Last week saw K3Capital releasing its full year 2022 results, which culminated in impressive numbers being delivered, much as had been hoped for.
Despite having traded very well, which had also seen a positive update to the market announced earlier in the year, the shares have endured a largely one-way trip southwards, much in keeping with the wider market.
Indeed, since I last penned a piece on the back of catching up with management in February of this year, the shares have been in constant retreat from the then £3.10p to a current to £2.50p as I write.
Although underwater to date on my investment here, I continue to hold and feel the shares have plenty of upside potential ahead, where, according to broker Numis, the shares trade on an attractive looking forward PER of 11.
That is just one measure though, on a business that is clearly in great shape where it provides specialist advisory and extensive services to SME’s which takes in areas of Tax, Restructuring and Business Sales.
In announcing the full year 2022 results, the numbers actually came out ahead of expectations, as adjusted pre-tax profit of £18.9m was recorded against the anticipated £17.7m.
Within the mix there were some notable achievements such as highly impressive organic growth of 24% across the group, where total revenue increased to £70.7m against the £47.2m for the prior year.
K3C - as I wrote in my previous piece - very much an acquisitive operator in a highly fragmented space and no less than half a dozen additions to the group were made over the last two years that have already bedded in well, providing further evidence of management’s ability to add value and further scale up the business.
Catching up with CEO John Rigby and CFO Andrew Melbourne once more, it is apparent that not only are they delighted with the performance and how the acquisitions have bolted on, but there is a confident belief in further and ongoing growth and delivery.
Rigby expressed pleasure at the group performance for last year, being particularly pleased with that of the Tax division which he says has made excellent progress over the last few years and where it has achieved year-on-year organic growth of 35%.
Having invested in its own platform alongside positive marketing initiatives, a record number of claims were submitted to HMRC and Rigby adds that the earnings quality in the division is at the higher end, which sees a significant level of contracted and recurring revenue providing for strong visibility.
The more established Business Sales arm which is the UK’s number one specialist in its field to SME’s also played its part, where it provides corporate finance services along with debt advice and buy-acquisition services.
The division enjoys a near 5% UK market share and delivered 35% sales growth of which 25% was organic to £21.6m, with EBITDA up to £10.8m representing a record performance.
The third aspect of K3 is that of Restructuring which provides for a good balance to the other aspects of the group level of earnings where it is focused on insolvency, administration and restructuring.
This includes forensic accounting and asset tracing along with creditor services, which importantly extends beyond the UK across the globe, where it already has an extensive and increasing footprint.
A recent notable pointed out by the CEO was its Quantuma advisory arm which oversaw the administration process of Derby County FC.
The division delivered 45% sales growth of which 21% was organic as it increased to £37.5m with EBITDA at £6.7m coming in positively despite a relatively subdued insolvency market.
Rigby says he expects that backdrop there to change across the UK in the medium term, which would provide for increased business, whilst at the same time, he adds that they have also made investment in new overseas offices.
This should pay off moving forward, as he sees a growth path in global territories and believes that will accelerate going into the years ahead from a relatively low base.
The CEO also points out that there are now strong synergies running right across the enlarged and expanding group, resulting in positive cross selling and referral opportunities which is playing out well in driving growth and healthy returns.
In this context the K3 Hub is clearly a key an integral part of the overall operation here and it is worth taking a closer look at what this involves.
The Hub, is effectively an inclusive centre for accountants in practice to access quality and specialist advice, services and continuing professional development training.
Its workings allow an existing K3 client to recommend other services provided by K3 to its own customers which thus provides for cross-selling opportunities and further revenue growth.
Each referral made by a particular client through the K3 Hub, comes with a financial incentive as it will receive a share of K3’s fee received for the service – the amount of which can be comparable to several years’ worth of audit fees.
Looking at the overall performance of the business it seems apparent that Rigby and his team, having laid the groundwork, cemented deals and successfully delivered on marketing are now clearly reaping the rewards.
Nothing of course is set in stone, particularly in such uncertain times, but the CEO nevertheless sounds as confident as can be expected on meeting current guidance for the year in play.
He points out the resilience of the business and how it has performed through the pandemic along with the subsequent navigation of recent global turmoil and prevailing economic headwinds.
To this end, he says that there hasn’t been any evidence of a slowdown as of yet and that the company remains on track with a high level of confidence for delivery.
In terms of further acquisitions, Rigby tells me that they continue to look at and assess various targets, but they will only move on the right proposition and at the right price.
There have, he says, been one or two they have looked at which has seen them walk away and given the strategy of continuing to build market share and further driving what is already an impressive level of organic growth, there appears to be no rush to move.
That said, it appears there are one or two possibilities in the line of sight, although in terms of funding any further buys, K3, which sits on net cash of £14m at present, wouldn’t look to raise additional funds at the current depressed share price level.
This perhaps implies that any nearer term addition would come at the smaller end in terms of valuation and to be funded from its own resources.
Aside the positive growth prospects, K3 also pays an attractive dividend presenting a decent yield, which sees Numis pencilling in 15.5p for 2023 increasing to 17.1p per share next year.
Numis also points out that although organic growth is significantly ahead of competitors, the shares trade at a circa 20% discount to peers, so the recent subdued share price looks unwarranted.
Looking at the same brokers forecasts for this year, it has revenue expectations of £78.5m in place with EBITDA at £22.3m and pre-tax profits of £20.8m, with EPS of 22.3p.
All in all, K3C remains highly attractive to me and any further weakness on the back of market sentiment could provide for an opportunity for my to averaging down.
That said, the shares have duly recovered from previous lows of late, so perhaps the message is already getting out that they look rather attractive.
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