Kape Technologies PLC

Kape Technologies PLC (LON: KAPE) is a FTSE AIM 100 listed Company that provides digital security software through its range of security and privacy products to protect consumers and personal data. It employs over 420 people across 8 locations worldwide and serves millions of paying subscribers. The Company has established a scalable SaaS-based operating model to cater vast global consumer digital privacy market. The Company’s core software products include Private Internet Access, CyberGhost, ZenMate, Intego, DriverFix, and Restoro.

Technological Trend and Advancements

Kape has accelerated its product development efforts and launched the Cyberghost suite in FY20 to focus on digital security and privacy. As per the AGM update released in May 2021, the Group was able to increase Average Order Value with a 12% increase in new CyberGhost customers. Kape has also added two new significant features - Privacy Guard and WireGuard® encryption protocol to enhance the security and performance of VPN service. The integration of PIA business generated operational cost synergies of US$6.5 million in FY20 and transformed its fully-fledged privacy and security suite. The Group has also increased cross-selling opportunities to drive future growth.

Growth Prospects

• Acquisition of Webselenese: As Kape has completed the acquisition of Webselenese (provider of highly valued consumer privacy and security content) in March 2021. It shall act as a key pillar for the Company’s ambition to become a global leader in consumer digital privacy and security market space. It is also likely to accelerate earnings growth, with expected increase of 65% in FY21 revenue over FY20.
• Attractive Fundamentals: The Company has a solid track record of revenue and EBITDA growth, while it has nearly 2.6 million paying subscribers now. Over the past 4.5 years, it has completed 6 acquisitions and deployed around US$308 million of capital on mergers & acquisitions, which has yielded a consistent growth in paying subscribers and EBITDA.
• Growing Market Awareness: With rising exposure of personal information (such as credit card numbers, e-mail addresses, IP addresses, among others), the estimated market size of the endpoint security market is likely to reach US$18.6 billion by 2027. The trend is accelerated by the remote working environment led by the Covid-19 pandemic.

Risk Assessment

• Emerging Risks: As Covid-19 pandemic induced restrictions have led to the global economic downturn, it can adversely impacts the revenue and operating profit with the shrinking subscriber base. Consequently, it can hurt the share price as well.
• Principal Risks: The business is also exposed to several operational uncertainties, such as cyber-attacks, loss of market share with the inability to expand service offerings, business interruption, and failure to comply with regulatory compliance. Kape also faces pricing pressure due to the high competitions, which impacts its margins.

Now we will analyse some key fundamental and shareholders statistics of Kape Technologies PLC. 

Recent News and Regulatory Developments

AGM Statement: On 20 May 2021, Kape affirmed that it has given a robust start to FY21 on the back of sustained demand for digital privacy products and the acquisition of Webselenese. As a result, it is on track to meet its FY21 revenue guidance of US$197-202 million (equating to a nearly 65% year-on-year increase). Similarly, adjusted EBITDA is likely to soar 90% year-on-year in FY21 to between US$73-76 million.

Acquisition: On 8 March 2021, Kape announced the acquisition of Webselenese Ltd for the consideration of US$149.1 million on a net cash basis. The acquisition shall deepen Kape's go-to-market capabilities and provide a competitive edge.

New Bank Facility: On 28 March 2021, Kape entered a new senior secured bank facility of ~US$220 million to support its future growth.

Financial Highlights (for the year ended 31 December 2020, as on 17 March 2021)

(Source: Company Annual Filing)

• During FY20, Kape experienced robust revenue growth, improved profitability with EBITDA ahead of expectations, underpinned by organic growth initiatives. On a year-on-year basis, revenue and adjusted EBITDA surged 85% and 168%, respectively.
• As the Company’s adjusted cash flow from operations soared 1,994% year-on-year in FY20, which enhanced its cash profile due to its growing customer base, Kape also increased Research and Development investment expenses by 49% to accelerate product development.
• In terms of financial position, Kape reported a strong balance sheet with net cash of US$11.1 million in FY20 against the net debt of US$32 million) in FY19.
• During the FY20, the Company also raised US$113.2 million through the oversubscribed capital raise, out of which US$72.5 million were used to settle delayed considerations of PIA’s founders and buy back shares.

Financial Ratios (FY20)

Share Price Performance Analysis

 (Analysis done by Kalkine Group)

On 18 June 2021, at 8:20 AM GMT, Kape Technologies PLC’s shares were trading at GBX 303.30, down by 0.72% against the previous day closing price. The stock made a 52-week High and Low of GBX 336.00 and GBX 150.00, respectively.

KAPE’s stock price is trading in the oversold zone since the stock price is hovering around the lower standard deviation of the Bollinger Bands. The momentum oscillator, 14-day RSI (41.64) also indicates a positive stance at the current level. Adjacently, the stock price is trading above the 50-day EMA (GBX 300.50) and 100-day SMA (267.80) levels are still sustaining below the current market price despite the recent correction in the stock, which may act as a crucial support zone at the lower end in short-term. On the technical chart, the next important support level is at GBX 248.71.

Business Outlook Scenario

In a nutshell, Kape has got a kickstart in FY21, supported by solid demand and the acquisition of Webselenese. In addition, the Group has completed the integration of PIA (Private Internet Access Inc), and it is serving over 2.6 million subscribers now. Moreover, the acquisition of Webselenese is a considerable milestone in the Group's strategic roadmap. It is likely to provide a distinct competitive advantage in driving organic growth, bring the Company close to the consumer, and earnings accretion of 65% in FY21. In a nutshell, Websense has a compelling financial profile to complement the strategic rationale. The Company also intends to maintain a low level of financial indebtedness, as it expects 1.6x of net leverage pro forma, following the acquisition of Webselenese. In terms of guidance, revenue and adjusted EBITDA for FY21 are likely to be in the range of US$197-202 million and US$73-76 million, respectively.

(Source: Company Presentation)

Based on the proven track record of integrating businesses, constantly growing demand, accelerated product development efforts, robust fundamentals, expected synergy from the acquisition of Webselenese, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Kape Technologies PLC at the current market price of GBX 303.30 (as on 18 June 2021 at 8:20 AM GMT) with lower double-digit upside potential based on 19.90x Price/NTM Earnings (approx.) on FY21E 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 or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

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

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