Enjoy this free share recommendation on K3 Capital Group extracted from the latest edition of the premium Trendwatch newsletter…
THIS NEXT company is interesting in terms of timing. K3 Capital Group was in uptrend as at the close last Friday (our base date for all the uptrends, down-trends, valuations, etc. for this issue) and still in uptrend on Tuesday of this week despite the hefty drop. We can see no good reason for it.
One reason for the volatility is that there is a relatively small free-float (shares available for investors to trade). The top nine shareholders, including K3’s own directors, account for about 85% of the shares.
Nevertheless, we’re sticking with K3 Capital Group, partly because there is no news to explain the fall, partly because of a positive trading update in May, of which more later.
If we’re right, then there’s a chance you’ll be able to pick up this share at a bargain price. If we’re wrong, at least you won’t have paid top-dollar for it.
You may not have even heard of K3 Capital (not to be confused with K3 Business Technology), as it only floated on AIM in April this year via a placing that raised £17.8m before expenses, mainly to fund acquisitions. So what does this company do?
K3 describes itself as “a disruptive innovator within the business and company sales marketplace”. It helps to match owners or direc-tors of small and medium sized enterprises across the UK who want an exit strategy to sell to a suitable trade, individual or institutional buyer in the UK and overseas. In short, it’s a matchmaker, matching buyers and sellers of businesses.
The services provided by K3 include the presentation of their cli-ents’ businesses for sale to market, the sourcing of potential acquir-ers and project management of transactions to completion. It does this under three separate subsidiaries:
KBC Corporate: Typically, this subsidiary handles businesses with an enterprise value ranging from around £0.5 million to c.£5 million. It covers a broad range of sectors including engi-neering, manufacturing, construction, technology, retail, whole-sale, and distribution and business services.
KBC Corporate Finance: This subsidiary deals with bigger businesses, whose complexity or value requires a service led by directors with a qualified and technical background. Typically, the companies being sold have an enterprise value of between c.£5 million and c.£200 million.
Knightsbridge. This subsidiary provides a business transfer service for smaller businesses, utilising extensive online adver-tising including business for sale portals and its own proprie-tary buyer database in order to match buyers and sellers. Typi-cally, these businesses have an enterprise value of up to around £0.5m, are a mix of leasehold and freehold, and cover all sec-tors including retail, catering, care, commercial, licenced and leisure markets. Its database of potential seller targets compris-es over 3.8m limited companies and more than 1.2m sole trad-ers and partnerships.
It acquires new clients using an experienced incentivised sales team. It also runs a proprietary online business valuation portal, which generates around 600 leads per month, and which the sales team follows up via telemarketing. This converts to around 100 man-dates per month from the seller. That in turn results in around 50 offers from potential buyers per month, and an average of more than 10 completed transactions per month.
As for its revenue model, there are two elements:
A non-contingent fee typically paid upon commencement of the contract. In 2016, these fees covered the Group’s related variable costs, all fixed costs and marketing costs.
A transaction fee, payable only upon the completion of a trans-action. This is typically a percentage of the transaction value and therefore varies on a client by client basis. To this extent, a client’s interest and those of K3 are aligned to achieving the optimal price.
The company has achieved industry recognition by winning a num-ber of prestigious awards over the past few months, including awards from Thomson Reuters, Experian, Corporate Insider, ACQ Maga-zine and Corporate Livewire.
Although it only floated on AIM in April, K3 Capital Group was incorporated in 2007. In its current guise, we have a track record going back to 2014.
|Year to May:||2014||2015||2016|
|Pre-tax profit (£m)||0.40||0.76||2.47|
|Earnings per share (p)||0.95||1.81||5.85|
The only significant news from the company since its AIM flotation is a pre-close trading statement issued on 14 June. It said: “K3’s strong performance has continued across the Group resulting in significant revenue growth and strengthening underlying normalised EBITDA.
As a result, the Board anticipates reporting revenue and normalised EBITDA for the period comfortably in line with market expectations. The strong performance has been driven by continued growth across each of the subsidiaries… winning an increasing number of client mandates at higher aver-age transaction fee values across the Group, compared with prior periods.”
A fairly small company that has only recently listed on AIM is, almost by definition, a high risk company. One slip-up can result in the share price being severely punished. That said, some of our best performing shares have been those whose potential we’ve spotted early. We believe that K3 could be one of those companies. Further-more, we believe that the risk is mitigated by a number of factors.
First, the company is run by a highly experienced Board with a good financial track record. Second, that good record looks set to continue if the forecasts (right) prove to be correct. The forecast earn-ings growth rate is 38.5% for this year and 23.5% next. Third, the forecast yield of 6.6% should help underpin the share price. We can see no reason why the dividend would be cut.
|Year to May:||2017||2018|
|Pre-tax profit (£m)||5.16||6.47|
|Earnings per share (p)||8.10||10.0|
|Dividends per share (p)||7.00||8.20|
To cap it all, the shares look to be extremely good value, given the PEG ratio of just 0.66 for this year and 0.74 next.
BUY K3 Capital Group (127.5p; fore-cast yield: 6.6%; market capitalisation: £52.8 million; initial stop-loss: 102p; EPIC: K3C; sector: Investment Banking & Investment services; classification: AIM; website: www.k3capitalgroupplc.com; tel: n/a).
We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…