Kin and Carta PLC (LON: KCT)

Kin and Carta PLC is an FTSE All-Share index listed United Kingdom-based Company that offers digital transformation services. It has achieved a B Corp certification from the London Stock Exchange.  

Investment Rationale for Valuation – Speculative Buy at GBX 228.00

• Acquisition of Melon: On 10 May 2022, KCT completed the acquisition of Melon AD, to bolster its digital transformation consulting services.
• Decent Fundamentals: The Company had shown a decent top-line business and bottom-line business growth during H1 FY22, supported by the strong US markets, which remained as the largest digital transformation market in the world. KCT had managed to win contracts with several prestigious clients such as UK Government Home Office, Wayfair, Wendy's, Canadian National, L'Atelier.
• Bright Growth Prospects: KCT kickstarted H2 FY22 with a record backlog, and thus, it anticipated organic net revenue growth ranging from 35% to 40% and an adjusted operating margin of 10-11% for FY22. Overall, the Company expects to remain in a net cash position at the end of FY22 to pursue further acquisition activities.
• Technical Indicator: From a technical standpoint, the MACD line has given a bullish crossover against the signal line, reflecting a positive price potential.

Key Risks

• Macroeconomic Risk: Markets are likely to remain jittery in the short term over rising interest rates, the strongest U.S. dollar in two decades, concerns over inflation and possible recession.
• Principal Risks: KCT is also exposed to pricing risk from competition, inability to realise anticipated synergies, and loss of key clients.  

H1 FY22 Financial Highlights (for the six months ended 31 January 2022, as of 24 March 2022)

(Source: Company Filings)

• Robust Top-line Business: The Company’s net revenue grew 63% YoY to £85.6 million during H1 FY22.
• Profitability: The adjusted profit before tax from continuing operations increased from £0.6 million during H1 FY21 to £5.0 million during H1 FY22.
• Divisional Performance: The Americas net revenue rose by around 76%, and Europe net revenue grew by approximately 41% YoY in H1 FY22.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: 1Spatial PLC, FDM Group (Holdings) PLC, Softcat PLC, and Kainos Group PLC.

*All selected peers are LSE-listed Companies from the Technology sector.

Conclusion

Based on the revenue guidance for FY22, several new contracts, improved cash position, decent bottom-line business, strong operational progress, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Kin and Carta PLC at the closing market price of GBX 228.00 (as of 12 May 2022) with lower double-digit upside potential based on 25.66x Price/NTM Earnings (approx.) on FY23E Earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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 unfavorable movement in the stock prices.

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