Kape Technologies — Strong H1 performance

Kape Technologies (LN: KAPE)

Last close As at 27/03/2024

GBP3.56

−2.00 (−0.56%)

Market capitalisation

GBP797m

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Research: TMT

Kape Technologies — Strong H1 performance

With Kape’s transition to a consumer cybersecurity business essentially complete, investors can focus on the trends in its core business. The interim results highlighted big improvements in both margins and visibility. A doubling of subscribers helped drive a 178% y-o-y rise in underlying EBITDA. We leave our estimates unchanged but with Intego adding $3m in subscription revenue in H2, the mix and margins should improve further. Stripping out $52m of cash, Kape trades at 19x FY19e EPS.

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TMT

Kape Technologies

Strong H1 performance

Interim results

Software & comp services

24 September 2018

Price

132p

Market cap

£187m

US$1.33:£1

Net cash (US$m) at FY18e

52

Shares in issue

141.9m

Free float

27%

Code

KAPE

Primary exchange

AIM

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

6.1

6.5

61.7

Rel (local)

7.0

7.4

56.1

52-week high/low

136p

63p

Business description

Kape Technologies specialises in consumer cybersecurity software. It markets four proprietary products: PC repair and maintenance (Reimage and Reimage for MAC), PC driver repair software (DriverAgent), anti-malware (Intego) and a virtual private network (CyberGhost).

Next events

Trading statement

January 2019

Analysts

Dan Gardiner

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Kape Technologies is a research client of Edison Investment Research Limited

With Kape’s transition to a consumer cybersecurity business essentially complete, investors can focus on the trends in its core business. The interim results highlighted big improvements in both margins and visibility. A doubling of subscribers helped drive a 178% y-o-y rise in underlying EBITDA. We leave our estimates unchanged but with Intego adding $3m in subscription revenue in H2, the mix and margins should improve further. Stripping out $52m of cash, Kape trades at 19x FY19e EPS.

Year end

Revenue (US$m)

EBITDA* (US$m)

PBT*
(US$m)

EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/16

56.5

6.4

4.8

2.9

30.0

59.5

12/17

66.4

8.3

7.5

4.9

23.3

35.6

12/18e

59.5

10.2

8.7

5.2

18.8

32.9

12/19e

69.7

13.7

11.8

7.0

14.1

24.6

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

Improving trends in App distribution…

Following the disposal of Media and acquisition of Intego in July, Kape is now 100% focused on consumer cybersecurity. Headline figures for the core App distribution business were disclosed in July’s trading statement (revenues up 14% y-o-y) but the interims showcased the underlying trends. Customer retention rose 5pp to 74%, the shift towards subscription substantially improved visibility and a 16pp y-o-y jump in segment margin (from 31.7% to 47.6%) drove a 71% rise in profit (see Exhibits 1 and 2). These trends primarily reflected the focus on subscription in Reimage plus the contribution of CyberGhost, which traded ahead of management expectations and was consolidated for a full period.

…look set to continue in H218e and beyond

Consolidating Intego in H218 ($3m of subscription revenue) should improve visibility still further. We forecast subscription sales reaching over 40% in H2. Re-iteration of “market expectations” guidance leads us to keep our FY18 estimates largely unchanged. Our FY18 revenue and segment profit margin estimates of $59.5m and 48.5% respectively should be readily achievable given the H1 performance. As the impact of the shift away from one time licensing sales annualises and revenue synergies with Intego grow, we forecast 12% top-line organic growth in FY19e.

Valuation: Improving growth, visibility and margins

The benefits of Kape’s strategic shift to consumer cybersecurity are becoming increasingly obvious. The sale of Media and the acquisition of Intego should lift both subscription revenue and margins still further in H2 and the business should return to strong organic growth in FY19e. In a fragmented market and with cash on the balance sheet, we see scope for Kape to make more value accretive deals that leverage its distribution network and enhance its strategic position. On our current forecasts and stripping out $52m cash, the shares trade at 19x FY19e EPS, a modest discount to Kape’s international B2C cybersecurity peers.

Improvements in underlying performance

Kape’s interims demonstrated improvements across a range of key performance indicators in its core App distribution segment (see Exhibit 1). The strategic decision to shift from one time licences to recurring subscriptions suppressed growth, but subscription customers offer both better visibility and higher margins. This effect is apparent in Kape’s H1 results. In particular, a strong performance from CyberGhost more than doubled the number of subscribers in just six months. This drove the mix of revenue ‘recognised over a period’ to 25.5% and segment margins to 47.6% (up 16ppt y-o-y). As a consequence, underlying adjusted EBITDA (ie stripping out the disposal of the web apps and licence business) rose 178% y-o-y to $4.3m (headline EBITDA rose 48%). Customer retention, a particularly key metric for long-term growth and margin performance, also improved (up 5pp to 74%).

