26.2

EPS - FRS 3 (p)

 

 

20.3

4.3

8.1

10.9

14.0

20.2

Dividend per share (p)

1.00

1.00

1.25

1.50

1.65

1.82

Gross Margin (%)

58.1

52.2

54.1

51.5

54.1

54.1

EBITDA Margin (%)

19.0

11.4

13.7

13.2

15.5

16.4

Operating Margin (before GW and except.) (%)

16.8

8.1

10.2

9.8

11.7

12.7

BALANCE SHEET

Fixed Assets

 

 

68,325

69,398

67,067

67,497

73,872

72,047

Intangible Assets

21,255

21,040

20,040

20,806

27,256

25,606

Tangible Assets

2,722

2,927

2,439

2,316

2,241

2,066

Goodwill

43,540

44,610

43,952

43,541

43,541

43,541

Other

808

821

636

834

834

834

Current Assets

 

 

32,418

25,523

29,535

33,734

39,564

44,147

Stocks

0

0

0

0

0

0

Debtors

30,322

25,251

28,888

31,839

34,283

36,934

Cash

2,096

272

647

1,895

5,281

7,213

Current Liabilities

 

 

(48,043)

(39,272)

(40,278)

(32,886)

(31,758)

(36,018)

Creditors

(8,797)

(5,842)

(7,218)

(7,640)

(8,012)

(8,750)

Other Creditors

(21,468)

(19,379)

(18,799)

(21,803)

(20,303)

(19,153)

Short term borrowings

(17,778)

(14,051)

(14,261)

(3,443)

(3,443)

(8,115)

Long Term Liabilities

 

 

(5,797)

(4,524)

(3,719)

(14,850)

(11,282)

(3,082)

Long term borrowings

0

(32)

(14)

(10,531)

(7,603)

(3)

Other long term liabilities

(5,797)

(4,492)

(3,705)

(4,319)

(3,679)

(3,079)

Net Assets

 

 

46,903

51,125

52,605

53,495

70,397

77,094

CASH FLOW

Operating Cash Flow

 

 

7,284

8,022

5,352

9,600

9,068

12,614

Net Interest

(839)

(820)

(848)

(950)

(780)

(300)

Tax

(1,312)

(1,217)

290

(264)

(1,697)

(2,259)

Capex

(3,160)

(4,613)

(4,487)

(4,564)

(4,700)

(4,600)

Acquisitions/disposals

(7,132)

(1,917)

(129)

(1,998)

(7,900)

0

Financing

5,026

2,677

277

69

12,800

0

Dividends

(214)

(286)

(316)

(397)

(477)

(594)

Net Cash Flow

(347)

1,846

139

1,496

6,314

4,860

Opening net debt/(cash)

 

 

15,486

15,682

13,811

13,628

12,079

5,765

HP finance leases initiated

0

0

0

0

0

0

Other

151

25

44

53

0

0

Closing net debt/(cash)

 

 

15,682

13,811

13,628

12,079

5,765

905

Source: K3 Business Technology Group, Edison Investment Research

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

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Level 25, Aurora Place

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