K3 Business Technology — Update 19 January 2016

K3 Business Technology — Update 19 January 2016

K3 Business Technology

Katherine Thompson

Written by

Katherine Thompson

Director

K3 Business Technology

On track

Trading update

Software & comp services

20 January 2016

Price

345.0p

Market cap

£110m

Net debt (£m) at end H116

10.4

Shares in issue

31.9m

Free float

78%

Code

KBT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.1)

9.9

64.3

Rel (local)

(2.7)

18.1

80.0

52-week high/low

373.50p

210.50p

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 event

Interim results

Mid-March 2016

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Ian Robertson

+44 (0)20 3681 2523

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

K3’s strategy to develop and sell more own-IP software progressed well in H116, with the expanding partner channel delivering several major orders. Significant growth in profitability year-on-year was in line with management expectations, while net debt was reduced by 14% h-o-h. The company believes it is on track to meet market expectations for FY16; we leave our forecasts unchanged pending interims in mid-March.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

72.0

6.6

18.5

1.25

18.6

0.4

06/15

83.4

7.2

19.1

1.50

18.1

0.4

06/16e

88.9

9.3

23.7

1.65

14.6

0.5

06/17e

93.8

11.3

28.4

1.82

12.1

0.5

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

Transition to own IP software sales progressing well

K3 reports that it made good progress in H116 with the development and sale of software that includes increasing amounts of its own IP. As well as the two orders previously announced (Tristyle and Klingel deals, both won via channel partners) the company has signed another major order with a global systems integrator. Hosting revenues saw strong growth, with contracted revenues 15% higher at the end of December compared to June 2015.

H116 profitability in line; net debt reducing

H116 revenues were broadly flat year-on-year, supressed by weaker non-core performance and the shift to consumption-based licensing (ie subscription licensing). As has previously been flagged, this shift means that less revenue will be recognised upfront, affecting revenues and cash flow. Benefiting from strong retail licensing and the recent restructuring, profitability grew significantly over the same period, in line with management expectations. Net debt reduced to £10.4m from £12.1m at the end of FY15, showing good progress towards our £9.6m year-end FY16 forecast. The company expects to meet market expectations for FY16; we make no changes to forecasts.

Valuation: Product focus to drive upside

The stock is trading on a P/E multiple of 14.6x FY16e EPS and 12.1x FY17e EPS compared to sub-£500m market cap UK software & IT services stocks trading on c 23x current year and c 17x next year EPS. The continued investment in developing and supporting its own-IP solutions, combined with a focus on growing the SYSPRO business and selling hosting services to a larger proportion of customers gives K3 the potential to grow the business on a multi-year basis. We expect upside triggers to include evidence that K3 continues to win more ‘ax│is’ contracts and hosting/managed services customers and continues to expand the international partner channel.

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

88,850

93,800

Cost of Sales

(28,491)

(30,375)

(32,990)

(40,446)

(42,365)

(44,809)

Gross Profit

39,470

33,138

38,960

42,981

46,485

48,991

EBITDA

 

 

12,942

7,261

9,861

10,975

13,464

15,446

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

11,405

5,164

7,328

8,169

10,139

11,921

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)

(600)

0

Operating Profit

7,352

1,185

2,590

4,805

6,609

8,991

Net Interest

(1,309)

(723)

(705)

(926)

(800)

(600)

Profit Before Tax (norm)

 

 

10,096

4,441

6,623

7,243

9,339

11,321

Profit Before Tax (FRS 3)

 

 

6,043

462

1,885

3,879

5,809

8,391

Tax

(319)

780

675

(436)

(1,046)

(1,585)

Profit After Tax (norm)

8,591

4,165

5,874

6,162

7,653

9,186

Profit After Tax (FRS 3)

5,724

1,242

2,560

3,443

4,763

6,806

Average Number of Shares Outstanding (m)

28.2

29.2

31.4

31.6

31.8

31.8

EPS - normalised (p)

 

 

30.4

14.3

18.7

19.5

24.1

28.9

EPS - normalised fully diluted (p)

 

 

29.7

14.1

18.5

19.1

23.7

28.4

EPS - FRS 3 (p)

 

 

20.3

4.3

8.1

10.9

15.0

21.4

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

52.3

52.2

EBITDA Margin (%)

19.0

11.4

13.7

13.2

15.2

16.5

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

16.8

8.1

10.2

9.8

11.4

12.7

BALANCE SHEET

Fixed Assets

 

 

68,325

69,398

67,067

67,497

65,552

63,407

Intangible Assets

21,255

21,040

20,040

20,806

19,106

17,206

Tangible Assets

2,722

2,927

2,439

2,316

2,071

1,826

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

36,950

41,908

Stocks

0

0

0

0

0

0

Debtors

30,322

25,251

28,888

31,839

34,566

36,492

Cash

2,096

272

647

1,895

2,384

5,416

Current Liabilities

 

 

(48,043)

(39,272)

(40,278)

(32,886)

(32,480)

(37,531)

Creditors

(8,797)

(5,842)

(7,218)

(7,640)

(8,134)

(8,585)

Other Creditors

(21,468)

(19,379)

(18,799)

(21,803)

(20,903)

(19,503)

Short term borrowings

(17,778)

(14,051)

(14,261)

(3,443)

(3,443)

(9,443)

Long Term Liabilities

 

 

(5,797)

(4,524)

(3,719)

(14,850)

(12,210)

(3,660)

Long term borrowings

0

(32)

(14)

(10,531)

(8,531)

(531)

Other long term liabilities

(5,797)

(4,492)

(3,705)

(4,319)

(3,679)

(3,129)

Net Assets

 

 

46,903

51,125

52,605

53,495

57,812

64,124

CASH FLOW

Operating Cash Flow

 

 

7,284

8,022

5,352

9,600

9,731

12,571

Net Interest

(839)

(820)

(848)

(950)

(800)

(600)

Tax

(1,312)

(1,217)

290

(264)

(1,686)

(2,135)

Capex

(3,160)

(4,613)

(4,487)

(4,564)

(4,280)

(4,280)

Acquisitions/disposals

(7,132)

(1,917)

(129)

(1,998)

0

0

Financing

5,026

2,677

277

69

0

0

Dividends

(214)

(286)

(316)

(397)

(476)

(524)

Net Cash Flow

(347)

1,846

139

1,496

2,489

5,032

Opening net debt/(cash)

 

 

15,486

15,682

13,811

13,628

12,079

9,590

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

9,590

4,558

Source: K3 Business Technology, Edison Investment Research

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Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

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Biotie Therapies — Update 19 January 2016

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