K3 Business Technology Group
K3 Business Technology |
Order slippage drives earnings downgrade |
Trading update |
Software & comp services |
10 January 2017 |
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 had a tough end to H117, with lengthening sales cycles for enterprise customers causing a shortfall in new business. More positively, recent restructuring is starting to drive more cross-divisional sales and is reducing the cost base. We have revised our revenue and EPS forecasts to reflect the slower pace of order wins as well as the restructuring, reducing FY17 EPS by 34% and FY18 by 11%. Evidence of improving order flow, growth in channel sales and growth in recurring revenues will be the triggers for share price recovery, in our view.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/15 |
83.4 |
7.2 |
19.1 |
1.50 |
12.5 |
0.6 |
06/16 |
89.2 |
8.8 |
23.0 |
1.75 |
10.3 |
0.7 |
06/17e |
89.1 |
7.7 |
16.7 |
1.93 |
14.3 |
0.8 |
06/18e |
90.2 |
11.0 |
24.4 |
2.12 |
9.8 |
0.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Order slippage at the end of H117
In the crucial last few weeks of December, K3 failed to close as much business as budgeted, with order slippage in both divisions. Enterprise customers are delaying decisions, particularly when choosing between cloud-based and on-premise solutions, although SME business (which typically is less cloud-focused) remains strong. In management’s view, these deals have not been lost, merely delayed, with the company remaining firm on pricing. The new management team is in the process of restructuring the business in order to streamline the operational structure and create a broader offering across the group. This strategy is already starting to pay off with a growing pipeline of cross-divisional opportunities.
Restructuring reduces impact of shortfall
Management expects the shortfall to reduce EBITDA by £3.5m in FY17 (before exceptionals). We have revised down our forecasts to reflect slower order intake in H117, as well as a higher proportion of cloud-based deals (where revenue is recognised over a longer period of time). The restructuring programme is expected to cost c £3m this year, and should result in annualised cost savings of £3m (with some benefit in FY17 and the full effect in FY18). We reduce our revenue forecasts by 8.4% in FY17 and 10.6% in FY18, and normalised EPS by 34% in FY17 and 11% in FY18. We increase our end-FY17 net debt forecast from £4.4m to £10.0m.
Valuation: Cloud reshaping the business model
On our revised forecasts, K3 is trading on 14.3x FY17e normalised EPS and 9.8x FY18e compared to small-cap UK software and IT services stocks trading on an average 16.5x current year and 15.2x next year EPS. K3’s continued investment in developing and supporting its own-IP solutions and building out its partner channel should provide opportunities to grow higher-margin revenues. At the same time, the increasing proportion of cloud-based deals, while reducing upfront revenue recognition, will help the company build a higher level of recurring revenues.
Exhibit 1: Financial summary
£'000s |
2012 |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
67,961 |
63,513 |
71,950 |
83,427 |
89,175 |
89,050 |
90,240 |
Cost of Sales |
(28,491) |
(30,375) |
(32,990) |
(40,446) |
(40,636) |
(41,043) |
(40,454) |
||
Gross Profit |
39,470 |
33,138 |
38,960 |
42,981 |
48,539 |
48,008 |
49,786 |
||
EBITDA |
|
|
12,942 |
7,261 |
9,861 |
10,975 |
12,843 |
12,318 |
15,856 |
Operating Profit (before am of acq. Intang. and except.) |
11,405 |
5,164 |
7,328 |
8,169 |
9,529 |
8,118 |
11,256 |
||
Amortisation of acquired intangibles |
(3,586) |
(3,182) |
(2,989) |
(2,800) |
(2,734) |
(2,900) |
(2,900) |
||
Share-based payments |
(72) |
(70) |
