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Kape’s interims saw Group revenues rise +97% y/y to $59.0m (organic: +12%), driven by a 245% increase in Digital Privacy sales (+47% organic). Organic growth was stronger than anticipated in Digital Privacy, above N1Se estimates of 30%-40% as a function of strong end-user demand. CyberGhost (VPN) and Intego (end-point protection) subscriber bases grew +10% and +11% h/h respectively. The main takeaway is Kape’s inflection to positive FCF ($6.7m; H1’19: -$1.8m) alongside increased cash investment into customer acquisition (+60% y/y to $29m). We see meaningful cash flow margins (>25%) being delivered in the next 1-2 years, with £31m of FCF forecast for FY’21E generating a 6.3% FCF yield (peers offer 3.5%-4%). Putting Kape on a 4% FCF yield implies an intrinsic value of >£3/share.
Companies: Kape Technologies Plc
Kape has enjoyed a good first half of 2020 both in terms of operational progress and financial performance. Revenues increased 97% to $59.0 million (H1 2019: $29.9 million), a 12% increase on a pro-forma basis. The interim results reflect the Group’s continuing success in integrating its Private Internet Access (PIA) acquisition while growing subscriber numbers – now just shy of 2.4m in total - across the businesses. The focus on customer lifetime value is evident in the marketing spend and investment in new product development. Kape remains on track to meet previous guidance for the full year and expects to deliver synergies from the PIA deal at the top end of the mooted range. We believe that the Group has good revenue visibility and it continues to maintain a high level of user retention at 80%. We make no changes to estimates other than to reflect a higher amortisation charge. In our view, the interim results show that Kape continues to display the drive and capacity to meet the growing needs of consumers for digital privacy and security products in a rapidly evolving marketplace.
CentralNic has agreed to acquire Codewise, which consists of Zeropark, a monetisation business similar to Team Internet, and Voluum, a complementary online marketing SaaS provider. CentralNic is consolidating and market at attractive valuations, delivering synergies and improving target company operations.
Overview: Zeropark operates a marketplace for domain name investors seeking monetisation and marketers seeking traffic. Voluum provides a SaaS marketing platform that helps SMBs track and analyse traffic sources, campaigns and performance data to optimise advertising campaigns. Codewise generated revenue of $60.3m and Adjusted EBITDA of $7.4m in the LTM ended June 2020.
Companies: CentralNic Group Plc
CentralNic has announced the conditional US$36m asset-based acquisition (payable in cash on completion) of one of Team Internet’s closest competitors, Codewise, a domain monetisation business based in Poland. Based on the year to 30 June 2020, the deal values Codewise at 0.60x historical sales (US$60.3m) and 4.9x adjusted EBITDA (US$7.4m). The deal is being funded by way of a share placing, with CentralNic having placed 40m shares (21% of the equity) at 75p per share (a 6% discount to the 10 September closing price), raising gross proceeds of £30m. Assuming a year end completion date, we estimate that the deal will be materially (c 18%) EPS enhancing in FY21. The acquisition is highly complementary to the successful Team Internet acquisition, completed in December 2019, building CentralNic’s technology base and market share in domain monetisation, diversifying its client base and strengthening the group’s development capability and senior management team.
Kape’s strong H1 trading update highlights revenue and adj EBITDA growth of 97% y/y (to $59.0m) and +180% y/y (to $16.1m) respectively, in-line with N1Se forecasts. Underlying pro forma growth of +12% y/y is being driven by strong performance in Digital Privacy, and management are confident of meeting FY’20E guidance of $120m-$123m of sales (N1Se: $122.6m) and $35m-$38m of adj EBITDA (N1Se: $36.6m). The higher-growth Digital Privacy segment is forecast to deliver c.76% of Group sales in FY’20E. Alongside this, the opportunity created by the Group’s Privacy suite to crosssell additional services into the Digital Privacy base, and to improve already market-leading customer retention rates, further underpins N1Se medium-term sales growth forecasts of 10% CAGR to FY’22E. Our FY’20E forecasts generate FCF of $19.1m representing a 3.9% yield at current valuation, rising to 6.1% the following year. As cash-generation steps up, we see scope for the valuation discount to peers closing over time.
Trading update: on track; Reiterate Buy rating
4imprint’s first half trading was heavily affected by the commercial repercussions of the COVID-19 pandemic as it spread across the US. With uncertainty over the speed and extent of the reopening of the US economy, projections for the remainder of the year (and for FY21) are more tentative than usual. Despite the difficult trading circumstances, 4imprint retains a strong, cash positive balance sheet, and has low fixed costs and capital requirements. We believe that it retains its long-term attractions in a large, fragmented market and should rebuild quickly as the economy recovers
Companies: 4imprint Group Plc
Altice Europe and Next, the holding of Patrick Drahi, have announced an agreement on a public offer to be made by Next on Altice Europe at €4.11 per share.
Whatever the reasons that have pushed Drahi to buy his group, he is indeed taking advantage (but who could blame him) of the fact that investors are neglecting the telecom sector. We believe the offer price is not expensive and minorities will have to wait to see what is going to happen.
Companies: Altice Europe NV
We are introducing our Best Ideas for 2019 and also review the performance of last year’s picks. We suggest ten solidly financed stocks with good business dynamics that ought to be considered for core portfolio holdings and six UK domestically focused stocks that our analysts believe should perform strongly in the event that uncertainties unwind. We also introduce a new style of research from N+1 Singer which presents a Company’s dynamics and metrics in a clear and concise manner and concentrates on the pivotal issues affecting that Company and an investment decision.
Companies: BCA CLIN CLG CBP DNLM EAH STU FCRM FUTR GTLY INS GLE NICL SDL SPR TRI
Microsoft unveiled the new Surface Duo, which runs on Android, at its annual hardware event on Wednesday. The folding phone features two side-by-side 5.6-inch displays that are connected by a 360-degree hinge. Microsoft said it partnered with Google to “bring the best of Android” to the device, while incorporating elements of Windows 10X, a new operating system meant for hybrid devices. It can also run two different apps at the same time. Specifically, the Surface Neo will rely on a new "Expression" of its Windows 10 operating system called Windows 10X.
Companies: KAPE EYE IMO
In a deal which will have a profound effect on the prospects for the group, Kape has announced the proposed acquisition of LTMI Holdings, the holding company for virtual private network provider Private Internet Access (PIA). PIA is a Denver-based security software business, the addition of which will transform the size of Kape by doubling group revenues (including a stronger recurring revenue base) and increasing adjusted EBITDA by around 2.5 times in FY 2020E. Reflecting that, our earnings estimates increase by around 90% for FY 2020E while our new FY 2021E estimates build strongly on that much larger base. Total consideration is c. US$95.5 million with an enterprise value of c. US$127.6 million. The deal is expected to complete within 45 days and is anticipated to be immediately earnings enhancing. The transaction will create a significant player in the digital privacy market and will enable Kape to expand its footprint in North America with a broader product offering.
COVID-19 update – on track and good liquidity
The Coronavirus pandemic is a human tragedy of vast proportions – as well as the terrible human toll, COVID-19 has led to economies across the globe going into physical lockdown and financial freefall. Entire populations are adapting to the “stay at home” edict, to safeguard the vulnerable – and some of these changes will lead to long-lasting or perhaps permanent changes in the way we live or work. This note describes some of our client companies whose business models are well adapted to these changes, or who might see a change in long-term structural demand.
Companies: AMO BGO FDM GAMA KAPE LOOP TERN ZOO
AGM statement upbeat; co on track; Buy
Capital markets day a potential catalyst; Buy