K3 Capital Group PLC (LON: K3C) – Creating a professional services business advising UK SMEs.

K3 Capital Group PLC is an FTSE AIM All-Share Index listed professional services company founded in 1998 and headquartered in Bolton, the United Kingdom. K3C got listed on the London Stock Exchange on 11 April 2017. The Company has five key brands: KBS Corporate, KBS Corporate Finance, Quantuma, Knightsbridge and RandD UK. Under KBS Corporate brand, it facilitates the matching between the sellers of SME businesses and trade, individual and institutional buyers. Under the KBS Corporate Finance brand, it delivers deals to private equity players. Under the Quantuma brand, K3C offers financial advisory services. Under the Knightsbridge brand, it offers business transfer services. Under the RandD brand, the Company provides tax credit specialist services.

Recent trend of dividend payments

  (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by K3C from FY2018 to FY2020. In FY2021, K3C paid an interim dividend of GBX 3.00 per share. It was paid on 17 March 2021 and had an ex-dividend date of 25 February 2021.

Growth Prospects

• Completed acquisitions: In H1 FY2021, K3C completed the acquisitions of RandD and Quantuma, which are earnings enhancing and transformational. Furthermore, the Company completed three more complementary acquisitions during H2 FY2021. All these acquisitions provided diversification of revenue and contributed to growth.
• Direct marketing strategy: The Company has initiated RandD direct marketing strategy by launching a new website. It has also created the One80 direct marketing brand, with the One80 website coming up. For this purpose, K3C recruited a dedicated sales team.
• Low disruption from the pandemic: The Company faced low disruption from the Covid-19 pandemic, with all group entities trading strongly despite the lockdowns in the UK. It signifies K3C’s robust operations and high demand for its services.
• Low leverage: K3C boosts very low leverage in its balance sheet. Hence, it can easily raise cheap debt to fund its acquisitions. In H2 FY2021, K3C agreed on undrawn debt facilities of £15 million.

Key Risks 

• Muted macroeconomic sentiment: Any further outbreak of Covid-19 could have a prolonged impact on global economic conditions. It could lead to muted consumer confidence and could further affect the business sentiment across the globe. Also, potential employee absenteeism could have an adverse impact on K3C’s operations.
• Failure to achieve desired synergies: Any failure to achieve expected synergies from the acquisitions could impact both revenue and cost for K3C.
• Reputational risk: The industry in which K3C operates demands a high level of integrity, with client trust being the most important aspect. Hence, the Company is vulnerable to adverse market perceptions if it fails to satisfy its responsibilities to its clients.
• Cyber threats: Cyber-attacks could threaten the Company’s valuable client data by bypassing its data protection mechanism. Hence, the Company has to incur costs to protect its sensitive data.

 

Now we will analyse some key fundamental and shareholders statistics of K3 Capital Group PLC.

Recent Development 

Fundraising: On 7 July 2021, the Company announced that it had successfully completed its fundraising of £10 million by an oversubscribed placing of 2,941,934 new Ordinary Shares. 

FY2021 Pre-Close Trading Update (released on 15 June 2021)

• The Company completed three acquisitions during H2 FY2021. These acquisitions contributed to the growth and provided further diversification of revenues.
• Driven by that, K3C increased both revenue and profit across all its divisions.
• The Company has a solid liquidity position, with an unaudited cash balance of ~£14 million at H2 FY2021 end.
• K3C agreed on debt facilities worth £15 million, which remains undrawn.

Financial and Operational Highlights (for the six months ended 30 November 2020 as of 16 February 2021)

(Source: LSE Website)

• The Company completed acquisitions of RandD and Quantuma during H1 FY2021. The acquisitions offer diversified revenues.
• With the successful integration of HR, Accounting and Marketing functions, the Company created a high margin, cash generative, and debt-free professional services entity.
• Driven by the acquisitions, revenue in H1 FY2021 surged to £17.8 million from £8.0 million in H1 FY2020.
• It led to adjusted EBITDA rising ~60% YoY and net cash surging ~48.5% YoY in H1 FY2021.

Financial Ratios (H1 FY2021)

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 10 August 2021, at 7:05 AM GMT, K3C’s shares were trading at GBX 345.00, at par against the previous day closing price. Stock 52-week High and Low were GBX 395.00 and GBX 135.00, respectively.

On a daily chart, K3C's price is sustaining above 200-day EMA of about GBX 297.00 and 200-day SMA of about GBX 287.00, indicating the possibility of an upward movement.

In the last year, K3C’s stock has delivered an excellent positive return of ~107.21%. Also, it has outperformed the FTSE AIM All-Share index with a return of about 34.40%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

K3C delivered an excellent performance in FY2021, with revenue potentially rising to ~£46.0 million from ~£15.0 million in FY2020. The management also expects adjusted EBITDA of at least £14.25 million for FY2021, which exceeds the previous FY2021 guidance. K3C has almost zero leverage, with a debt/equity ratio of 0.03x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help K3C to fund further acquisitions. K3C also raised £10 million by ordinary share placement to fund its recent acquisitions. The Company could benefit from synergies from its completed acquisitions, its direct marketing strategy, its robust operations and high demand for its services and low leverage going into FY2022. The management has great confidence for FY2022 and anticipating further progress of the Company’s service lines.

Considering the synergies from the acquisitions, the Company’s direct marketing strategy, its continued investments, the better profitability, liquidity and leverage position of the business than the industry, 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 345.00 (as on 10 August 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 20.00x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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