Kape Technologies — Acquisition further strengthens VPN position

Kape Technologies (LN: KAPE)

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GBP3.56

−2.00 (−0.56%)

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GBP797m

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Research: TMT

Kape Technologies — Acquisition further strengthens VPN position

Kape has announced the acquisition of ZenMate, a digital privacy company based in Germany focusing on virtual private network (VPN) provision. With 50,000 software-as-a-service (SaaS) customers, the move strengthens Kape’s position in VPN, a standout growth area for the company currently. By utilising its digital marketing experience, Kape is confident it can accelerate ZenMate’s growth. We raise our FY19e EBITDA forecasts by $0.5m and adjusted EPS by 4%.

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Written by

TMT

Kape Technologies

Acquisition further strengthens VPN position

Acquisition update

Software & comp services

17 October 2018

Price

114.5p

Market cap

£162m

US$1.33/£1

Net debt/cash ($m) 2018e

46

Shares in issue

141.9m

Free float

27%

Code

KAPE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.3)

2.2

48.7

Rel (local)

(9.8)

10.1

58.2

52-week high/low

135.5p

63.0p

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 event

Trading statement

January 2019

Analyst

Dan Gardiner

+44 (0)20 3077 5700

Kape Technologies is a research client of Edison Investment Research Limited

Kape has announced the acquisition of ZenMate, a digital privacy company based in Germany focusing on virtual private network (VPN) provision. With 50,000 software-as-a-service (SaaS) customers, the move strengthens Kape’s position in VPN, a standout growth area for the company currently. By utilising its digital marketing experience, Kape is confident it can accelerate ZenMate’s growth. We raise our FY19e EBITDA forecasts by $0.5m and adjusted EPS by 4%.

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

26.1

52.0

12/17

66.4

8.3

7.5

4.9

20.3

31.1

12/18e

60.0

10.2

8.7

5.2

16.4

28.8

12/19e

72.2

14.2

12.3

7.3

11.7

20.5

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

ZenMate: VPN-focused SaaS business

ZenMate is a multi-platform security software business with a focus on VPN solutions. It currently has 50,000, predominantly consumer, customers on an SaaS model and its main market is Germany. We estimate that these customers currently pay between $40 and $50 annually. To date, most of ZenMate’s customer acquisition has been organic and it claims a high retention rate (slightly below Kape’s current 74%).

Strategic rationale: Accelerate VPN growth

This deal fits neatly within Kape’s consumer cybersecurity focus and should be highly complementary to its existing VPN business (CyberGhost). It increases its exposure to this high-growth segment and consolidates Kape’s position in the German market. Using its digital marketing platform, Kape has doubled CyberGhost’s subscriber platform in 18 months. It sees a similar opportunity to accelerate ZenMate’s growth.

Impact on financials: 4% increase to FY19 adj EPS

We estimate ZenMate could add c $0.5m in revenues in FY18e and c $2.5m in FY19e. Restructuring (incurring $0.3m of costs) should ensure profitability within a year and we pencil in a $0.5m uplift to Kape’s FY19e EBITDA and a 4% increase in adjusted EPS (from 7.0c to 7.3c). The €4.8m consideration (100% cash) implies $111 per subscriber, similar to the Intego deal ($107), and 10x our estimate of ZenMate’s FY19e EBITDA contribution.

Valuation: Trading at 16x ex cash adj FY19e EPS

This deal highlights the strategic opportunity for Kape to use its balance sheet to build a high quality (ie growth, margins and visibility) consumer security business. We see scope for further value accretive deals that leverage its distribution network and a return to organic growth in FY19e. Factoring in the uplift to forecasts and the recent market sell-off, the shares trade at 16x FY19e adjusted EPS.

Exhibit 1: Financial summary

$000s

2015

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

84,635

56,532

66,383

59,968

72,185

Cost of Sales

(58,111)

(37,277)

(42,366)

(33,122)

(37,085)

Gross Profit

26,524

19,255

24,017

26,846

35,100

EBITDA

 

 

10,064

6,413

8,261

10,221

14,192

Operating Profit (before amort. and except.)

 

 

9,016

5,034

6,946

8,701

12,302

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

11,002

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

12,267

Profit Before Tax (reported)

 

 

(14,695)

(10,013)

(2,036)

7,487

10,967

Reported tax

(2,902)

(665)

(467)

(973)

(1,481)

Profit After Tax (norm)

7,421

4,088

7,042

7,714

10,786

Profit After Tax (reported)

(17,597)

(10,678)

(2,503)

6,514

9,486

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

10,706

Net income (reported)

(17,597)

(10,678)

(2,503)

6,434

9,406

Average Number of Shares Outstanding (m)

148

141

142

142

143

EPS - normalised (c)

 

 

5.02

2.90

4.98

5.37

7.49

EPS - diluted normalised (c)

 

 

5.02

2.90

4.85

5.23

7.30

EPS - basic reported (c)

 

 

(11.91)

(7.57)

(1.77)

4.53

6.58

Dividend per share (c)

0.00

0.00

4.93

0.00

0.00

Revenue growth (%)

19.0

(-33.2)

17.4

(-9.7)

20.4

Gross Margin (%)

31.3

34.1

36.2

44.8

48.6

EBITDA Margin (%)

11.9

11.3

12.4

17.0

19.7

Normalised Operating Margin

10.7

8.9

10.5

14.5

17.0

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

59,748

71,619

Stocks

0

0

65

65

65

Debtors

16,280

7,950

11,071

8,215

8,662

Cash & cash equivalents

71,336

72,064

69,502

46,156

54,405

Other

0

0

1,792

5,312

8,487

Current Liabilities

 

 

(16,721)

(7,339)

(15,028)

(8,199)

(10,580)

Creditors

(15,316)

(7,096)

(10,094)

(8,080)

(8,703)

Tax and social security

0

0

0

0

0

Short term borrowings

0

0

0

0

0

Other

(1,405)

(243)

(4,934)

(119)

(1,877)

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

87,472

Minority interests

0

0

977

977

977

Shareholders' equity

 

 

91,510

80,553

80,349

78,163

88,449

CASH FLOW

Op Cash Flow before WC and tax

10,064

6,413

8,261

10,221

14,192

Working capital

(2,197)

613

(1,392)

(722)

(1,365)

Exceptional & other

(1,297)

(823)

(624)

0

0

Tax

(1,826)

(904)

(109)

(973)

(1,481)

Net operating cash flow

 

 

4,744

5,299

6,136

8,525

11,346

Capex

(1,813)

(1,678)

(2,020)

(2,088)

(2,192)

Acquisitions/disposals

(1,402)

(1,439)

(5,337)

(22,770)

(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)

(23,346)

8,249

Opening net debt/(cash)

 

 

(76,041)

(71,336)

(72,064)

(69,502)

(46,156)

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)

(46,156)

(54,405)

Source: Kape accounts, 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 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.
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London +44 (0)20 3077 5700

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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 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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