FY15 in line, with strong cash management
K3 Business Technology Group (LONDON:KBT) expects to report FY15 results broadly in line with market expectations, while net debt has fallen faster than we forecast. The company is making good progress with its strategy to grow its own-IP business, which should support revenue and margin growth in the medium term. K3 is planning to report full year results in mid-September.
FY15 trading in line
K3 expects to report FY15 results broadly in line with market expectations. The company noted that it saw weaker than expected demand from the Dutch market, and has also seen a small negative impact from the weakening of the euro over the period (the euro weakened 3% in Q215 vs Q115). The IP business has seen strong levels of interest and is making progress in its efforts to grow the number of global channel partners. Recurring income is expected to show year-on-year growth, helped by strong demand for hosting.
Debt reduction better than expected
K3 expects to report a net debt position of £12.1m at the end of FY15, significantly lower than our £14.1m forecast. With profitability expected to be close to our forecasts, we assume that the benefit has come from better working capital management. The reduction of £1.5m over the year is after paying £1.75m for Willow Starcom in April. We make no changes to our forecasts, pending full year results in mid-September.
Valuation: Re-rating has further to go
The stock is trading on a P/E multiple of 12.4x FY15e EPS and 9.5x FY16e EPS. Sub-£200m market cap UK software and IT services stocks are trading on 17.4x current year and 15.1x next year EPS. K3 continues to invest in developing and supporting its own-IP solutions, including its “ax│is” solution. Combined with a focus on growing the SYSPRO and Sage businesses and selling hosting services to a larger proportion of customers, K3 has the potential to grow the business on a multi-year basis. We would expect triggers for a stock re-rating to include evidence that K3 continues to win more “ax│is” contracts, expansion of the international channel, and the managed services business winning customers. We believe that the stock could trade up to at least 15x FY15e EPS (289p per share).
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