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Kape has announced the acquisition of ZenMate, a digital privacy company based in Germany focusing on virtual private network (VPN) provision. With 50,000 software-as-a-service (SaaS) customers, the move strengthens Kape’s position in VPN, a standout growth area for the company currently. By utilising its digital marketing experience, Kape is confident it can accelerate ZenMate’s growth. We raise our FY19e EBITDA forecasts by $0.5m and adjusted EPS by 4%.
Written by
Kape Technologies |
Acquisition further strengthens VPN position |
Acquisition update |
Software & comp services |
17 October 2018 |
Share price performance
Business description
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Kape Technologies is a research client of Edison Investment Research Limited |
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Kape has announced the acquisition of ZenMate, a digital privacy company based in Germany focusing on virtual private network (VPN) provision. With 50,000 software-as-a-service (SaaS) customers, the move strengthens Kape’s position in VPN, a standout growth area for the company currently. By utilising its digital marketing experience, Kape is confident it can accelerate ZenMate’s growth. We raise our FY19e EBITDA forecasts by $0.5m and adjusted EPS by 4%.
Year end |
Revenue (US$m) |
EBITDA* |
PBT* |
EPS* |
EV/EBITDA |
P/E |
12/16 |
56.5 |
6.4 |
4.8 |
2.9 |
26.1 |
52.0 |
12/17 |
66.4 |
8.3 |
7.5 |
4.9 |
20.3 |
31.1 |
12/18e |
60.0 |
10.2 |
8.7 |
5.2 |
16.4 |
28.8 |
12/19e |
72.2 |
14.2 |
12.3 |
7.3 |
11.7 |
20.5 |
Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
ZenMate: VPN-focused SaaS business
ZenMate is a multi-platform security software business with a focus on VPN solutions. It currently has 50,000, predominantly consumer, customers on an SaaS model and its main market is Germany. We estimate that these customers currently pay between $40 and $50 annually. To date, most of ZenMate’s customer acquisition has been organic and it claims a high retention rate (slightly below Kape’s current 74%).
Strategic rationale: Accelerate VPN growth
This deal fits neatly within Kape’s consumer cybersecurity focus and should be highly complementary to its existing VPN business (CyberGhost). It increases its exposure to this high-growth segment and consolidates Kape’s position in the German market. Using its digital marketing platform, Kape has doubled CyberGhost’s subscriber platform in 18 months. It sees a similar opportunity to accelerate ZenMate’s growth.
Impact on financials: 4% increase to FY19 adj EPS
We estimate ZenMate could add c $0.5m in revenues in FY18e and c $2.5m in FY19e. Restructuring (incurring $0.3m of costs) should ensure profitability within a year and we pencil in a $0.5m uplift to Kape’s FY19e EBITDA and a 4% increase in adjusted EPS (from 7.0c to 7.3c). The €4.8m consideration (100% cash) implies $111 per subscriber, similar to the Intego deal ($107), and 10x our estimate of ZenMate’s FY19e EBITDA contribution.
Valuation: Trading at 16x ex cash adj FY19e EPS
This deal highlights the strategic opportunity for Kape to use its balance sheet to build a high quality (ie growth, margins and visibility) consumer security business. We see scope for further value accretive deals that leverage its distribution network and a return to organic growth in FY19e. Factoring in the uplift to forecasts and the recent market sell-off, the shares trade at 16x FY19e adjusted EPS.
Exhibit 1: Financial summary
$000s |
2015 |
2016 |
2017 |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
84,635 |
56,532 |
66,383 |
59,968 |
72,185 |
Cost of Sales |
(58,111) |
(37,277) |
(42,366) |
(33,122) |
(37,085) |
||
Gross Profit |
26,524 |
19,255 |
24,017 |
26,846 |
35,100 |
||
EBITDA |
|
|
10,064 |
6,413 |
8,261 |
10,221 |
14,192 |
Operating Profit (before amort. and except.) |
|
|
9,016 |
5,034 |
6,946 |
8,701 |
12,302 |
Amortisation of acquired intangibles |
(8,322) |
(8,505) |
(5,130) |
(700) |
(700) |
||
Exceptionals |
(11,089) |
(5,545) |
(899) |
0 |
0 |
||
Share-based payments |
(3,407) |
(716) |
(3,516) |
