K3 Business Technology
K3 Business Technology |
On track |
Trading update |
Software & comp services |
20 January 2016 |
Share price performance
Business description
Next event
Analysts
K3 Business Technology is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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