K3 Capital Group PLC  

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

Rationale for Valuation – SPECULATIVE BUY at GBX 260.00

• Acquisition: On 1 March 2022, K3 Capital announced the acquisition of JE Consulting (professional services firm) for an initial consideration of £2.32 million (excluding cash and surplus assets).
• Solid Platform for Growth: K3C has shown excellent organic growth, launched new services lines, completed the acquisition of Knight businesses, continued investment in people, and delivered market expectations successfully. Adjacently, 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.
• Better Multiples: On a forward 12-month basis – EV/Sales, Price/Earnings and EV/EBITDA valuation multiples are lower than the average of the Financials sector. Adjacently, K3C has a higher dividend yield than the industry.
• UK Composite PMI: According to the most recent data available from the IHS Markit/CIPS, UK Composite Purchasing Managers' Index, which comprises manufacturing and services activity, jumped to 60.2 in February 2022 from 54.2 in January 2022, marking an eight-month high.
• Dividend Policy: 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.
• Technical Indicator: From a technical standpoint, 14-day RSI (~35.50) is in the oversold territory, supporting the upside potential.
• Stronger Profitability: In H1 FY22, K3C’s EBITDA margin and net margin were higher than the industry median of 18.5% and 4.5%, respectively.

Key Risks

• Macroeconomic Uncertainty: Global shares are down about 5% so far in 2022 due to the continued tightening monetary policy on the global economic recovery from the COVID-19 slump.
• Subdued UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.

Interim Results (for six months ended 30 November 2021, as of 7 February 2022)

(Source: Company Filings)

• Financial Growth: During H1 FY22, there was significant growth in revenue, EBITDA, and dividends.
• Strong Balance Sheet: At the end of H1 FY22, the net cash was stood at £8.8 million (H1 2021: £10.1 million).

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

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

*Peers: Fintel PLC, River and Mercantile Group PLC, Alpha Financial Markets Consulting PLC, and Amigo Holdings PLC.

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

Conclusion 

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

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 closing price of GBX 260.00 (as of 8 March 2022), with a lower double-digit upside potential based 16.12x Price/Earnings (approx.) on FY22E Earnings 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.

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 NETWking 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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