(27) |
(18) |
(28) |
(30) |
(30) |
||
Other |
(395) |
(727) |
(1,722) |
(546) |
(1,538) |
(3,000) |
0 |
||
Operating Profit |
7,352 |
1,185 |
2,590 |
4,805 |
5,229 |
2,188 |
8,326 |
||
Net Interest |
(1,309) |
(723) |
(705) |
(926) |
(701) |
(400) |
(250) |
||
Profit Before Tax (norm) |
|
|
10,096 |
4,441 |
6,623 |
7,243 |
8,828 |
7,718 |
11,006 |
Profit Before Tax (FRS 3) |
|
|
6,043 |
462 |
1,885 |
3,879 |
4,528 |
1,788 |
8,076 |
Tax |
(319) |
780 |
675 |
(436) |
(425) |
(965) |
(1,508) |
||
Profit After Tax (norm) |
8,591 |
4,165 |
5,874 |
6,162 |
7,650 |
6,133 |
8,973 |
||
Profit After Tax (FRS 3) |
5,724 |
1,242 |
2,560 |
3,443 |
4,103 |
823 |
6,568 |
||
Average Number of Shares Outstanding (m) |
28.2 |
29.2 |
31.4 |
31.6 |
32.4 |
36.0 |
36.0 |
||
EPS - normalised (p) |
|
|
30.4 |
14.3 |
18.7 |
19.5 |
23.6 |
17.0 |
24.9 |
EPS - normalised fully diluted (p) |
|
|
29.7 |
14.1 |
18.5 |
19.1 |
23.0 |
16.7 |
24.4 |
EPS - FRS 3 (p) |
|
|
20.3 |
4.3 |
8.1 |
10.9 |
12.6 |
2.3 |
18.2 |
Dividend per share (p) |
1.00 |
1.00 |
1.25 |
1.50 |
1.75 |
1.93 |
2.12 |
||
Gross Margin (%) |
58.1 |
52.2 |
54.1 |
51.5 |
54.4 |
53.9 |
55.2 |
||
EBITDA Margin (%) |
19.0 |
11.4 |
13.7 |
13.2 |
14.4 |
13.8 |
17.6 |
||
Operating Margin (before GW and except.) (%) |
16.8 |
8.1 |
10.2 |
9.8 |
10.7 |
9.1 |
12.5 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
68,325 |
69,398 |
67,067 |
67,497 |
78,072 |
77,242 |
74,792 |
Intangible Assets |
21,255 |
21,040 |
20,040 |
20,806 |
26,369 |
25,739 |
23,439 |
||
Tangible Assets |
2,722 |
2,927 |
2,439 |
2,316 |
2,389 |
2,189 |
2,039 |
||
Goodwill |
43,540 |
44,610 |
43,952 |
43,541 |
48,793 |
48,793 |
48,793 |
||
Other |
808 |
821 |
636 |
834 |
521 |
521 |
521 |
||
Current Assets |
|
|
32,418 |
25,523 |
29,535 |
33,734 |
43,695 |
41,454 |
44,066 |
Stocks |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
30,322 |
25,251 |
28,888 |
31,839 |
40,923 |
40,987 |
41,535 |
||
Cash |
2,096 |
272 |
647 |
1,895 |
2,772 |
467 |
2,531 |
||
Current Liabilities |
|
|
(48,043) |
(39,272) |
(40,278) |
(32,886) |
(36,332) |
(41,893) |
(36,674) |
Creditors |
(8,797) |
(5,842) |
(7,218) |
(7,640) |
(8,324) |
(8,313) |
(8,422) |
||
Other Creditors |
(21,468) |
(19,379) |
(18,799) |
(21,803) |
(24,632) |
(23,132) |
(20,732) |
||
Short term borrowings |
(17,778) |
(14,051) |
(14,261) |
(3,443) |
(3,376) |
(10,448) |
(7,520) |
||
Long Term Liabilities |
|
|
(5,797) |
(4,524) |
(3,719) |
(14,850) |
(12,025) |
(3,171) |
(2,646) |
Long term borrowings |
0 |
(32) |
(14) |
(10,531) |
(8,272) |
(38) |
(38) |
||
Other long term liabilities |
(5,797) |
(4,492) |
(3,705) |
(4,319) |
(3,753) |
(3,133) |
(2,608) |
||
Net Assets |
|
|
46,903 |
51,125 |
52,605 |
53,495 |
73,410 |
73,633 |
79,538 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
7,284 |
8,022 |
5,352 |
9,600 |
5,498 |
7,742 |
13,018 |
Net Interest |
(839) |
(820) |
(848) |
(950) |
(783) |
(400) |
(250) |
||
Tax |
(1,312) |
(1,217) |
290 |
(264) |
(688) |
(1,585) |
(2,033) |
||
Capex |
(3,160) |
(4,613) |
(4,487) |
(4,564) |
(5,573) |
(5,000) |
(5,050) |
||
Acquisitions/disposals |
(7,132) |
(1,917) |
(129) |
(1,998) |
(7,386) |
(1,270) |
0 |
||
Financing |
5,026 |
2,677 |
277 |
69 |
13,175 |
0 |
0 |
||
Dividends |
(214) |
(286) |
(316) |
(397) |
(477) |
(630) |
(693) |
||
Net Cash Flow |
(347) |
1,846 |
139 |
1,496 |
3,766 |
(1,143) |
4,992 |
||
Opening net debt/(cash) |
|
|
15,486 |
15,682 |
13,811 |
13,628 |
12,079 |
8,876 |
10,019 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
151 |
25 |
44 |
53 |
(563) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
15,682 |
13,811 |
13,628 |
12,079 |
8,876 |
10,019 |
5,027 |
Source: K3 Business Technology, Edison Investment Research
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