K3 Capital Group – this one is a winner

Mark Watson-Mitchell believes that K3 Capital Group is a major winner in the making and that its shares are substantially under-rated at the current 147.5p.

Can there be any business owner in the land that has not, at some time or another, heard of, dealt with or had literature sent through from one of this group’s subsidiaries?

The Bolton-based K3 Capital Group (LON:K3C) is involved in the business sales and brokerage sector. Employing some 130 people, the group has operations throughout the UK.

Pss… “want to buy a business?” or “wanna sell your business?” well K3C will help you.

K3 Capital Group is a multi-disciplinary professional services firm providing advisory services to SMEs, with operations throughout the UK and overseas.

It has a total data base of some 3.8m limited entities and 1.2m sole traders and partnerships. Through direct mail, email, online, remarketing, telemarketing and a business valuation portal, it promotes its services and creates interest from potential seller targets.

Through its KBS Corporate, KBS Corporate Finance, Knightsbridge and KBS Capital Markets subsidiaries it offers company sales, brokerage and corporate finance services to SMEs looking to achieve full or partial exit. They advise on sales to private, trade, plc, private equity or overseas acquirors, as well as providing strategic advisory and valuations, financial due diligence and debt advisory services.

In late June this year the group acquired RandD UK, which advises clients on research and development tax credit claims.

Then in early August the group acquired Quantuma Advisory, which offers restructuring advisory services, as well handling formal insolvency appointments. It also provides informal restructuring advisory, personal insolvency and pension restructuring and insolvency advice.

Quantuma’s other services include financial advisory, creditor services, forensic accounting and expert witness facilities, together with a pensions advisory provision.

These recent earnings enhancing acquisitions fit in very well with the group’s medium-term strategy, which is to build a wider group of growing and complementary professional services businesses to provide SMEs with high quality advice across specialist disciplines. The cross-selling potential will be significant.

There are 68.55m shares in issue. Large holders include Premier Miton Group (14.88%), AXA Investment Management (5.49%), Schroder Investment Management (3.80%), and Hargreave Hale (3.26%).

Certain board members have significant holdings – CEO John Rigby (11.11%), executive vice chairman Anthony Ford (9.16%), and sales director Simon Daniels (3.70%).

Chairman Ian Mattioli in late September, when commenting on the end May results, stated that “I am pleased to report a satisfactory year of trading at K3 Capital Group. The trading period has seen a 10% increase in revenue and a 36% increase in EBITDA, this has been delivered despite the economic challenges that the Covid-19 pandemic has presented to companies and economies across the globe.”

“The board remains positive for the outlook in FY21 due to a strong first quarter of trading and the encouraging performance of major KPIs across the group.”

The year to end-May saw the group report revenues of £15m and an adjusted pre-tax profit of £6.4m, worth 12.2p per share and covering a useful 7.5p per share dividend.

Following the recent acquisitions, finnCap, brokers to the company, are very bullish about the group. They see £35.1m of sales in the current year to end-May 2021, generating £9.6m profits, 11.4p of earnings and 8.4p of dividends per share.

However, going forward they see £47.4m of revenues for 2022 and £58.1m in 2023.

With pre-tax profits leaping to £13.5m then £17.6m for 2022 and 2023 respectively, earnings are forecast at 16p then 20.8p per share and dividends of 12p then 15.6p respectively.

My feelings are that K3 Capital Group is a major winner in the making and that its shares are substantially under-rated at the current 147.5p.

Well before the interim trading update is due to be announced in mid-December, I believe that its shares will be looking to climb well over the 200p level at which I now set my target price.