Kape’s acquisition of Intego for $16m looks a good fit. It broadens Kape’s portfolio by adding anti-malware software and significantly strengthening its Mac offering. We see good scope for sales synergies through cross-selling and leveraging Kape’s customer acquisition platform. The deal boosts our FY18 and FY19 EPS by 2% and 9% respectively, while synergies should strengthen beyond our forecast period.
Intego provides a suite of products including anti-malware, firewall and parental control products to 150,000 Mac users, all on a subscription basis, significantly strengthening Kape’s position in the Mac ecosystem. The anti-malware product in particular, fills a big gap in Kape’s portfolio, while the Intego engineering team will also strengthen the company’s product development capability.
The deal creates the potential for sales synergies in three areas: cross-selling Intego’s anti-malware product to Kape’s existing Mac user base; using Kape’s digital marketing expertise across Intego’s product suite; and using the strengthened engineering team, Intego product core to develop a windows antimalware product. Once released this should be a highly complementary addition to the portfolio.
This deal delivers on many of the strategic initiatives we highlighted in Unveiling Kape (June 2018). Aside from building scale and bolstering its cybersecurity offering, it accelerates the company’s transition to a SaaS and subscription-based model. If delivered, we believe this transition will bring improved earnings visibility that should be rewarded with a higher rating. We would expect Kape to continue to use its balance sheet cash to enhance its scale and accelerate this transition.
Factoring in Intego (assuming little near-term benefit from revenue synergies), raises our FY19e adjusted EPS forecasts by 9% to 7.5c. At the current share price, this implies a P/E multiple of 19.5x, broadly in line with peers (c 20x, see Exhibit 2). However, stripping out the FY18 cash estimate of $53m (post Intego acquisition), Kape trades at just 14.5x FY19e P/E. We see a number of potential catalysts for upside: stronger realisation of synergies or further earnings-enhancing acquisitions could drive EPS upside and we see scope for a rerating upwards as the business migrates to a recurring subscription model.