With Kape’s transition to a consumer cybersecurity business essentially complete, investors can focus on the trends in its core business. The interim results highlighted big improvements in both margins and visibility. A doubling of subscribers helped drive a 178% y-o-y rise in underlying EBITDA. We leave our estimates unchanged but with Intego adding $3m in subscription revenue in H2, the mix and margins should improve further. Stripping out $52m of cash, Kape trades at 19x FY19e EPS.
Following the disposal of Media and acquisition of Intego in July, Kape is now 100% focused on consumer cybersecurity. Headline figures for the core App distribution business were disclosed in July’s trading statement (revenues up 14% y-o-y) but the interims showcased the underlying trends. Customer retention rose 5pp to 74%, the shift towards subscription substantially improved visibility and a 16pp y-o-y jump in segment margin (from 31.7% to 47.6%) drove a 71% rise in profit (see Exhibits 1 and 2). These trends primarily reflected the focus on subscription in Reimage plus the contribution of CyberGhost, which traded ahead of management expectations and was consolidated for a full period.
Consolidating Intego in H218 ($3m of subscription revenue) should improve visibility still further. We forecast subscription sales reaching over 40% in H2. Reiteration of “market expectations” guidance leads us to keep our FY18 estimates largely unchanged. Our FY18 revenue and segment profit margin estimates of $59.5m and 48.5% respectively should be readily achievable given the H1 performance. As the impact of the shift away from one time licensing sales annualises and revenue synergies with Intego grow, we forecast 12% top-line organic growth in FY19e.
The benefits of Kape’s strategic shift to consumer cybersecurity are becoming increasingly obvious. The sale of Media and the acquisition of Intego should lift both subscription revenue and margins still further in H2 and the business should return to strong organic growth in FY19e. In a fragmented market and with cash on the balance sheet, we see scope for Kape to make more value accretive deals that leverage its distribution network and enhance its strategic position. On our current forecasts and stripping out $52m cash, the shares trade at 19x FY19e EPS, a modest discount to Kape’s international B2C cybersecurity peers.