Exhibit 1: App distribution key performance indicators

(US$m unless stated)

H117

H217

FY17

H118

H218e

FY18e

Revenue

Reported

21.1

27.1

48.2

24.1

31.7

55.8

Headline growth (%)

26.1

14.1

16.9

15.7

Visibility

Subscribers (m)

0.2

0.3

0.6

Revenue from existing users in future periods

8.0

18.0

Revenue "recognised over a period"

1.9

4.5

6.5

6.1

13.0

19.1

Revenue "recognised over a period" (%)

9.2

16.7

13.4

25.5

41.0

34.3

Profitability

Segment profit

6.7

10.5

17.2

11.5

15.6

27.0

Segment margins (%)

31.7

38.7

35.7

47.6

49.2

48.5

Customer retention (%)

69.0

69.0

74.0

Source: Company data, Edison Investment Research

In H218e we expect visibility to improve further: consolidating Intego should lift subscription revenue to over 50% (see Exhibit 2). Backing out our estimate of the $3.0m contribution from Intego implies revenues rise c 6% y-o-y in H2 as the shift towards subscription and the first revenue synergies from Intego offsets the decline in one-time licence sales. Our 49% segment profit margin forecast looks relatively conservative given the performance in H1 and the expectation of higher revenues in H2. Our $10.2m FY18 EBITDA forecast implies a 19% margin in H2.

Into FY19e, revenue growth should accelerate as the impact of lower one-off licence sales reduces and the further revenue synergies with Intego are realised. We forecast 12% organic revenue growth in FY19e and a 19% EBITDA margin.

Exhibit 2: Visibility improving - the rising % of revenues recognised ‘over a period’

Source: Company data, Edison Investment Research

Exhibit 3: Financial summary

31-December (US$000s)

2015

2016

2017

2018e

2019e

Income statement

Revenue

 

 

84,635

56,532

66,383

59,468

69,685

Cost of sales

(58,111)

(37,277)

(42,366)

(32,422)

(35,086)

Gross profit

26,524

19,255

24,017

27,046

34,599

EBITDA

 

 

10,064

6,413

8,261

10,221

13,691

Operating profit (before amort. and except.)

 

 

9,016

5,034

6,946

8,701

11,801

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

10,501

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

11,766

Profit before tax (reported)

 

 

(14,695)

(10,013)

(2,036)

7,487

10,466

Reported tax

(2,902)

(665)

(467)

(973)

(1,413)

Profit After Tax (norm)

7,421

4,088

7,042

7,714

10,353

Profit After Tax (reported)

(17,597)

(10,678)

(2,503)

6,514

9,053

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

10,273

Net income (reported)

(17,597)

(10,678)

(2,503)

6,434

8,973

Average number of shares outstanding (m)

148

141

142

142

143

EPS - normalised (c)

 

 

5.02

2.90

4.98

5.37

7.19

EPS - diluted normalised (c)

 

 

5.02

2.90

4.85

5.23

7.01

EPS - basic reported (c)

 

 

(11.91)

(7.57)

(1.77)

4.53

6.28

Dividend per share (c)

0.00

0.00

4.93

0.00

0.00

Revenue growth (%)

19.0

(33.2)

17.4

(10.4)

17.2

Gross margin (%)

31.3

34.1

36.2

45.1

49.7

Ebitda margin (%)

11.9

11.3

12.4

17.2

19.6

Normalised operating margin

10.7

8.9

10.5

14.6

16.9

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

65,548

76,714

Stocks

0

0

65

65

65

Debtors

16,280

7,950

11,071

8,146

8,362

Cash & cash equivalents

71,336

72,064

69,502

52,024

60,109

Other

0

0

1,792

5,312

8,178

Current liabilities

 

 

(16,721)

(7,339)

(15,028)

(14,000)

(16,108)

Creditors

(15,316)

(7,096)

(10,094)

(7,981)

(8,331)

Tax and social security

0

0

0

0

0

Short term borrowings

0

0

0

0

0

Other

(1,405)

(243)

(4,934)

(6,019)

(7,777)

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

87,038

Minority interests

0

0

977

977

977

Shareholders' equity

 

 

91,510

80,553

80,349

78,163

88,015

Cash flow

Op cash flow before WC and tax

10,064

6,413

8,261

10,221

13,691

Working capital

(2,197)

613

(1,392)

(754)

(1,096)

Exceptional & other

(1,297)

(823)

(624)

0

0

Tax

(1,826)

(904)

(109)

(973)

(1,413)

Net operating cash flow

 

 

4,744

5,299

6,136

8,494

11,181

Capex

(1,813)

(1,678)

(2,020)

(2,088)

(2,192)

Acquisitions/disposals

(1,402)

(1,439)

(5,337)

(16,870)

(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)

(17,478)

8,084

Opening net debt/(cash)

 

 

(76,041)

(71,336)

(72,064)

(69,502)

(52,024)

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)

(52,024)

(60,109)

Source: Company data, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Kape Technologies and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Kape Technologies and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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