K3 Capital Group PLC (LON: K3C) 

K3 Capital Group PLC (LON: K3C) is an FTSE AIM All-Share index listed UK professional services firm providing advisory services to SME’s. Moreover, the Group comprises five key brands: KBS Corporate, KBS Corporate Finance, Quantuma, Knightsbridge, and randd uk. The Company has been listed on LSE since 11 April 2017.

On 14 February 2022, the Company will release H1 FY22 financial results. 

Recent trend of dividend payments

K3C has a progressive dividend policy and paid a final dividend of 6.10 pence per share on 30 November 2021, while the ex-dividend date was 18 November 2021. Moreover, the Company had shown around 22% growth in the total dividend paid for FY21.

(Source: LSE website; Analysis done by Kalkine Group)

Growth Prospects

• Diversification of Tax Division: K3C had made accelerated progress regarding the diversification of the Company’s Tax Division. It is now comprised of randd, Knight R&D, InTax, and K3 Tax Advisory.
• Record M&A Activities: The Company had depicted a record level of appointments and client mandates during Q1 FY22 under the M&A Division. Furthermore, the levels of buyer activity had created a strong transaction fee pipeline.
• Acquisition Benefits: K3C expects the acquisition of Knight Corporate Finance and Knight R&D to be immediately earnings enhancing and represent a complementary extension to the Group's M&A and Tax Divisions. Meanwhile, the Company had also raised £30.5 million to initiate an acquisition strategy of diversifying revenue.

Key Risks

• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
• Omicron Variant: The Government-led restrictions under Plan B because of an increasing number of Covid-19 cases in the UK may adversely impact the UK Equities.
• Macroeconomic Uncertainty: The ongoing economic instability, potential tightening of monetary policy, subdued consumer confidence, and currency fluctuations can also impact business performance.
  

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of K3 Capital Group PLC.

Premier Asset Management Ltd is the most significant shareholder as it holds nearly 10.27 million shares as of 31 December 2021. 

Trading Update (for six months ended 30 November 2021, as of 13 December 2021)

• Strong Divisional Performance: All business divisions managed to perform on the expected notes driven by both organic growth in existing brands as well as the contribution of the recent acquisitions of Knight Corporate Finance Group Limited and Knight R&D Limited which were completed in July 2021.
• Financial Performance: The Company expects to report revenue of more than £30 million and adjusted EBITDA of £9 million during H1 FY22.

FY21 Financial & Operational Highlights (for 12 months ended 31 May 2021, as of 01 November 2021)

(Source: Company result)

• Top-Line Business: The Company had delivered top-line revenue growth of around 215% and an increase of approximately 131% in the adjusted EBITDA during FY21.
• Strong M&A Activities: The M&A division had a strong year with substantial organic growth delivering revenue and adjusted EBITDA significantly ahead of expectations.
• Cash Balance: K3C had shown an increase of around 72% in net cash from £8.3 million during FY20 to around £14.3 million at the end of FY21.
  

Financial Ratios (FY21)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 18 January 2022, at 09:23 AM GMT, K3C’s shares were trading at GBX 341.25, up by around 1.11% from the previous day closing price. Stock 52-week High and Low were GBX 395.00 and GBX 230.00, respectively.

From a technical standpoint, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, illustrating a bullish price momentum.

Over the last one year, K3C’s stock price has delivered a positive return of ~29.51%, and it has outperformed the FTSE AIM All-Share index (benchmark index) with a return of negative 0.64% and FTSE All-Share Financials index (benchmark sector) with a return of around 21.34%.

Valuation Methodology: Price/Book Approach (FY22) (Illustrative)

Business Outlook

The Company had replicated the positive business performance of FY21 into H1 FY22 as well with expected revenue growth of at least 70% and adjusted EBITDA growth of approximately 60%. Moreover, the Company had maintained strong pipeline of business opportunities across its brands for H2 FY22, driven by the strong contributions from the M&A division due to the continued development of its proprietary technologies and SME data.  The successful integration of K3's marketing model and data-driven approach will continue to see record levels of new client wins in the Tax division. K3C may undergo sizeable corrections because of the rising interest rates prospect, global inflation, and Omicron variant of the Covid-19 pandemic. Nonetheless, the Company remained optimistic about the prospects for modest revenue growth over the medium term because of the robust pipelines and continued increases in major KPIs.

Considering the solid revenue growth during H1 FY22, robust bottom-line business growth, strong leverage position, growth in dividend payments, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on K3 Capital Group PLC at the current price of GBX 341.25 (as on 18 January 2022 at 09:23 AM GMT), with lower-double digit upside potential based on 4.43x Price/NTM Book value per share (approx.) on FY22E book value per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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