K3 Capital Group PLC

K3 Capital Group PLC (LON: K3C) is an FTSE AIM All-Share listed UK professional services firm providing advisory services to SME’s.                                                

Investment Rationale for Valuation – Speculative Buy at GBX 340.00

• The Company will cement its reputation as an M&A advisory firm within the telecoms and technology sector with the proposed acquisition of Knight Corporate Finance Group Limited and Knight R&D Limited.
• K3C had raised FY21 revenue & profitability guidance in the most recent trading update.
• The Company had expected FY21 revenue to show more than around 200% increase when compared with the prior-year levels.
• On the leverage front, the Company’s debt-to-equity remained lower than the industry median of 1.01x during H1 FY21.
• From a technical standpoint, K3C is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Key Risks

• The Company had not released FY21 results as scheduled during September 2021.
• The recent rally in the Treasury yield could have an adverse impact on the UK Equities.
• The recent acquisitions may not bring the desired synergy to the Company, affecting its margins.
  

Recent Developments 

Proposed Acquisition: On 07 July 2021, K3C confirmed that it had planned to acquire Knight Corporate Finance Group Limited and Knight R&D Limited for the total consideration of up to £8.6 million. Moreover, the Company had also aimed to raise gross proceeds of approximately £10 million to fund both transactions. 

Pre-Close FY21 Trading Update (for 52 weeks ended 31 May 2021, as of 15 June 2021)

• The Company expects to deliver top-line revenue of approximately £46.0 million and adjusted EBITDA of at least £14.25 million during FY21.
• The M&A division had a strong year with substantial organic growth delivering revenue and adjusted EBITDA significantly ahead of expectations.
• K3C had a cash balance of approximately £14 million as of 31 May 2021.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had managed to complete three key acquisitions to diversify the revenue streams during FY21. In addition, the new tax advisory & debt advisory offerings and the newly established Market Mapping joint venture would remain as the key growth catalyst for FY22 and beyond. Meanwhile, the proposed acquisition of Knight Corporate Finance Group Limited and Knight R&D Limited is expected to be earnings accretive. The stock made a 52-week low and high of GBX 143.00 and GBX 395.00, respectively.

Based on the strong revenue guidance, better leverage position against the industry, and valuation as done using the above method, we have given a “Speculative Buy” recommendation on K3 Capital Group PLC at the current market price of GBX 340.00 (as of 12 October 2021 at 08:25 AM GMT+1), with lower-double digit upside potential based on 4.79x Price/NTM Book Value per share (approx.) on FY22E book value per share (approx.).

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

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

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

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

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