Kape has made solid progress in refining its product set and is now fully focused on the consumer cyber security segment. By leveraging its marketing platform to scale new products while also transitioning to a subscription model, we expect to see strong revenue growth and margin expansion translating to our forecast 16% three year CAGR in EPS. With $69.5m net cash, acquisitions should enhance this further. We believe the shares should be on a growth rating yet despite the recent performance, the 21.8x FY18 P/E is below peers. We see upside towards 157p.
Having transitioned away from ad tech, Kape’s divisions are now fully aligned to focus on the online distribution of consumer cyber security software. By expanding the product range, both organically and through acquisition, honing the company’s expertise in online user acquisition and transitioning to a subscription-based model, Kape expects to increase the lifetime value of its customers, while at the same time improving the quality of its earnings.
During 2017 this strategy drove an 18% increase in the user base for Reimage and DriverAgent and added 30% to CyberGhosts’ sales within four months of starting marketing, underpinning a 47% increase in continuing gross profits. 2018 has started well and we forecast continued strong revenue growth as the group scales marketing investment for its newer products. In addition, during 2018 we expect to see improved retention rates at Reimage following the group’s transition last year to a subscription model – a core driver for our forecast increase in EBIT margins from 10.5% in FY17 to 15.8% in FY20. The closure of the Web Apps division in September 2017 will continue to weigh on headline EPS growth in 2018, despite this we forecast a three year CAGR in EPS of 16%.
The B2C cyber security market is evolving rapidly to cope with the increased risk profile faced by consumers. In a competitive market, brand visibility and trust are key. While relatively small compared to large cyber security peers that offer similar product lines, Kape’s experience in user acquisition should enable it to punch above its weight. A DCF suggests the share price is starting to discount the nearterm organic opportunity. However, additional acquisitions are targeted and with net cash accounting for 41% of the market cap, a deal could trigger material earnings upside. With efficient deployment of the balance sheet, we see scope for the shares to move towards 157p as opportunities convert.