K3 Business Technology
K3 Business Technology |
FY16 trading in line |
Trading update |
Software & comp services |
14 July 2016 |
Share price performance
Business description
Next events
Analysts
K3 Business Technology is a research client of Edison Investment Research Limited |
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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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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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