(500) |
(600) |
||
Reported operating profit |
(13,802) |
(9,732) |
(2,599) |
7,501 |
11,002 |
||
Net Interest |
(855) |
(328) |
(255) |
(14) |
(35) |
||
Joint ventures & associates (post tax) |
(38) |
47 |
(40) |
0 |
0 |
||
Exceptionals |
0 |
0 |
858 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
8,123 |
4,753 |
7,509 |
8,687 |
12,267 |
Profit Before Tax (reported) |
|
|
(14,695) |
(10,013) |
(2,036) |
7,487 |
10,967 |
Reported tax |
(2,902) |
(665) |
(467) |
(973) |
(1,481) |
||
Profit After Tax (norm) |
7,421 |
4,088 |
7,042 |
7,714 |
10,786 |
||
Profit After Tax (reported) |
(17,597) |
(10,678) |
(2,503) |
6,514 |
9,486 |
||
Minority interests |
0 |
0 |
0 |
(80) |
(80) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
7,421 |
4,088 |
7,042 |
7,634 |
10,706 |
||
Net income (reported) |
(17,597) |
(10,678) |
(2,503) |
6,434 |
9,406 |
||
Average Number of Shares Outstanding (m) |
148 |
141 |
142 |
142 |
143 |
||
EPS - normalised (c) |
|
|
5.02 |
2.90 |
4.98 |
5.37 |
7.49 |
EPS - diluted normalised (c) |
|
|
5.02 |
2.90 |
4.85 |
5.23 |
7.30 |
EPS - basic reported (c) |
|
|
(11.91) |
(7.57) |
(1.77) |
4.53 |
6.58 |
Dividend per share (c) |
0.00 |
0.00 |
4.93 |
0.00 |
0.00 |
||
Revenue growth (%) |
19.0 |
(-33.2) |
17.4 |
(-9.7) |
20.4 |
||
Gross Margin (%) |
31.3 |
34.1 |
36.2 |
44.8 |
48.6 |
||
EBITDA Margin (%) |
11.9 |
11.3 |
12.4 |
17.0 |
19.7 |
||
Normalised Operating Margin |
10.7 |
8.9 |
10.5 |
14.5 |
17.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
21,785 |
8,729 |
13,312 |
26,980 |
26,782 |
Intangible Assets |
19,254 |
7,113 |
12,350 |
25,950 |
25,528 |
||
Tangible Assets |
1,003 |
591 |
815 |
883 |
1,107 |
||
Investments & other |
1,528 |
1,025 |
147 |
147 |
147 |
||
Current Assets |
|
|
87,616 |
80,014 |
82,430 |
59,748 |
71,619 |
Stocks |
0 |
0 |
65 |
65 |
65 |
||
Debtors |
16,280 |
7,950 |
11,071 |
8,215 |
8,662 |
||
Cash & cash equivalents |
71,336 |
72,064 |
69,502 |
46,156 |
54,405 |
||
Other |
0 |
0 |
1,792 |
5,312 |
8,487 |
||
Current Liabilities |
|
|
(16,721) |
(7,339) |
(15,028) |
(8,199) |
(10,580) |
Creditors |
(15,316) |
(7,096) |
(10,094) |
(8,080) |
(8,703) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1,405) |
(243) |
(4,934) |
(119) |
(1,877) |
||
Long Term Liabilities |
|
|
(1,170) |
(851) |
(1,342) |
(1,342) |
(349) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(1,170) |
(851) |
(1,342) |
(1,342) |
(349) |
||
Net Assets |
|
|
91,510 |
80,553 |
79,372 |
77,186 |
87,472 |
Minority interests |
0 |
0 |
977 |
977 |
977 |
||
Shareholders' equity |
|
|
91,510 |
80,553 |
80,349 |
78,163 |
88,449 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
10,064 |
6,413 |
8,261 |
10,221 |
14,192 |
||
Working capital |
(2,197) |
613 |
(1,392) |
(722) |
(1,365) |
||
Exceptional & other |
(1,297) |
(823) |
(624) |
0 |
0 |
||
Tax |
(1,826) |
(904) |
(109) |
(973) |
(1,481) |
||
Net operating cash flow |
|
|
4,744 |
5,299 |
6,136 |
8,525 |
11,346 |
Capex |
(1,813) |
(1,678) |
(2,020) |
(2,088) |
(2,192) |
||
Acquisitions/disposals |
(1,402) |
(1,439) |
(5,337) |
(22,770) |
(870) |
||
Net interest |
(660) |
(281) |
156 |
(14) |
(35) |
||
Equity financing |
(5,131) |
(995) |
(1,477) |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
(7,000) |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(4,262) |
906 |
(2,542) |
(23,346) |
8,249 |
||
Opening net debt/(cash) |
|
|
(76,041) |
(71,336) |
(72,064) |
(69,502) |
(46,156) |
FX |
(443) |
(178) |
(20) |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(71,336) |
(72,064) |
(69,502) |
(46,156) |
(54,405) |
Source: Kape accounts, Edison Investment Research
|
|
Findel’s pre-Christmas peak period has started strongly over recent weeks. Management retains its guidance for the full-year results and we retain our forecast of c 6% earnings growth. Past negatives, which have complicated the investment case, continue to be resolved: turnaround is on course at the smaller Education division, financial services redress is in the final stages and the balance sheet has strengthened further. We see no reason to change our valuation of 428p, which is c 60% above the current share price.